Economic Analysis For Management: IME, IIT Kanpur
Economic Analysis For Management: IME, IIT Kanpur
Economic Analysis For Management: IME, IIT Kanpur
Lecture 2
Consumers:
Consumers have limited incomes, which can be spent on a wide
variety of goods and services, or saved for the future.
Workers:
Workers also face constraints and make trade-offs. First, people must
decide whether and when to enter the workforce. Second, workers
face trade-offs in their choice of employment. Finally, workers must
sometimes decide how many hours per week they wish to work,
thereby trading off labor for leisure.
Firms:
Firms also face limits in terms of the kinds of products that they can
produce, and the resources available to produce them.
Prices and Markets
Is an Industry a Market?
Real vs Nominal prices
▶ Nominal price, or the current price is the rupee value of the price
quoted in the market. It is unadjusted for inflation. Price of the
same variety of rice was Rs. 5 a kg in 1970, Rs. 20 in 2000 and
Rs. 70 in 2020 (let’s say).
▶ The real price, on the other hand, is the price adjusted for
inflation. The nominal price is adjusted by an aggregate measure
of prices to arrive at the real price. Example, in real terms, price
of the rice variety in 2020 is Rs. 4 per kg in 1970 prices.
▶ The two major price indices in India are: consumer price index
(CPI), and the wholesale price index (WPI). Why?
Example from your book
▶ The quantity that producers are willing to sell depends not only
on the price they receive but also on their production costs,
including wages, interest charges, and the costs of raw materials.
▶ When production costs decrease, output increases no matter
what the market price happens to be. The entire supply curve
thus shifts to the right.
▶ Economists often use the phrase change in supply to refer to
shifts in the supply curve, while reserving the phrase change in
the quantity supplied to apply to movements along the supply
curve.
The demand curve
The demand curve shows how much of a good consumers are willing
to buy as the price per unit changes.
We can write this relationship between quantity demanded and price
as an equation: Q = Qd (P)
The demand curve
The demand curve shows how much of a good consumers are willing
to buy as the price per unit changes.
We can write this relationship between quantity demanded and price
as an equation: Q = Qd (P)
▶ Qd = a − bP + cI, or Qs = a + bP − cR
▶ Movement along the curves, when P changes.
▶ Shift of the curves when other variables change.
▶ It is possible that both happening at the same time.
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