Economics for Engineers (UNIT-1)

V SEMESTER HS-301

1 Department of Electrical and Electronics Engineering, BVCOE, New

Delhi Subject: Economics for Engineers, Instructor: Dr. Sandeep
Sharma
 Economics for
Engineers
Course Objectives
 To explain the basic micro and macro economics concepts.
 To analyze the theories of production, cost, profit and break
even analysis.
 To evaluate the different market structures and their implication
for the behavior of the firm.
 To apply the basics of rational income accounting and business
cycles
to Indian economy.

Department of Electrical and Electronics Engineering, BVCOE, New

2 Delhi
Subject: Economics for Engineers, Instructor: Dr. Sandeep Sharma
 Economics for Engineers
Course Outcomes (CO)
 CO1: Analyze the theories of demand, supply, elasticity and consumer choice
in the market.
 CO2: Analyze the theories of production, cost, profit and break even
analysis.
 CO3: Evaluate the different market structures and their implication for the
behavior of the firm.
 CO4: apply the basics of rational income accounting and business cycles to
Indian economy.

Department of Electrical and Electronics Engineering, BVCOE, New

3 Delhi
Subject: Economics for Engineers, Instructor: Dr. Sandeep Sharma
 Economics for Engineers
Course Outcomes (CO)
Course Outcomes (CO to Programme Outcomes (PO) Mapping (scale 1: low, 2: Medium,
3: High

CO/PO PO01 PO02 PO03 PO04 PO05 PO06 PO07 PO08 PO09 PO10 PO11 PO12

-
CO1 1 2 1 2 1 - 1 1 1 3 1

-
CO2 1 2 1 2 1 - 1 1 1 3 1

-
CO3 1 2 1 2 1 - 1 1 1 3 1

CO4 1 2 1 2 1 - 1 - 1 1 3 1

Department of Electrical and Electronics Engineering, BVCOE, New

4 Delhi
Subject: Economics for Engineers, Instructor: Dr. Sandeep Sharma
Economic Understandings
Use the basic concepts of trade, opportunity cost,
specialization, voluntary exchange, productivity, and price
incentives to illustrate historical events.
• Hi! My name is Mrs. Econ
and today I am going to
teach you about economics.

• Economics is the study of

the making, buying, and
selling of goods or services.
 Barter-Trade
• When the 13 colonies were founded,
I have 5 rabbits to some people were good hunters,
trade. Want to trade some were craftsmen, and some
were farmers.
with me?
• In order to get things that a person
needed to survive, one person might
have traded one item for another
item.

• This is known as voluntary

exchange.
 What is voluntary exchange?
• People will trade if they both get
Yes. I will trade something from it.
my milk and eggs
• The lady trades a jug of milk and 3
for your rabbits. eggs for 5 rabbits.
• She needs the rabbits to make rabbit
stew.
• She’ll use the rabbits’ skin to make a
fur cap.
• The man’s family needs milk and
eggs.
 Let’s review voluntary exchange.
• Voluntary exchange helps
both buyers and sellers.
• Voluntary exchange was
used in the system of colonial
trade. (barter)
I’ll make your I’ll give you 4 • The colonists swapped goods
that they had for things they
farming tools crates of apples needed.
for 4 crates of for farming
apples. tools.

Both parties must

benefit from the
trade.
 Trade was very important after the Revolutionary
War ended.

Under the Articles of Confederation, Congress

had no power to make laws about trade.
This turned out to be a big problem among the
thirteen states.
 How was this a problem?

•Each state wanted to control their own trade. They tried to make big profits.

•Each state made their own money. Sometimes they would not accept another state’s money.

•Most foreign countries would not trade with the United States because the 13 states could not get along
with each other.
How did they solve these economic problems?

• Thanks goodness they wrote the U.S.

Constitution!
• The Constitution says that the federal
government controls trade between
the states and with foreign countries.
• The state government controls trade
within its own state.
1. Who is the United • Canada
States’ Number 1
trading partner?

2. Can you name one of the most

important industries trading between
Canada and the U.S.A.?
(It’s big in Japan and Korea, too.
Your family probably uses this every day!)
 Automobiles
 PRODUCTIVITY
Vol
it y unt
r t un Exc ar y
o han
Opp ost ge
C

Basic Economics

zati o n
Cho e c i al i
ices S p

Price Incentives
 $ Choices Cost You!
$
• We have to make economic choices every day.
• Some choices are easy because they’re not very expensive.
• Some choices are hard because they cost a lot of money.

$ $ $ $
 Examples of Daily Choices
(Cost a small amount of money)

Choice 1 Choice 2 Choice 3

• Eat school • Go to the • Ride the
lunch or movies or bus to
• Bring your • Rent a school or
lunch movie • Ride with
from and watch your
home it at home parents
 Examples of Hard Choices
(Involves a lot of money)

Choice 1 Choice 2 Choice 3

• Buy a new • Go on a • Go to
car or trip or work or
• Buy a • Save the • Stay
used car money for home and
college take care
of the
children
Opportunity Cost

• Opportunity cost is the value of what is given up

when a choice is made.
• Every time you make a choice, you give up
something else.
• You might decide to watch TV instead of washing a
neighbor’s car to make some money.
• Your opportunity cost is the money you could have
made washing the car!
 Making Choices
All choices require giving up something

• A farmer decides to  His opportunity cost is

grow corn instead of the tomatoes he could
tomatoes. have grown.
 Making Choices
All choices require giving up something
• A dad decides to watch  His opportunity cost is
his son’s soccer game the money he could
instead of earning some have earned fixing the
extra money fixing the computer.
neighbor’s computer.
 Leaders throughout history have had to make choices that
involved opportunity cost.

• The kings and queens decided to  Their opportunity cost was the
spend money to search for a short money that could have be used
cut to Asia. They paid for ships, for important things at home or
supplies, and manpower. to trade with other countries
closer to home.
How do price incentives affect people’s behavior and
choices?
• A price incentive is used to affect people’s buying behavior.
• Incentives can motivate people to take action!
• An offer for “Buy one pizza, get one free,” is a price incentive.
• A sale where items are ½ price is a price incentive.

SALE
50% off
TODAY
 BASIC ECONOMIC
PROBLEM

33 Department of Electrical and Electronics Engineering, BVCOE New Delhi

Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
 BASIC ECONOMIC
PROBLEM
Physical Environment:
Engineers produce products and services depending on
physical laws. Physical efficiency takes the form:

System Output
Physical (efficiency)=
System Input

34 Department of Electrical and Electronics Engineering, BVCOE New Delhi

Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
 BASIC ECONOMIC
PROBLEM
Economic Environment:

Much less of a quantitative nature is known about economic

environments– this is due to economics being involved with
the actions of people, and the structure of organization.

System worth
Economic (efficiency) =
System Cost

35 Department of Electrical and Electronics Engineering, BVCOE New Delhi

Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
 BASIC ECONOMIC
PROBLEM

36 Department of Electrical and Electronics Engineering, BVCOE New Delhi

Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
 BASIC ECONOMIC
PROBLEM

37 Department of Electrical and Electronics Engineering, BVCOE New Delhi

Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
 ECONOMIC PROBLEM
SOLUTION

38 Department of Electrical and Electronics Engineering, BVCOE New Delhi

Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
 ECONOMIC PROBLEM
SOLUTION

39 Department of Electrical and Electronics Engineering, BVCOE New Delhi

Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
 Micro and Macro Economics

Economics is the study of choice. It makes a choice between unlimited wants and limited means. Men and
Introduction society have to make choices to fulfil their wants. Men have to choose to satisfy their wants and society has
to choose as to what to produce and in what quantity and how to distribute it among the different
individuals. This problem of choice for the men and society lead us to study economics in 2 parts: Micro
and Macro Economics.

The term micro economics is derived from the Greek word ‘Mikros’ meaning small. Micro economics
Micro Economics studies an individual or a firm. It studies the smallest unit of the economy.
According to K.E.Boulding, “Microeconomics is the study of particular firms, particular households,
individual prices, wages, incomes, individual industries, particular commodities”.

Subject Matter of Micro Economics

 The basic concept behind micro economics is the commodity pricing. It looks into the demand and
Commodity Pricing supply from individual perspective and tries to reach the equilibrium position with the interaction
between the two. On the demand side we study the law of demand which is the one of the basic
concepts of economics. We also study about the law of supply and with the interaction of the two
the consumer reaches the equilibrium. Elasticity of demand and supply is also one of the basic
concept of economics.

Factor Pricing The factors engaged in production process need to be paid remuneration and economics find
out how. There are basically four factors of production: land, labour, capital and
entrepreneur. Land is paid rent, labour is paid wages, capital is paid interest and
entrepreneurs are paid profits. Factor pricing helps the firm to decide how a piece of land or a
worker is paid for his participation in the work.

Theory of Economic Welfare

Economic welfare guides the government in
taking key policy decisions. It decides as to
whether a policy should be implemented or not
by weighing it under the parameters of
economic welfare. If a policy decision benefit
someone but harm others then should that
policy decision be taken or not is decided by the
economic welfare concept.
Macroeconomics
The word is derived from the Greek word
‘Makros’ which means large. It studies the
economy as a whole. It studies in aggregates. It
seeks to solve problem for the whole of the
economy.
K.E.Boulding, “Macroeconomics deals not with
individual quantities as such but with aggregates
of these quantities; not with individual incomes but
with national income; not with individual prices
but with price levels; not with individual outputs
but with the national output.”

Theory of Income and Employment

The theory of income and employment determines the optimum level Theory of Price Level and Inflation
in the economy taking into consideration aggregate demand and
aggregate supply function. It depends upong consumption function
and investment function. Any divergence between the two leads to The general level of price level at which economy will function smoothly
fluctuations in the business cycle. is determined by the theory of price level. How much is the inflation rate
and how is it affecting the economy
is all decided by the macro economics. Too much inflation or deflation is harmful for the economy. The theory suggests
measure to control them.
Theory of Economic Growth
The theory of economic growth explains the growth rate which is optimum for the economy of any country. Any
divergence from the optimum growth rate leads to problems of inflation or deflation and can also lead to deep economic
problems of poverty and unemployment. The theory suggests ways in which it can be checked.
Macro Theory of Distribution
Macro economics deals with the overall distribution of wages and profits for a
nation as a whole. It seeks to find out ways in which overall distribution is
affected so that balance is maintained in the economy.
Differences Between Micro and Macro Economics
Production Possibility Curve TABLE 1.1 – PRODUCTION POSSIBILITIES

Simplifying Assumptions:
1. Economy is operating CHOICE MOVIES COMPUTERS
efficiently
2. Available supply of resources
A 0 25,000
is fixed in quantity and B 100 24,000
quality at this point of time
3. No new development in
technology during analysis C 200 22,000
4. Economy produces only 2
types of products D 300 18,000
5. Choices will be necessary
because resources and
technology are fixed E 400 13,000

A production possibilities table F 500 0

indicates some of the possible
choices, PPC is a graphical
presentation of choices Copyright © 2001 by Houghton Mifflin Company. All rights 55
reserved.
Figure 1.1
The Production
Possibilities Curve

 Points on the curve represent maximum possible

combinations
 Points inside the curve represent underemployment or
unemployment
 Points outside the curve are unattainable at present
 Optimal or best product will some point on the curve. The
exact point depends on society ; this is a normative decision.
Copyright © 2001 by Houghton Mifflin Company. All 56
rights reserved.
 Law of increasing opportunity costs

• The slope of PPC becomes steeper, showing increasing opportunity cost. That is, the amount of other goods and services that
must be foregone to obtain more of any given product increases
• Economic rationale: economic resources are not completely adaptable to alternative uses

Key question

How does a society decide its optimal point on the PPC?

Society receives marginal benefits (MB) from each additional product consumed
But the law of increasing opportunity costs reminds us that marginal costs (MC) also rise as more of a
product is produced and consumed
Selection Criterion: Produce and consume so long as MB exceeds MC

Copyright © 2001 by Houghton Mifflin Company. All 59

rights reserved.
3. Unemployment, economic growth and the future

• Unemployment and productive inefficiency occur

when the economy is producing less than full
production or inside the PPC
• Economic growth occurs when PPC shifts outward.
This happens when:
1. Resource supplies expand in quality or quantity
2. Technological advances are occurring
• Our present choices affect our future possibilities

Figure 1.2
Shifts in the Production
Possibilities Curve

Copyright © 2001 by Houghton Mifflin Company. All 60

rights reserved.
Figure 1.3
Shifts in the Production Possibilities Curve Depend on Choices
Copyright © 2001 by Houghton Mifflin Company. All 61
rights reserved.
THE CIRCULAR FLOW OF ECONOMIC ACTIVITY
 Product Market – where goods and services are exchanged

Households – suppliers of the factors of production

& demanders of goods and services

Government – providers of public goods and services & demanders

of both private goods and services and the factors of
production

Businesses / Firms – suppliers of goods and services

& demanders of the factors of production

Factor Market – where the factors of production

are exchanged
 The circular-flow diagram is a model that represents the transactions in an economy by flows around a circle.

 Two sectors models

a.) savings economy
b.) non-savings economy

 Three sectors models

 Four sectors models

Two sectors model

(no savings economy)
(savings economy)
Factors of payment
(rent, wages, interest, profit)
Factors of Production
(land, labor, capital, entrepreneur)

Business
Household
Firm
Sector

Output of G/S

Consumption of G/S

Household
Expansion of business
savings
 Three sectors models
It includes household sector, producing
sector and government sector. It will
study a circular flow income in these
sectors excluding rest of the world
i.e. closed economy income. Here flows
from household sector and producing
sector to government sector are in the
form of taxes. The income received from
the government sector flows to
producing and household sector in the
form of payments for government
purchases of goods and services as well
as payment of subsides and transfer
payments. Every payment has a receipt in
response of it by which aggregate
expenditure of an economy becomes
identical to aggregate income and makes
this circular flow unending.
 Four sectors models
⚫ A modern monetary economy comprises a network of four
sector economy these are-

⚫ 1.Household sector 2. Firms or Producing sector

3. Government sector 4. Rest of the world sector. Each of
the above sectors receives some payments from the other
in lieu of goods and services which makes a regular flow
of goods and physical services. Money facilitates such an
exchange smoothly. A residual of each market comes in
capital market as saving which in turn is invested in firms
and government sector. Technically speaking, so long as
lending is equal to the borrowing i.e. leakage is equal to
injections, the circular flow will continue indefinitely.
However this job is done by financial institutions in the
economy.
Types of cost

• Fixed Costs
• Variable Costs

Classification of Goods

• Nessicity –luxury
• Producer-Consumer
• Complementary – Substitute
• Inferior –Normal
 Types of Markets
• Perfectly competitive markets have the following two

characteristics:
• Goods being sold are all the same
• Both Buyers and sellers are price takers

Monopoly is characterized by:

• One seller and many buyers
• Seller sets the price

Oligopoly is characterized by
• Few sellers without rigorous competition
• The sellers get together to set a price

Monopolistic competition is characterized by

• Many sellers, each selling a differentiated product
• Sellers have some ability to set the price for their own
product
Types of Demand

• Elastic and Non-elastic

The Concept of Demand, Supply, and Market
Equilibrium
 The Basic Decision-Making Units

• A firm is an organization that transforms resources (inputs) into products (outputs). Firms are the primary

producing units in a market economy.

• An entrepreneur is a person who organizes, manages, and assumes the risks of a firm, taking a new idea
or a new product and turning it into a successful business.
• Households are the consuming units in an economy.

The Circular Flow of

Economic Activity

• The circular flow of economic activity shows the connections between

firms and households in input and output markets.
Input Markets and Output Markets

• Output, or product, markets are the markets in which

goods and services are exchanged.
• Input markets are the markets in which resources—labor,
capital, and land— used to produce products, are
exchanged.

• Payments flow in the opposite direction as the physical flow of resources, goods,
and services (counterclockwise).
Input Markets

Input markets include:

• The labor market, in which households supply work for wages to firms that demand labor.

• The capital market, in which households supply their savings, for interest or for claims to future profits, to
firms that demand funds to buy capital goods.

• The land market, in which households supply land or other real property in exchange for rent.

Determinants of Household Demand

A household’s decision about the quantity of a particular output to demand depends on:
• The price of the product in question.
• The income available to the household.
• The household’s amount of accumulated wealth.

• The prices of related products available to the household.

• The household’s tastes and preferences.

• The household’s expectations about future income, wealth, and prices.

 SUPPLY

• Quantity supplied of a n y good i s t h e a m o u n t t h a t

sellers a re willing to sell i n t h e m a r k e t

• D e t e r m i n a n t s of s u p p l y :
• Price
• I n p u t prices
• Technology
• Expectations
• N u m b e r of sellers (Market s u p p l y curve)
 Law of supply

• Other things equal, the quantity supplied of a good rises when the price of the good rises.

• Quantity supplied is positively related to the price of the good

• Supply schedule is a table that shows the relationship between the price of a good and the quantity supplied

• Supply curve graphs the supply schedule. It is upward sloping

 SUPPLY AND DEMAND

• How do supply and demand combined together determine the quantity and price of a good sold in the market?

• Supply and demand curves intersect. At this equilibrium price quantity supplied equals quantity demanded

• Equilibrium is a situation in which supply equals demand

• Equilibrium price is also called as the market clearing price as quantity supplied equals quantity demanded

• What happens when market price is not equal to the equilibrium price?

• Excess supply- surplus in the market

• Excess demand- shortage in the market
• Free markets reach equilibrium through the interaction of buyers and sellers and price is the tool through which the market is
cleared
 Demand in Output Markets

ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS

QUANTITY • A demand schedule is a table showing how

much of a given product a household would be
PRICE DEMANDED willing to buy at different prices.
(PER (CALLS PER CALL)
• Demand curves are usually
MONTH)
derived from demand schedules.
$ 0 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
 Law of Demand
• Other things equal, the quantity demanded of a good falls when the price of the good rises.

• Price and quantity demanded are negatively related

• Quantity demanded is the amount of the good that buyers are willing to purchase

• Determinants of quantity demanded:

• Income (normal, inferior)

• Prices of related goods (substitutes, complements)

• Tastes

• Expectations

• Number of buyers (Market demand curve)

• Demand schedule and Demand curve

• Demand schedule is a table that shows the relationship between the price of a good and the
quantity demanded
• Demand curve graphs the demand schedule. The demand curve slopes downward
 The Demand Curve

ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
QUANTITY
PRICE DEMANDED
(PER (CALLS PER • The demand curve is a graph illustrating
CALL) MONTH) how much of a given product a household
$ 0 30 would be willing to buy at different prices.
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
The Law of Demand

• The law of demand states that there is a

negative, or inverse, relationship between
price and the quantity of a good demanded
and its price.

• This means that

demand curves slope
downward.
Other Properties of Demand Curves

• Demand curves intersect the quantity (X)- axis, as a

result of time limitations and diminishing marginal
utility.
• Demand curves intersect the (Y)-axis, as a
result of limited incomes and wealth.
 Income and Wealth
• Income is the sum of all households wages, salaries, profits, interest payments, rents, and
other forms of earnings in a given period of time. It is a flow measure.

• Wealth, or net worth, is the total value of what a household owns minus what it
owes. It is a stock measure.

Related Goods and Services

• Normal Goods are goods for which demand goes up when income is higher and for which
demand goes down when income is lower.
• Inferior Goods are goods for which demand falls when income rises.

Related Goods and Services

• Substitutes are goods that can serve as replacements for one another; when the price of one
increases, demand for the other goes up. Perfect substitutes are identical products.

• Complements are goods that “go together”; a decrease in the price of one results in an increase
in demand for the other, and vice versa.
Shift of Demand Versus Movement Along a Demand Curve

• A change in demand is not the same as a

change in quantity demanded.
• In this example, a higher price causes
lower quantity demanded.

• Changes in determinants of demand, other

than price, cause a change in demand, or
a shift of the entire demand curve, from
DA to DB.
A Change in Demand Versus a Change in Quantity Demanded

• When demand shifts to the right, demand

increases. This causes quantity demanded
to be greater than it was prior to the shift,
for each and every price level.
A Change in Demand Versus a Change in Quantity Demanded

To summarize:
• Change in price of a good or service leads to

• Change in quantity demanded

• (Movement along the curve).

Change in income, preferences, or

prices of other goods or services
leads to

Change in demand
(Shift of curve).
 The Impact of a Change in Income

• Higher income decreases the • Higher income increases the

demand for an inferior good demand for a normal good
 The Impact of a Change in the Price of Related Goods
• Demand for complement good
(ketchup) shifts left

• Demand for substitute good (chicken) shifts right

• Price of hamburger rises

• Quantity of hamburger demanded falls
 From Household to Market Demand

• Demand for a good or service can be defined for an individual household, or for a group of households that make up a market.
• Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the
market for that good or service.

• Assuming there are only two households in the market, market demand
is derived as follows:
 Supply in Output Markets

CLARENCE BROWN'S
SUPPLY SCHEDULE FOR
SOYBEANS

QUANTITY
• A supply schedule is a table showing how much
SUPPLIED of a product firms will supply at different prices.
PRICE (THOUSANDS (PER
OF BUSHELS • Quantity supplied represents the number of units of a
BUSHEL) PER YEAR)
product that a firm would be willing and able to offer
for sale at a particular price during a given time
$ 2 0
1.75 10 period.
2.25 20
3.00 30
4.00 45
5.00 45
 The Law of Supply

6
5
4
Price of soybeans per bushel ($)

• The law of supply states that there

3 is a positive relationship between
price and quantity of a good
2 supplied.
1 • This means that supply curves
0 typically have a positive slope.

0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year
Determinants of Supply A Change in Supply Versus
a Change in Quantity Supplied
• The price of the good or service.
• The cost of producing the good, which in
turn depends on:
• The price of required inputs (labor,
capital, and land),
• The technologies that can be used
to produce the product, • A change in supply is not the
• The prices of related products. same as a change in quantity
supplied.
• In this example, a higher price
causes higher quantity supplied,
and a move along the demand
curve.
• In this example, changes in determinants of supply, other than price, cause an
increase in supply, or a shift of the entire supply curve, from SA to SB.
A Change in Supply Versus
a Change in Quantity Supplied

• When supply shifts to the right,

supply increases. This causes
quantity supplied to be
greater than it was prior to the
shift, for each and every price
level.
A Change in Supply Versus
a Change in Quantity Supplied

To summarize:
• Change in price of a good or service leads to

• Change in quantity supplied

• (Movement along the curve).

Change in costs, input prices, technology, or prices of

related goods and services
leads to

Change in supply
(Shift of curve).
 From Individual Supply to Market Supply

• The supply of a good or service can be defined for an individual firm,

or
for a group of firms that make up a market or an industry.
• Market supply is the sum of all the quantities of a good or service
supplied per period by all the firms selling in the market for that good
or service.
• As with market demand, market supply is the horizontal summation of
individual firms’ supply curves.
• Excess supply, or surplus, is the
condition that exists when quantity
supplied exceeds quantity demanded
at the current price.

• When quantity supplied exceeds

quantity demanded, price tends to
fall until equilibrium is restored.
 Increases in Demand and Supply

• Higher demand leads to higher • Higher supply leads to lower

equilibrium price and higher equilibrium equilibrium price and higher
quantity. equilibrium quantity.
 Decreases in Demand and Supply

• Lower demand leads to lower • Lower supply leads to higher price

price and lower quantity and lower quantity exchanged.
exchanged.
 Relative Magnitudes of Change

• The relative magnitudes of change in supply and demand determine the

outcome of market equilibrium.
 Relative Magnitudes of Change

• When supply and demand both increase, quantity will increase, but
price may go up or down.
 Analyzing Changes in Equilibrium:
Summary
DEMAND/ No change in Increase in Decrease in
SUPPLY Supply supply supply
No change in P same P down P up
demand Q same Q up Q down
Increase in P up P ambiguous P up
demand Q up Q up Q
ambiguous
Decrease in P down P down P
demand Q down Q ambiguous
ambiguous Q down
 Law of Diminishing Returns

• The law of diminishing returns states that in all productive processes, adding more of
one factor of production, while holding all others constant, will at some point yield
lower incremental per-unit returns.

• The law of diminishing returns does not imply that adding more of a factor will
decrease the total production, a condition known as negative returns, though in fact
this is common.

A common sort of example is adding more workers to a job, such as assembling a car on a
factory floor. At some point, adding more workers causes problems such as workers
getting in each other's way or frequently finding themselves waiting for access to a part. In
all of these processes, producing one more unit of output per unit of time will eventually
cost increasingly more, due to inputs being used less and less effectively.
Income elasticity
 Market Equilibrium

• The operation of the market depends on the

interaction between buyers and sellers.
• An equilibrium is the condition that exists when
quantity supplied and quantity demanded are equal.
• At equilibrium, there is no tendency for the market
price to change.
Market Equilibrium
• Only in equilibrium is quantity
supplied equal to quantity
demanded.

• At any price level other than

P0, the wishes of buyers and
sellers do not coincide.
Market Disequilibria

• Excess demand, or shortage, is the

condition that exists when quantity
demanded exceeds quantity supplied at
the current price.

• When quantity demanded exceeds

quantity supplied, price tends to rise until
equilibrium is restored.