Introductory Economics Basics | UG Minor 1 | Part - 1

“If you understand Economics, you understand how the world works.”

Dear Students,

Economics is not just a subject, it is a way of understanding life around us. Whether you have taken Economics as your major subject or as a minor, the importance remains the same. For majors, it builds a strong foundation for higher studies and careers. For minors, it may seem secondary, but it is one of the most scoring subjects if studied with focus & full dedication.

At CBPBU, questions are set in both Bengali and English, but writing in English will help you present your answers more sharply and gain good marks. That’s why we encourage you to follow this material in English, explained in the simplest way with examples from daily life, so that every student, regardless of background, can learn and succeed.

You may worry about the subject, what will you read, what kind of questions may be asked and how you should write your answers, you may not have any idea, however, no worries here’s the solution. We’ll provide you a complete guideline to help you shine in the crowd with a better mark. Hope it’ll be helpful for you, and most importantly if you have any doubt or queries feel free to ask, we’ll try our best to help you out. Let’s delve deeper into the syllabus and afterward will discuss every concept in easiest way possible, as the syllabus is vast we will read it unit wise. In this content we will discuss about Unit – I. Let’s explore the syllabus step by step.

 Let’s Break Down the Syllabus

• Unit I -> Microeconomics basics
• Unit II -> Macroeconomics basics (National Income, Inflation, etc.)
• Unit III -> Money & Banking
• Unit IV ->  Budget & Taxation

 

Microeconomics Basics

Microeconomics is a branch of economics that studies the behavior and decision- making of individual economic units such as households, firms and markets. It examines how these units allocate resources and make choices in a market economy.

Microeconomics studies small parts of the economy like one person, one family, or one shop. It explains how they buy, sell, and decide prices.

 Example 1: You have ₹10. You must choose between buying a pen or a biscuit. -> That’s microeconomics.

 Example 2: In summer, the price of ice cream goes up because more people want it. -> That’s microeconomics.

 Example 3: A shopkeeper decides how much rice to sell in the market. -> That’s microeconomics.

 Simple rule: Whenever we study small decisions (one buyer, one seller, one market) -> it is Microeconomics.

 

   Scope of Microeconomics

Microeconomics mainly studies four things:

1. Consumer Behavior (How people spend money)

-> How households make decisions about what goods and services to buy with the limited money. (It studies how a person decides what to buy with limited money.)

Example: With ₹100, you choose between buying fruits or a packet of sweets.

2. Producer Behavior (How firms produce goods)

 -> It studies how a firm decides what to produce and how much to produce to earn profit.

Example: A bakery decides whether to bake more bread or more cakes depending on demand.

3. Price Determination

-> How prices are determined in different market structures.

It shows how the interaction of demand and supply fixes the price of a good.

Example: If many students want cold drinks in summer, the price goes up.

4. Market Structures

It studies different types of markets such as perfect competition, monopoly, oligopoly.

Perfect Competition

·         Many sellers, many buyers.

·         All products are almost the same.

·         No one can charge a higher price because buyers will simply go to another seller.

 Example: Local vegetable market.

·         If one seller tries to sell potatoes at ₹60/kg while others sell at ₹50/kg, customers will not buy from him.

Here, sellers are price-takers, not price-makers.

  Monopoly

·         Only one seller in the market.

·         No close substitute available.

·         The seller can set the price as he wants.

Example: Indian Railways (for long-distance train travel).

·         If you want to go from Cooch Behar to Delhi by train, you cannot choose another railway company only Indian Railways runs it.

Here, the seller is a price-maker.

Oligopoly

·         Only a few big sellers control the market.

·         They compete with each other but also keep an eye on each other’s prices.

·         Often, they use advertisements and offers to attract customers.

Example: Telecom Companies (Jio, Airtel, VI).

·         If Jio reduces recharge price, Airtel and VI also quickly change their prices.

·         Customers mostly have to choose between these 3 only.

Summary of Market Types:

• Perfect Competition = Many sellers, same product, no one controls price.
• Monopoly = One seller, full control over price.
• Oligopoly = Few sellers, compete and watch each other.

 

Summary:

The scope of microeconomics is to study how people buy, how firms sell, how prices are fixed, and how markets work.

 

 

Utility (Cardinal vs Ordinal)

 Utility means the satisfaction we get from consuming a good.

Example: Eating an ice cream gives you happiness -> that’s utility.

1.     Cardinal Utility (old approach):

o    Utility can be measured in numbers (utils).

o    Example: If you drink tea, you may say it gives you 10 utils of satisfaction, and coffee gives you 20 utils.

o    Developed by Alfred Marshall.

Example: If you eat 1 chocolate and say “it gave me 5 points of happiness,” and 2 chocolates = 10 points -> that is cardinal measurement.

2.     Ordinal Utility (modern approach):

o    Utility cannot be measured, but we can rank preferences.

o    You cannot say coffee gives exactly “20 utils,” but you can say:

“I prefer coffee more than tea.”

“I like tea more than cold drink.”

o    Introduced by Hicks and Allen.

Example: You cannot count your happiness in numbers, but you can say coffee > tea > cold drink in your preference order.

Basis	Cardinal	Ordinal
Measurement	Utility can be measured in numbers (utils).	Utility cannot be measured in numbers, only ranked in order.
Main Thinkers	Proposed by Alfred Marshall and his followers.	Developed by Hicks and Allen.
Basis of Analysis	Based on the Law of Diminishing Marginal Utility (DMU).	Based on Indifference Curve Analysis.
Assumption about Utility	Assumes utility is like a physical quantity (can be added, subtracted).	Assumes utility is only a matter of preference, not measurable.
Practical Use	Less realistic, not used much today.	More realistic and widely used in modern economics.
Example	Tea gives 10 utils, Coffee gives 20 utils.	Coffee is preferred over Tea, Tea is preferred over Cold Drink.

 

 Demand

 Meaning of Demand

Demand means the quantity of a good a consumer is willing and able to buy at a given price and time.

Important: Only willingness is not enough, you must also have the ability (money) to buy.

Example: You want an iPhone (willingness) but if you don’t have money, it is not real demand.

 Law of Demand

Definition:  The law of demand says when price falls, demand increases. When price rises, demand decreases, keeping other things constant.

 Example:

·         If price of mango falls from ₹100/kg to ₹60/kg -> people buy more mangoes.

·         If price rises again to ₹120/kg -> demand falls.

So, as price increases demand decreases while price decreases demand increases. This shows an inverse relation between price and demand.

This simple downward sloping curve shows that as price increases, demand decreases.

The curve slops downward from left to right.

 Factors Affecting Demand

Demand for a good depends on many things, not only price. The main factors are:

1. Price of the Good

·         If price rises -> demand falls.

·         If price falls -> demand rises.

2. Income of the Consumer

·         When income increases, demand for normal goods increases.

·         For inferior goods, demand may fall when income rises.

·         Inferior good: A good whose demand decreases with an increase in income.

Example: A bus ticket is an inferior good.

3. Price of Related Goods

·         Substitutes: If price of one rises, demand for the other increases.

·         Complements: If price of one rises, demand for both falls.

4. Tastes and Preferences

·         Demand depends on fashion, habits, and social trends.

5. Future Expectations

·         If people expect price to rise in future, they buy more today.

6. Population

·         Larger population -> higher demand for goods.

·         Type of population (young, old) also affects demand.

7. Season and Climate

·         Some goods are demanded more in particular seasons.

Summary :

Factors affecting demand are price, income, related goods, tastes, expectations, population, and season.

 

Exceptions (When Law of Demand doesn’t work)

1.     Giffen Goods: Poor people may buy more cheap food (like potatoes, bajra) even when price rises.

2.     Luxury Goods: Rich people buy more diamonds, cars when price is high (to show status).

3.     Future Price Expectation: If petrol is expected to cost more tomorrow, people buy more today even at high price.

4.     Necessities (like salt, medicines) :demand stays constant even if price changes.

Elasticity of Demand (Simple)

Elasticity means: How fast demand changes when price changes.

1.     Elastic Demand: Big change in demand.

2.     Inelastic Demand: Small change in demand.

    In short:

·         Law of Demand: Price decreases -> Demand increases.

·         Exceptions: Giffen goods, luxury goods, future price.

·         Elasticity: Demand may change more (elastic) or less (inelastic).

 

So, as price increases demand decreases while price decreases demand increases. This shows an inverse relation between price and demand.

 

Supply (The Seller’s Side of the Story)

When we studied demand, we looked at buyers. Now let’s see the other side the sellers.

Supply simply means how much of a good, sellers are ready to sell at a certain price.

Think of a farmer. If rice is ₹40/kg, he may bring 50 kg to the market. But if the price jumps to ₹80/kg, he will bring 100 kg. Why? Because higher price means higher profit.

That’s why we say:

Law of Supply -> Higher price = more supply, Lower price = less supply.

Real-life example: When onion price rises suddenly, you’ll see more trucks of onions coming to the market. Sellers rush to sell because profit is high.

So, supply is nothing complicated it’s just sellers reacting to price and profit.

Goes upward (left to right).

Higher price -> sellers supply more.

Lower price -> sellers supply less.

Example: Onion price goes up -> farmers bring more onions.

 

Factors Affecting Supply

1.     Price of the Good -> Higher price, higher supply.

2.     Cost of Production -> If cost rises, supply falls.

3.     Technology -> Better technology increases supply.

4.     Price of Other Goods -> If wheat price rises, farmers may shift land from rice to wheat.

5.     Government Policy -> Taxes reduce supply, subsidies increase supply.

 

Market Equilibrium (Where Buyers and Sellers Shake Hands)

Now imagine both sides, buyers (demand) and sellers (supply)  coming to the market.

·         Buyers want the lowest price.

·         Sellers want the highest price.

So, where do they agree? That exact price where buyers are willing to buy and sellers are willing to sell is called Equilibrium Price. The quantity bought and sold at that price is called Equilibrium Quantity.

Example: At ₹50 per kg, people want to buy 100 kg of rice, and sellers are also ready to sell 100 kg. Perfect balance! That’s equilibrium.

If price is higher than equilibrium -> Surplus (excess supply, unsold goods).

If price is lower than equilibrium -> Shortage (excess demand, not enough goods).

 Only at equilibrium both are satisfied. That’s why economists call it the “meeting point” of demand and supply.

In simple words:

• Supply = Sellers’ willingness.
• Equilibrium = Peace treaty between buyers and sellers.

Demand and Supply meet at one point -> Equilibrium Price & Quantity.

Price above this -> too much supply (surplus).

Price below this -> too much demand (shortage).

It’s the balance point of buyers and sellers.

 

Concept of Revenue in Economics

 

 1. Meaning

Revenue means the income a firm earns from selling goods and services. It’s not profit (because profit is revenue minus cost). Revenue only looks at the money coming in from sales.

Total Revenue (TR)

This is the total money a seller gets by selling a certain number of goods.

Formula:

TR = Price × Quantity

Example: A pen costs ₹10. If a shopkeeper sells 50 pens:

TR = 10 × 50 = ₹500.

Average Revenue (AR)

This means revenue per unit of output.

It tells us how much money the seller earns on average from each unit sold.

Formula:

AR = TR ÷ Quantity

Example: If TR = ₹500 from selling 50 pens,

AR = 500 ÷ 50 = ₹10.

Here, AR is usually equal to the price of the good.

Marginal Revenue (MR)

This means the extra revenue earned by selling one more unit.

Formula:

MR = TRn − TRn1

Example:

·         Selling 50 pens gives TR = ₹500

·         Selling 51 pens gives TR = ₹510

In general cases, MR is also equal to price. But in imperfect markets (like monopoly), MR can be less than AR.

Relation Between TR, AR, and MR

·         Perfect Competition (many sellers):

o    Price stays the same.

o    AR = MR = Price.

o    TR increases regularly.

Example: If each chocolate is always ₹10, then selling 1 more chocolate always adds ₹10.

Perfect Competition -> Price always same. So,

AR = MR = Price (straight horizontal line).

TR increases steadily with output.

Example: If one chocolate is ₹10, every extra chocolate adds ₹10 -> line is flat.

 

·         Monopoly (one seller):

o    To sell more, seller reduces price.

o    AR goes down slowly.

o    MR falls twice as fast as AR.

o    TR increases at first, then starts to fall.

Example: A cinema owner lowers ticket price to more people come, however, after a point total money earned may reduce.

Importance of Revenue

We study revenue because:

1.     It tells firms how much to produce.

2.     It helps to calculate profit (Profit = Revenue – Cost).

3.     It shows differences between market types (in competition AR=MR, in monopoly AR>MR).

 

    Perfect competition = simple, AR = MR.

Monopoly = tricky, AR > MR, TR rises then falls.

 

Short Run and Long Run Cost & Profit

 

Short Run

·         Definition: A period where some inputs are fixed (land, machines) and some are variable (labour, raw materials).

·         Cost: Has Fixed Cost (TFC) + Variable Cost (TVC).

·         Profit: Firm may earn supernormal profit, normal profit, or loss depending on demand and cost.

Long Run

·         Definition: A period where all inputs are variable; firm can change its scale (factory size, machines, labour).

·         Cost: No fixed cost -> only variable costs remain.

·         Profit:

o    In Perfect Competition -> only Normal Profit (new firms enter if profit is high).

o    In Monopoly/Oligopoly -> Supernormal Profit can continue due to barriers to entry.

    Short Run: Some inputs fixed, TFC + TVC, profit can be supernormal/normal/loss.

    Long Run: All inputs variable, only normal profit in perfect     competition, supernormal possible in monopoly.

 

Perfect Competition

Definition

Perfect competition is a market structure where there are a large number of buyers and sellers dealing in homogeneous products, and no single buyer or seller has control over the price. The price is decided by the interaction of total demand and total supply in the market.

    Perfect competition = many sellers + identical goods + price decided by market.

Features of Perfect Competition

1.     Large Number of Buyers and Sellers: No single buyer or seller can influence price.

2.     Homogeneous Product: All goods are identical in quality.

3.     Free Entry and Exit of Firms: Firms can enter or leave market anytime.

4.     Perfect Knowledge: Buyers and sellers know prices and conditions fully.

5.      Price Taker: Firms cannot set price. They must accept the market price.

6.      Perfect Mobility of Factors: Labour and capital can freely move between firms.

7.     No Transportation Cost (assumption): It is assumed that goods sell at same price everywhere. It’s only an assumption in theory. However, in reality transportation cost exists.

    Perfect competition = Large sellers + Same goods + Free entry + Perfect knowledge + Price taker.

 

Monopoly

 

Definition

Monopoly is a market structure with a single seller selling a product that has no close substitutes. The monopolist has full control over supply and can influence price.

Example: Indian Railways (government monopoly), Microsoft Windows (dominant software).

Features of Monopoly

1️. Single Seller, Many Buyers -> Only one firm controls the market.

2️. No Close Substitute -> Consumers cannot easily switch.

3️. Price Maker -> Monopolist decides price, buyers have to accept.

4️. Barriers to Entry -> New firms cannot enter (due to law, patent, huge capital, etc.).

5️. Price Discrimination Possible -> Seller can charge different prices from different buyers.

Example: Railways charge different fares for 1st class and sleeper.

Oligopoly

 

Ø Definition

Oligopoly is a market structure with a few large firms dominating the industry. Products may be homogeneous (same) or differentiated (slightly different). Firms are interdependent in decision-making.

Examples:  Indian telecom market (Airtel, Jio). Indian airline industry (IndiGo, Air India, SpiceJet).

Ø Features of Oligopoly

1️. Few Sellers, Many Buyers -> A handful of firms dominate the market.

2️. Interdependence -> One firm’s decision (price/output) affects others.

3️. Barriers to Entry -> Difficult for new firms to enter.

4️. Non-Price Competition -> Firms often compete through advertisement, quality, offers (not only price).

5️. Price Rigidity -> Prices tend to be stable; firms avoid frequent changes.

6️. Collusion Possible -> Sometimes firms cooperate (form cartels) to fix prices/output.

Example: OPEC (oil-producing countries).

    Monopoly: One seller, no substitute, price maker, entry blocked.

Oligopoly: Few sellers, interdependent, competition + collusion, advertising important.

 

Stay tune for Unit- II

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