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Subhan
M. Sc (Eco), IIU, Pak M. Phil (Eco), QAU, Pak LLM (IPR), Italy
Micro Economics
Mid Exam
Qazi Subhan
Bahria University
Fall 2011
Weeks 13 Investment Theory Week 17 Inflation and Unemployment and their measurement
Weeks 12 Consumption and Saving Functions
Macro Economics
Week18
Final Exam
Weeks 10 Introduction to Macro economics Bahria University Department of Management Sciences Fall 2011
3
Qazi Subhan
An Overview of Macroeconomics
1. 2. 3. 4.
Introduction to Macroeconomics National Income Determination Keynesian Consumption Function Saving Investment Function
5.
6. 7.
8.
Definition of Economics
Definitions of Economics
Adam Smith Alferd Marshall Prof. Robbins
General Definition
Economics is the study of knowledge which guides a consumer about the allocation of scarce resources in the presence of unlimited wants.
Economics as Behavioral Science Economics is the study of mankind in an ordinary business of life. Alfred Marshall has examined the individual behavior, ordinary business of life and use of the material requite of well beings.
is a social science which studies the human behavior as a relationship between multiple ends and scarce resources which have an alternative uses.
CLASSIFICATION OF ECONOMICS
Economics
Theoretical Economics
Applied Economics
Normative Economics
Positive Economics
Micro Eco
Macro Eco
Mathematical Economics
Theoretical Economics
It consists of Economic theories like consumer theory,
firm theory, Theory of distribution etc. It is broadly categorized into two main branches: Positive and Normative. Positive Economics addresses the issues related to real facts and figures of the state like current literacy rate, current Inflation rate, current Exports or current balance of payments. Normative Economics prescribes that a certain action should be taken to rectify any economic and social problem. For example, the literacy rate of Pakistan should be up to 90%. if the objective is to do future planning then it is called Normative Economics Positive Economics is further decomposed in to three parts: Microeconomics, Macroeconomics and Mathematical Economics.
of individual such as businesses, households, and individuals, with a view to understand decision making in the face of scarcity and the allocation consequences of these decisions. Macroeconomics: which considers the economy as a whole. All those issues which have significant impact on the economy are discussed. For Instance, Inflation, Unemployment, Literacy rate, Health Situation, transportation, communication etc. Mathematical Economics : It is mathematical interpretation of Economic theories and models Applied Economics: It is used to formulate policies for betterment of nation by utilizing the current information with the help of statistical tools
Firm Owner
Profit Maximization
Concept of Utility
Utility means mental level of satisfaction which a
consumer attains after the consumption of goods and services Types of Utility
Initial Utility Marginal Utility Total Utility Positive Utility Zero Utility
Negative Utility
Measurement of Utility
According to classical approach Utility can be
measured through UTILS ( One Unit of Utility) or in Numbers or in Digits. To Prove it, Professor Marshall has introduced two Laws of Utility:
Law of Diminishing Marginal Utility Law of Equi- Marginal Utility
This law states that when a consumer increases the consumption of commodity continuously, the marginal utility decrease with each additional unit.
ASSUMPTIONS
4
5 6 7 8
89
100 104 104 98
14
11 4 0 -6
60 40 20 0 -20 0 2 4 6 8 10
Units of X Commodity
Limitations/ Exceptions
Knowledge
Music
Hobbies Money
were two goods for consumption then a consumer would be in equilibrium when marginal utilities of two goods are equal. It is also called utility maximizing rule for the consumer.
Assumptions
Income of the consumer is given Two goods for Analysis Utility is cardinal ( Measured in numbers) Items are divisible Consumer is rational (Utility Maximizer)
Rupees 1 2 3 4 5
MUA 25 20 15 10 5
MUB 20 15 10 5 0
instance, a person has five rupees and he has to purchase two goods (A, B) A Consumer would be in equilibrium at that point where MU of A good is equal to MU of B
Assumptions
Rationality (Consumer is Rational or Utility
Maximizer) Diminishing Marginal Rate of Substitution (DMRS) Utility is Ordinal U = f (X1+X2+ X3+X4--------------XN) =K
indifference curve. Rate of substitution means the rate at which one commodity is substituted with another commodity. To keep the level of satisfaction at constant level (or to fulfill the last assumption of Indifference Curve), if the consumer wants to increase the use of one good (A), then the consumption of other good (B) should be decreased.
BUDGET LINE
Budget line consists of all those bundles of goods,
Budget Line
m /p2
m /p1
x1
m /p2
m /p1
x1
m /p2
m /p1
x1
m /p2
m /p1
x1
m /p2
m /p2
Changes in Income
Income of consumer increases Income of consumer decreases
CONSUMER EQUILIBRIUM
Two Conditions
At equilibrium point Indifference curve should be
Convex to the Origin Slope of Indifference curve should be equal to slope of budget line
Consumer Equilibrium
x2
x2
x2
E1
E0
E2
x 1
x1
x1
Nature of Goods
Necessities Normal Good
Consumer Goods
Inferior good ( Related with income) Giffen Good (Related with price)
Substitute Goods
Complement goods
curve. As price decreases, the purchasing power of a consumer increases, he would purchase more of that good. The same relationship can be depicted in demand curve.
Demand curve shows the relationship between price
Own-Price Changes
Fixed p2 and y.
p1
p1
p1
p1 x1*(p1) x1*(p1)
x 1*
x1*(p1)