1- What is DMU (diminishing marginal value)?

Diminishing marginal utility is an economic concept that means the more you consume of
something, the less satisfaction or benefit you get from each additional unit.

For example, imagine eating pizza. The first slice might make you very happy, the second slice is still
good but less exciting, and by the third or fourth slice, you might not enjoy it as much. This decrease
in enjoyment or satisfaction is diminishing marginal utility.

Assumption of DMU

Cardinal measurement: - Utility (satisfaction) can be measured in numbers or units, like "utils."

Continuous consumption: - The consumption happens without any breaks or gaps; the units are
consumed one after another.

No change in quality: - The quality and nature of the goods being consumed remain the same
throughout.

Rational Consumer: - The consumer is logical and aims to maximize satisfaction with their choices.

MU Decreases (DMU): As more units are consumed, the extra satisfaction (MU) decreases.

TU Increases, Then Declines: TU rises while MU is positive but starts falling once MU becomes
negative (after 6 units in this case).

Saturation Point: When MU = 0, TU reaches its maximum (e.g., at 6 units).

MU Curve: Slopes downward, showing diminishing satisfaction.

TU Curve: Rises, flattens at the peak (when MU = 0), then declines when MU is negative.
2- law of Equi- marginal utility

The Law of Equi-Marginal Utility says that to get the most satisfaction from your money, you should
spend it in such a way that the extra happiness (marginal utility) you get from each product is equal,
for every rupee spent.

In simple terms, you should balance your spending on different goods so that the benefit you get
from the last rupee spent on each product is the same.

3- Law of demand

The Law of Demand says that as the price of a product goes up, the quantity demanded (how much
people want to buy) goes down, and when the price goes down, the quantity demanded goes up.

In simple terms:

• Higher prices lead to less demand.

• Lower prices lead to more demand.

This happens because people tend to buy less when things are expensive and buy more when things
are cheaper. So, price and demand are inversely related: when one goes up, the other goes down.
The Demand Curve:

• The demand curve typically slopes downwards from left to right, which indicates the inverse
relationship between price and demand.

• As the price of the product increases, the quantity demanded decreases, and as the price
decreases, the quantity demanded increases.

3- Elasticity of Demand

Elasticity of Demand refers to how sensitive the quantity demanded of a product is to changes in its
price. In simple terms, it measures how much people’s buying behavior changes when the price
changes.

% CHANGE IN QD New – old

EP= ------------------------- % CHANGE= ------------------
% CHANGE IN PRICE Average
1. Unit Elastic Demand:

• Definition: Demand changes exactly in the same proportion as the price changes.

• Example: If the price increases by 10%, the quantity demanded decreases by 10%.

• Elasticity: Equal to 1.

2. Relatively Inelastic Demand:

• Definition: Demand changes very little when the price changes. Consumers don’t reduce
their purchases much even if the price increases.

• Example: Necessities like food, fuel, or medicine.

• Elasticity: Between 0 and 1 (e.g., 0.2 or 0.5).

3. Always Perfectly Inelastic Demand:

• Definition: Demand doesn’t change at all, no matter how much the price increases or
decreases.

• Example: Life-saving medications, like insulin for diabetic patients.

• Elasticity: Zero (0).

4. Relatively Elastic Demand:

• Definition: Demand changes significantly when the price changes. A small price change
causes a large change in quantity demanded.

• Example: Non-essential luxury items, like designer clothes or gadgets.

• Elasticity: Greater than 1 (e.g., 2 or 3).

5. Perfectly Elastic Demand:

• Definition: Any small change in price causes an infinite change in quantity demanded. People
will only buy at one price, and nothing at all if the price changes.

• Example: A highly competitive market with identical goods, where consumers will only buy
at one specific price.

• Elasticity: Infinite.
Determinants of elasticity of demand

Substitutes: If there are close substitutes available for a product, the demand is more elastic.
Consumers can easily switch to another product if the price of the original product increases.

Example: If the price of tea rises, people might switch to coffee, making the demand for tea more
elastic.

Time Frame: The elasticity of demand tends to be more elastic in the long run than in the short run.
Over time, consumers can adjust to price changes by finding alternatives or changing their behavior.

Example: If gasoline prices rise, people may not change their driving habits immediately, but over
time, they may switch to electric cars or public transport.

Share of Total Income: If a product takes up a large portion of a consumer's income, its demand is
more elastic. People are more sensitive to price changes when they have to spend a large part of
their income on it.

Example: A price increase in a luxury car (expensive) will lead to a significant decrease in demand,
but a small price increase in salt (cheap) won't affect demand much.

Luxury vs. Necessity:

Explanation: Necessities tend to have inelastic demand because people need them, regardless of
price changes. Luxuries tend to have more elastic demand because people can reduce their
consumption if the price increases.

Example: Medicines (necessity) have inelastic demand; even if the price rises, people will still buy
them. However, designer clothing (luxury) has more elastic demand because people can live without
it if the price goes up.

Competition:

Explanation: The level of competition in a market affects the elasticity of demand. When there are
many competitors offering similar products, the demand tends to be more elastic because
consumers can easily switch to a competitor if the price increases. However, if there is little or no
competition, demand tends to be more inelastic because consumers have fewer alternatives.

Example:

In a market with many brands of smartphones, if one brand raises its prices, people can easily switch
to another, making demand more elastic.
Supply
The Law of Supply states that, all other factors being equal, as the price of a product increases, the
quantity supplied (how much producers are willing to sell) also increases. Conversely, when the price
decreases, the quantity supplied decreases.

• Higher prices → More supply.

• Lower prices → Less supply.

Producers are willing to produce and sell more of a product when the price is higher because they
can make more profit.

Determinants of supply

1. Time Frame:

• In the short term, producers can’t quickly increase supply, but in the long term, they can
adjust supply more easily if prices rise.

Example: If the price of wheat rises, farmers may not be able to increase supply quickly in the short
term, but in the long term, they can plant more wheat.
2. Availability of Resources:

• If there are enough resources (like materials or workers), supply will be high. If resources are
limited, supply will be low.

• Example If there is a shortage of steel, the supply of cars may decrease because steel is a key
material for car production.

3. Storage Facility:

• If products can be stored easily, producers can supply more when prices go up. If storage is
difficult, supply may be limited.

• Example: Farmers can store grain in silos to sell when prices are higher, increasing supply
when needed. Without proper storage, the supply may be limited to what can be sold
immediately.

4. Factor Mobility:

• If resources like workers or equipment can easily move between industries, supply can adjust
quickly. If they can't move easily, supply will be slower to change.

• Example: If a factory can quickly switch from producing toys to making electronics based on
market demand, supply becomes more flexible. However, if workers lack the skills to switch
industries, supply may be less responsive.

EXPLAIN Market equilibrium

Market equilibrium is the point where the quantity of a product that consumers want to buy
(demand) is equal to the quantity that producers want to sell (supply) at a certain price.

In simple terms:

• Equilibrium Price: The price at which demand and supply are balanced.

• Equilibrium Quantity: The amount of goods bought and sold at that price.

• Demand Curve: Slopes downward from left to right, showing that as the price
decreases, the quantity demanded increases.
• Supply Curve: Slopes upward from left to right, showing that as the price increases,
the quantity supplied increases.
• The point where the demand curve and supply curve intersect is the equilibrium point.
• At this price (equilibrium price), the quantity demanded equals the quantity supplied, and the
market is balanced.
• Above the equilibrium price: There is a surplus, meaning supply exceeds demand (producers
are willing to sell more than consumers are willing to buy).
• Below the equilibrium price: There is a shortage, meaning demand exceeds supply
(consumers want more than what producers are willing to sell).

SURPLUS

The image you provided outlines the concepts of Consumer Surplus and Producer Surplus. Let's
break down each one:

1. Consumer Surplus

• Definition: It's the difference between what a consumer is willing to pay for a good or service
and the actual price they pay.

• Calculation:

o Method 1: Price consumer is willing to pay - Market price

 o Method 2: Marginal Benefit (MB) - Market Price (MP)

• Explanation: Consumers often have a maximum price they're willing to pay for a product. If
the market price is lower, they gain a surplus. This surplus represents the extra value they
receive beyond what they actually paid.

2. Producer Surplus

• Definition: It's the difference between the price a producer receives for a good or service and
the minimum price they would be willing to accept. 1

• Calculation:

• Method 1: Market Price - The price at which producers are willing to sell.

• Method 2: Market Price - Market Cost

• Explanation: Producers have a minimum price they need to cover their costs. If the market
price is higher, they gain a surplus. This surplus represents the extra revenue they earn
beyond their costs.

Learn from note book 2 pages and part of production function also

Isoquant:

An Isoquant is a curve that shows all the combinations of two inputs (like labor and capital) that
produce the same level of output. It is similar to the concept of an indifference curve in consumer
theory, but for producers.

• In simple terms: An isoquant shows different ways to produce a certain quantity of a product
using various combinations of inputs.

• Example: A farmer can grow the same amount of crops using either more labor and less
machinery or less labor and more machinery. Both combinations would lie on the same
isoquant curve.

Isoquant Curve Properties:

• It slopes downward and is usually convex to the origin (reflecting the diminishing marginal
rate of technical substitution).

• The more to the right an isoquant curve is, the higher the level of output.

Isocost:

An Isocost is a line that shows all the combinations of two inputs that a producer can buy given a
certain budget or cost. It represents the cost of using various combinations of labor and capital to
produce goods.

• In simple terms: An isocost line shows the different combinations of inputs (like labor and
capital) that a firm can afford at a specific cost.

• Example: A firm with a certain budget can either choose to hire more workers and use less
machinery or hire fewer workers and use more machinery. The isocost line shows all possible
combinations of labor and capital that can be purchased within the given budget.

Isocost Line Properties:

• It slopes downward and is straight (with a negative slope) because of the trade-off between
the two inputs.

• The steeper the line, the more expensive the labor relative to capital, and vice versa.
The Law of Diminishing Marginal Returns (also known as Diminishing Marginal Productivity) states
that as you keep adding more units of a variable input (like labor or raw materials) to a fixed
amount of other resources (like machines or land), the additional output (marginal product)
produced by each new unit of input will eventually decrease after a certain point.

In simple terms:

• If you keep increasing the number of workers (or any input), initially, your total output
increases at a higher rate.

• But after a certain point, adding more workers leads to smaller and smaller increases in
output. Eventually, adding too many workers may even reduce total output because they get
in each other's way or don’t have enough tools to work with.

Example:

Imagine a factory with 1 machine and 1 worker. If you add more workers, the total output will
increase. But after a certain number of workers, each new worker contributes less to the total
output because there’s only 1 machine and not enough tools or space for everyone to work
efficiently. Eventually, adding more workers might actually reduce the total output.

In short, the Law of Diminishing Marginal Returns means that beyond a certain point, adding more
of one resource (like labor) leads to smaller increases in output.
Production function 2

TYPS OF MARKET
Monopoly:

In a monopoly, one company controls the entire market and sets the prices because there are no
competitors. An example is a local water or electricity company.
Oligopoly:

An oligopoly is a market dominated by a few large firms that control prices and production.
Examples include car manufacturers (Ford, Toyota) or mobile phone providers.

Monopolistic Competition:

In monopolistic competition, many companies sell similar but differentiated products, giving them
some control over prices. An example is restaurants, where each offers unique dishes or services.

Perfect Competition:

In perfect competition, many firms sell identical products, and no single company controls the
price. An example is farmers selling the same type of produce, like wheat or apples.

1. Monopoly

• Number of Sellers: One

• Influence over Price: Absolute; Price Maker

• Product Type: NA (one)

• Entry Barriers: High

o A monopoly is a market structure where a single seller controls the entire market for a
particular product or service. This gives them significant power to influence prices,
often charging higher prices than in competitive markets.

2. Oligopoly

• Number of Sellers: Few

• Influence over Price: Medium

• Product Type: Homogeneous or Differentiated

• Entry Barriers: Medium

o An oligopoly is a market structure with a small number of sellers. These firms can
influence prices, but their actions are often interdependent. Products can be identical
(homogeneous) or differentiated (having unique features).

3. Monopolistic Competition
• Number of Sellers: Many

• Influence over Price: Low

• Product Type: Differentiated

• Entry Barriers: Low

o Monopolistic competition is a market structure with many sellers, each offering a

slightly differentiated product. This allows for some price control, but competition is
still significant.

4. Perfect Competition

• Number of Sellers: Many

• Influence over Price: None; Price Taker

• Product Type: Homogeneous

• Entry Barriers: None

o Perfect competition is a theoretical market structure with many sellers, each selling
an identical product. No single seller can influence the market price, making them
price takers.