Economics is the science related to the production, distribution and consumption of wealth or the material welfare of mankind, political economy, economic questions, affairs or aspects. In general, economics can be defined as “a social science which deals with human behaviour, how he uses limited income to satisfy the unlimited wants”.
Kinds of Economics

  1. Micro
  2. Macro


Micro Economics is also called “Theory of Firm”. Micro economics is the branch of economics which is concerned with the analysis of the behaviour of the individual units or variables such as individual demand or the price of the product.

Micro economics basically deals with individual decision making and the problem of resource allocation. It is concerned with applications such as Law of Demand, Price Theory etc.


Macro economics is that branch of economics which deals with the aggregate behaviour of the economy as a whole, which makes a study of the economic systems in general. E.g. National income, Total saving, Total Consumption, Unemployment, Economic Growth rate.

Managerial Economics

Economics is concerned with the problem of allocation of scare resources among competing wants. The economic principles, concepts, methods, tools and techniques that can be applied practically to solve the problems of Business Management is known as managerial economics
Therefore, Managerial Economics is a part of Economics and it is concerned with business practice for the purpose of facilitating decision making.

Nature of Managerial Economics

  1. Micro economics in nature
  2. Normative Economics
  3. Application Oriented
  4. Take the help of Macro Economics
  5. Evaluation of each alternative
  6. Assumptions
  7. Goal Oriented

Scope of Managerial Economics

  1. Demand analysis and forecasting
  2. Cost Analysis
  3. Production Analysis
  4. Marketing Analysis
  5. Pricing Policies
  6. Profit Management
  7. Capital Management

Relationship of Economics with other disciplines

  1. Managerial Economics and Traditional Economics
  2. Managerial Economics and Operation Research
  3. Managerial economics and Statistics
  4. Managerial economics and Accounting
  5. Managerial economics and psychology
  6. Managerial economics and Computer Science
  7. Managerial Economics and Mathematics


A Company is an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business and who share the profit or loss arising there from. A company is an artificial person created


  1. Artificial Person
  2. Separate legal existence
  3. Voluntary association of persons
  4. Limited Liability
  5. Transferability of shares
  6. Common Seal


Public Interest

  1. Public
  2. Private
  3. Government


  1. Indian Companies
  2. Foreign Companies


  1. Chartered Companies
  2. Statutory Companies
  3. Registered Companies


  1. Unlimited Liability
  2. Limited Liability
  3. Liability by Guarantee


Partnership is an improved from of sole trader in certain respects. Where there are like-minded persons with resources, they can come together to do the business and share the profits/losses of the business in an agreed ratio. Persons who have entered into such an agreement are individually called ‘partners’ and collectively called ‘firm’. The relationship among partners is called a partnership.


  1. Relationship
  2. Two or More persons
  3. There should be a business
  4. Agreement
  5. Carried on by all or any one of them acting for all


  1. Easy to form
  2. Availability of larger amount of capital
  3. Flexibility
  4. Personal contact with customers
  5. Quick decision and prompt actions


  1. Unlimited liability
  2. Limited amounts of capital
  3. Instability
  4. Mutual distrust
  5. Limitation on transfer of shares



  1. Long term
  2. Medium term
  3. Short term

Long Term

More than 3 years

  1. Own Capital
  2. Share Capital
  3. Retained Profits
  4. Debentures

Medium Term

b/w 1 and 3 years

  1. Bank Loan
  2. Hire purchase
  3. Leasing or renting
  4. Venture Capital

Short Term

  1. Commercial Paper
  2. Bank overdraft
  3. Trade credit
  4. Advance from customers


Law of Demand

The law of demand is an important theory in micro-economics. According to law of demand there is an inverse relationship or a negative relationship between the price of a product and its demand. The law may be stated as follows “when the price falls, demand extends, price rises demand falls, other things, remaining constant”


  1. Price of the Product
  2. Income of the Consumers
  3. Tastes, Habits and Preference of the Consumer
  4. Relative price of Substitute Goods and Complement Goods
  5. Consumer Expectation
  6. Population
  7. Climate and Weather
  8. Advertisement effect


  1. Giffen Goods/ Inferior Goods
  2. Veblen Goods
  3. Consumer Expectation
  4. Consumer Psychological Bias
  5. Necessaries
  6. Impulse Buying

Elasticity of Demand

Elasticity of Demand is the measure of the degree of change in the amount demanded of the commodity in response to a given change in price of the commodity, price of some related goods or change in consumer income.

There are four important kinds of elasticity of demand.

  1. Price elasticity of demand
  2. Income elasticity of demand
  3. Cross elasticity of demand
  4. advertising and promotional elasticity of demand

Price Elasticity of Demand

Price elasticity of demand measures the responsiveness of demand to changes in price. The price elasticity of demand for a commodity is the rate at which quantity bought changes as the price changes. It is denoted by (Ep)


  1. Perfect Elastic demand
  2. Perfect inelastic demand
  3. Unit elasticity demand
  4. Relative/Comparative Elasticity of demand
  5. Relative/ Comparative Inelasticity of demand

Measurement of Price Elasticity of Demand


  1. Percentage Method / Proportionate Change Method
  2. Total Outlay Method
  3. Point Method
  4. Arc Method

Demand Forecasting

Demand forecasting means expectation about the future course of the market demand for product. Demand forecasting is essentially reasonable judgment of future probabilities of the future demand. It cannot be 100% precise.


  1. Intentions of customer
    1. Survey method
      1. Census
      2. Sample
    2. Collective Opinion Method
    3. Delphi Technique
    4. Test Market
  2. Market Experimentation Method
  3. Based on Fast Trends
  4. Economic Barometer
  5. Statistical Method
    1. Naive
    2. Regression


Demand schedule: it is the table showing the prices per unit of the commodity and the amount demanded per period of time
Law of Supply: Supply is what the seller is able and willing to offer for sale. The Quantity supplied is the amount of a particular commodity that a firm is willing and able to offer for sale at a particular price during.


Production Function

Production function is basically is an engineering concept but is widely used in economics for studying production behaviour. The technical relationship between physical inputs and physical output is referred as the production function.

Cobb-Douglas Production Function: This is one of the most well-known production functions. It is represented as: Q = A * L^α * K^β Where A is a constant, L is labor input, K is capital input, and α and β are constants that represent the output elasticities with respect to labor and capital, respectively. This function exhibits constant returns to scale if α + β = 1.


  1. Short run Production function
    1. Law of Variable Proportion
    2. Iso Quants
  2. Long run Production function

Law of Variable Proportion

When total output or production of a commodity is increased by adding units of a variable input while the quantities of other inputs are held constant, the increase in total production becomes after some point, smaller and smaller.
The law of variable proportion explains the input- output relation, the change in output due to addition of one variable input

Total Production (TP)\ Average Production: TP/labou
Marginal Production: del(TP)/del(Labour)

Law of Return to Scale

In the long run all the factors of production are variable and an increase in output is possible by increasing all the inputs. Returns to scale implies the change in output or returns when all factors are change simultaneously in same ratio. In this law all the factors of production are changed in the same ratio

Three laws:

  1. Law of Increasing Returns to Scale
  2. Law of Constant Returns to Scale
  3. Law of Decreasing Returns to Scale

Law of Increasing Returns to Scale

This law states that the volume of output keeps on increasing with every increase in the input. Where given increase in factors of production results in a more than proportionate increase in output. In this first stage of production, the marginal output increases. It will explain through the following


  1. Indivisible factors
  2. Scope for greater specialisation
  3. Advantage of increasing dimensions
  4. External economies

Law of Constant Returns to Scale

Increasing returns to scale do not continue indefinitely. As the firm expands production more and more, the advantages of large scale production gradually give place to disadvantages. There is a limit to the advantages of size. At certain size of production the advantages and disadvantages of large scale production balance each other and we get constant result.

Law of Diminishing Returns to Scale

Constant returns to scale are only a passing phase. If the scale of production is increased further, diminishing returns will se in and the costs of production will rise.

Economics of Scale

Production may be carried on a small scale or on a large by a firm. When a firm expands its size of production by increasing all the factors, it secures certain advantages known as economies of production. These economies of large scale production have been classified by Marshall in to two kinds they are

  1. Internal Economics
  2. External Economics

Internal Economics

Internal Economies are those which are opened to a single factory or a single firm independently of the action of other firms. It is based on the size of the firm and it is different for different firms.
Causes for internal economies

  1. Indivisibilities
  2. Specialisation of workers Types:
  3. Technical Economies
  4. Managerial Economies
  5. Marketing Economies
  6. Financial Economies
  7. Risk Bearing Economies
  8. Economies of Research
  9. Economies of Welfare
  10. Economies of By-products

External Economies:

Business firms enjoys a number of external economies, which are discussed below

  1. Economies of Concentration
  2. Economies of information
  3. Economies of Welfare
  4. Economies of Specialisation

Types of Cost

  1. Opportunity costs and outlay costs
  2. Explicit and implicit costs
  3. Historical and Replacement costs
  4. Short – run and long – run costs
  5. Out of pocket and books costs
  6. Fixed and variable costs
  7. Post and Future costs:
  8. Traceable and common costs
  9. Avoidable and unavoidable costs
  10. Controllable and uncontrollable costs


Perfect Competition

Perfect competition refers to a market structure where competition among the sellers and buyers prevails in its most perfect form. In a perfectly competitive market, a single market price prevails for the commodity, which is determined by the forces of total demand and total supply in the market.
Perfect competition is a market structure where many firms offer a homogeneous product. Because there is freedom of entry and exit and perfect information, firms will make normal profits and prices will be kept low by competitive pressures.


An industry in economic terminology consists of a large number of independent rms. Each such unit in the industry produces a homogeneous product so that there is competition amongst goods produced by different units. When the total output of the industry is equal to the total demand, we say that the industry is in equilibrium


Monopoly refers to a market structure in which there is a single producer or seller that has a control on the entire market.
This single seller deals in the products that have no close substitutes and has a direct demand, supply, and prices of a product.
The word ‘Monopoly’ means “alone to sell”. Monopoly is a situation in which there is a single seller of a product which has no close substitute. Pure monopoly is never found in practice. However, in public utilities such as transport, water and electricity, we generally and a monopoly form of market

Price Determination in Short Run

A firm under monopoly faces a downward sloping demand curve or average revenue curve. Further, in monopoly, since average revenue falls as more units of output are sold, the marginal revenue is less than the average revenue. In other words, under monopoly the MR curve lies below the AR curve.

Price Determination in Long Run

Long run is a period long enough to allow the monopolist to adjust his plant size or to use his existing plant at any level that maximises his profit. In the absence of competition, the monopolist need not produce at the optimal level. He can produce at a sub-optimal scale also

Monopolistic Competition

Monopolistic competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term.


Oligopoly is an important form of imperfect competition. Oligopoly is often described as ‘competition among the few’. In other words, when there are few (two to ten) sellers in a market selling homogeneous or differentiated products, oligopoly is said to exist. Oligopolies mostly arise due to those factors which are responsible for the emergence of monopolies. Unlike monopoly where a single firm enjoys absolute market power, under oligopoly a few firms exercise their power to keep possible competitors out.


Pricing Methods

  1. Pricing based on Cost
    1. Cost plus pricing
    2. Marginal Pricing
  2. Pricing based on Competition
    1. Going rate pricing
    2. Sealed bid pricing
  3. Pricing based on Demand
    1. Perceived value pricing
    2. Price Discrimination
  4. Strategy based pricing
    1. Creaming and skimming
    2. Penetration Pricing
    3. Two part pricing
    4. Bundling pricing
    5. Transfer pricing
    6. Cross subsidisation

National Income

National income is the aggregate of income earned by all the individuals in a country. It is measures of output and income and helps us to find out how an economy is growing from year to year. A healthy growth rate of national income indicates that the people in the country earn larger incomes and enjoy a high standard of living.

Express National Income

  1. Gross National Product (GNP)
  2. Net National Product(NNP)
  3. Gross Domestic Product(GDP)
  4. Net Domestic Product(NDP)
  5. Personal Income
  6. Disposable Personal Income

Methods of estimating National Income

  1. Output Method
  2. Income Method
  3. Expenditure Method

Precautions to be taken

  1. Conduct surveys regularly
  2. Expand the Central Statistical Organization
  3. Focus on the unorganised sector
  4. Minimise or eliminate guess work
  5. Inculcate the practice of maintaining account records
  6. Train the enumerators suitably
  7. Avoiding the double counting
  8. Create a database at the village level


When prices of given commodity or service increase over a period of time, inflation is said to occur. Inflation is a quantitative measure that explains the rise in average price level of basket of selected goods and services in an economy over a period of time. When there is inflation, one cannot buy as much as what one bought earlier for the same unit of money.


  1. Demand –Pull Effect
  2. Cost –Push Effect:
  3. Built – in inflation

Business Cycles

The history of different economies reveals that economy did not grow in a steady way. Every economy is bound to have healthy and prosperous business conditions offering innumerable jobs, providing special incentives such as overtime, bonus and large profits. This may be followed by a recession leading to dull business environment that is associated with job cuts, closure of factories, and withdrawal of all incentives or even financial crisis. It is very difficult to get through this stage. These fluctuations are called business cycles. Business cycles are also trade cycles.


  1. Changes in money supply
  2. Changes in bank credit
  3. Over investments in capital goods manufacturing industries
  4. Excessive savings or under consumption
  5. Waves of optimism and pessimism in business circles
  6. Technological innovations
  7. Artificial political climate


  1. Control over supply of money
  2. Manipulation the bank rate
  3. Open market operations
  4. Fiscal policy
    1. Rational tax system
    2. Revised wage rates
    3. Plan public Expenditure