Positive Economics: Positive economics deals with objective analysis, focusing

on what is, was, or will be in the economy. It seeks to describe and explain
economic phenomena without making value judgments. For example, "If the
price of gasoline increases, the quantity demanded will decrease.
"Normative economics, on the other hand, involves subjective judgments and
opinions about what ought to be in the economy. It deals with statements that
involve value judgments or opinions. For example, "The government should
increase taxes on luxury goods to reduce income inequality.
“Change in Demand vs. Change in Quantity Demanded:
Change in Demand: Change in demand refers to a shift of the entire demand
curve, caused by factors other than price, such as changes in consumer
preferences, income, or expectations. It signifies a change in the quantity
demanded at each price point.
Change in Quantity Demanded: Change in quantity demanded refers to
movement along the demand curve in response to a change in price, assuming
all other factors remain constant. It represents a change in the quantity
demanded at a specific price point.
Normal Goods vs. Inferior Goods:
Normal Goods: Normal goods are those for which demand increases as
consumer income rises and decreases as consumer income falls. Examples
include most consumer goods and services, such as clothing, electronics, and
vacations.
Inferior Goods: Inferior goods are goods for which demand decreases as
consumer income rises and increases as consumer income falls. These goods are
often seen as lower-quality substitutes for more expensive items when
consumers' purchasing power decreases. Examples include generic brands,
public transportation, and some fast-food items.
Perfectly Elastic Demand vs. Perfectly Inelastic Demand:
Perfectly Elastic Demand: Perfectly elastic demand refers to a situation
where the quantity demanded changes infinitely with even the slightest change
in price. In other words, consumers are extremely responsive to changes in
price. This scenario is represented by a horizontal demand curve.

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 Perfectly Inelastic Demand: Perfectly inelastic demand, on the other hand,
describes a situation where the quantity demanded remains constant regardless
of changes in price. In this case, consumers are not responsive to price changes.
This scenario is represented by a vertical demand curve.
Effects of Price Control: Price controls can lead to various effects on the
market depending on whether they are set above or below the equilibrium price.
Minimum Price Control (Price Floor): Can lead to surpluses if set above the
equilibrium, as quantity supplied exceeds quantity demanded. May result in
increased producer surplus but reduced consumer surplus.
Maximum Price Control (Price Ceiling): Can lead to shortages if set below
the equilibrium, as quantity demanded exceeds quantity supplied. May result in
increased consumer surplus but reduced producer surplus.
Price controls can distort market signals, leading to inefficiencies, black
markets, and reduced incentives for producers to supply goods at controlled
prices.
Elasticity of Demand: Elasticity of demand measures the responsiveness of
quantity demanded to changes in price, income, or other factors. It indicates
how much the quantity demanded changes in response to a change in price.
Elasticity of demand can be classified into several types, including:
Price elasticity of demand
Income elasticity of demand
Cross-price elasticity of demand
Advertising elasticity of demand
Time elasticity of demand
Short Notes:
Implicit Cost: Implicit costs are the opportunity costs of using resources that a
firm already owns. They are not recorded as actual monetary payments but
represent the value of resources used in the production process, such as the
owner's time or the use of owned equipment.
Explicit Cost: Explicit costs are the direct, out-of-pocket expenses incurred by
a firm in producing goods or services. They are recorded in the firm's
accounting records as actual monetary payments for factors of production, such
as wages, rent, and raw materials.
Sunk Cost: Sunk costs are costs that have already been incurred and cannot be
recovered regardless of future decisions. These costs should not be considered
in decision-making processes because they are irrelevant to future costs and
benefits
.Abandonment Cost: Abandonment costs refer to the costs associated with
discontinuing a project or operation. These costs include any expenses incurred
to shut down operations, terminate contracts, or dispose of assets related to the
project or operation.
Calculations:
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Cross Elasticity of Demand: Cross elasticity of demand (XED) measures the
responsiveness of the quantity demanded of one good to a change in the price of
another good.
Formula: XED = (% change in quantity demanded of good 1) / (% change in
price of good.
2) Types of Commodity: If XED > 0: Goods are substitutes. If XED < 0: Goods
are complements.
If XED = 0: Goods are unrelated.
Income Elasticity of Demand: Income elasticity of demand (YED) measures
the responsiveness of the quantity demanded of a good to a change in income.
Formula: YED = (% change in quantity demanded) / (% change in income)
Types of Demand: If YED > 1: Goods are luxury goods (income elastic).If 0 <
YED < 1: Goods are normal goods (income inelastic).If YED < 0: Goods are
inferior goods.
Command Economy: In a command economy, the government or a central
authority makes all decisions regarding the production, distribution, and pricing
of goods and services. The allocation of resources is centrally planned, and
there is little room for individual choice or market forces. Examples include
historical communist regimes like the Soviet Union and North Korea.
Market Economy: In a market economy, decisions regarding production,
distribution, and pricing are determined by the interactions of buyers and sellers
in the market. Resources are allocated based on supply and demand, and
individual choice plays a significant role in economic decisions. Examples
include the United States, United Kingdom, and many other capitalist
economies.
Mixed Economy: A mixed economy combines elements of both command and
market economies. While individuals and businesses have some freedom to
make economic decisions, the government also intervenes through regulation,
taxation, and public services. Most modern economies, including those of the
United States, Canada, and many European countries, are mixed economies.
Factors Influencing Individual Demand for a Commodity: Price of the
commodity Consumer income Price of related goods (substitutes and
complements) Consumer preferences and tastes Future expectations regarding
price changes, income, or availability of the commodity.
Price Control: Price control refers to government intervention in markets to
regulate the prices of goods and services. It can involve setting either a
maximum or minimum price for a particular commodity to achieve specific
economic objectives.
Minimum Price Control vs. Maximum Price Control:
Minimum Price Control: Minimum price control (price floor) sets a legal
minimum price above the equilibrium price in the market. This policy aims to
ensure that producers receive a fair income and can cover their costs. Examples
include minimum wage laws and agricultural price supports.

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 . Maximum Price Control: Maximum price control (price ceiling) sets a legal
maximum price below the equilibrium price in the market. This policy aims to
make goods more affordable for consumers, especially for essential items.
Examples include rent control and maximum prices on certain pharmaceuticals.
Effects of Price Control: Price controls can lead to distortions in the market,
causing shortages or surpluses depending on whether the control is set below or
above the equilibrium price. These distortions can lead to inefficiencies, reduced
consumer welfare, and potentially the emergence of black markets.
Elasticity of Demand: Elasticity of demand measures the responsiveness of
quantity demanded to changes in price, income, or other factors. It helps in
understanding how sensitive consumers are to price changes or changes in their
income.
Five Types of Elasticity of Demand: Price Elasticity of Demand (PED)
Income Elasticity of Demand (YED)
Cross-Price Elasticity of Demand
(XED) Advertising Elasticity of Demand
Time Elasticity of Demand
Short Notes:
Implicit Cost: Implicit costs are the opportunity costs of using resources that a
firm already owns. They represent the value of resources used in production,
like the owner's time or the use of owned equipment.
Explicit Cost: Explicit costs are the direct, out-of-pocket expenses incurred by
a firm, such as wages, rent, and raw materials. These costs are recorded in
accounting records as actual monetary payments.
Sunk Cost: Sunk costs are costs that have already been incurred and cannot be
recovered. They are irrelevant to future decisions and should not influence
decision-making processes.
Abandonment Cost: Abandonment costs are the costs associated with
discontinuing a project or operation. These include expenses to shut down
operations, terminate contracts, or dispose of related assets.
Calculations:
Cross Elasticity of Demand (XED): XED measures the responsiveness of the
quantity demanded of one good to a change in the price of another good.
Formula: XED = (% change in quantity demanded of good 1) / (% change in
price of good 2)
Types of Commodity: If XED > 0: Goods are substitutes. If XED < 0: Goods
are complements. If XED = 0: Goods are unrelated.
Income Elasticity of Demand (YED): YED measures the responsiveness of the
quantity demanded of a good to a change in income. Formula: YED = (%
change in quantity demanded) / (% change in income) Types of Demand: If
YED > 1: Goods are luxury goods (income elastic).If 0 < YED < 1: Goods are
normal goods (income inelastic).If YED < 0: Goods are inferior goods.

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