Branches of economics

Economics is a vast field with various branches that focus on specific aspects of economic
activity. Here’s a breakdown of some major branches:

1. Microeconomics: This branch studies individual economic units, such as

consumers, households, and firms, and how they make decisions regarding
resource allocation and pricing. Microeconomics examines demand and
supply, pricing, and market structures, focusing on how these small units
interact within an economy.
2. Macroeconomics: Unlike microeconomics, macroeconomics looks at the
economy as a whole. It analyzes large-scale economic factors like inflation,
national income, unemployment, and GDP growth. This branch is essential
for understanding how policies affect overall economic stability and growth.
3. Development Economics: This branch explores economic aspects of the
development process in low-income countries. It focuses on ways to foster
economic growth, reduce poverty, improve living standards, and address
issues such as education, health, and income inequality.
4. International Economics: Focusing on international trade and finance, this
branch examines how countries interact economically through trade
agreements, exchange rates, tariffs, and globalization's impact on national
economies. It also studies the balance of payments and international
monetary systems.
5. Public Economics: Also known as public finance, this branch deals with
government economic policies and their impact on the economy. It covers
topics like taxation, government spending, budgeting, and policies that affect
public goods and services distribution within society.

Explicit Cost

Definition: Explicit costs are direct, out-of-pocket expenses paid by a business

to run its operations. These include costs like wages, rent, utilities, raw
materials, and other tangible expenses.

Formula: Explicit Costs = Sum of Direct Payments (e.g., wages + rent +

utilities)

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Implicit Cost

Definition: Implicit costs are the opportunity costs of using resources that a
business already owns, which could have been used for other purposes. Unlike
explicit costs, implicit costs are not directly paid out.

Formula: Implicit Costs = Opportunity Cost of Owned Resources

Accounting Profit

Definition: Accounting profit is the total revenue minus the explicit costs of a
business. It reflects the profit shown in financial statements, based only on tangible
expenses.

Formula:Accounting profit=Total revenue- Explicit costs

Economic Profit

Definition: Economic profit takes into account both explicit and implicit costs,
providing a more comprehensive view of profitability by considering opportunity
costs.

Formula:Economic profit =Total revenue- (Explicit costs+implicit costs)

1. Demand:

Demand refers to the quantity of a good or service that a consumer is willing and
able to purchase at a given price within a specific period. It reflects individual
preferences and purchasing power. Demand depends on factors like the price of the
product, consumer income, tastes, preferences, and prices of related goods
(substitutes and complements).

Market Demand:

Market demand is the total quantity of a good or service that all consumers in a
market are willing and able to purchase at a given price over a period. It is the

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aggregate of all individual demands for the good or service, calculated by summing
up the quantities demanded by all consumers at various prices

Key Differences:

Scope: Demand pertains to individual consumers, while market demand aggregates

all consumers in a market.

Calculation: Individual demand is a single quantity, whereas market demand is the

sum of all individual demands

Determinants of Demand

Price of the Good or Service: Generally, as the price decreases, demand increases
(and vice versa).

Income of Consumers: Higher income usually increases demand, while lower

income decreases it. For normal goods, demand rises with income, while for
inferior goods, demand may fall.

Prices of Related Goods:

Substitutes: An increase in the price of a substitute (e.g., tea vs. coffee) can raise
demand for the good.

Complements: A decrease in the price of a complement (e.g., printers and ink)

may increase demand.

Consumer Preferences and Tastes: Changes in trends, tastes, and preferences

can shift demand.

Future Expectations: If consumers expect prices to rise in the future, they may
buy more now, increasing current demand.

Population and Demographics: A larger or more specific demographic may

increase demand for certain goods.

Determinants of Supply:

Price of the Good or Service: Higher prices incentivize producers to supply more,
while lower prices may reduce supply.

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Production Costs: Lower production costs (like cheaper labor or materials)
increase supply, while higher costs reduce it.

Technology: Advances in technology can increase supply by making production

more efficient.

Prices of Related Goods in Production: If prices of alternative goods (substitutes

in production) increase, producers may shift supply toward the more profitable
item.

Future Expectations: If producers expect higher prices in the future, they might
limit current supply to sell later at a higher price.

Number of Suppliers: More suppliers in the market increase total supply, while
fewer suppliers reduce it.

1. Law of Demand:

The Law of Demand states that, all else being equal, there is an inverse
relationship between the price of a good or service and the quantity demanded.
This means that as the price of a good decreases, the quantity demanded increases,
and conversely, as the price increases, the quantity demanded decreases. This
relationship is typically represented by a downward-sloping demand curve.

Example: If the price of apples decreases from $2 to $1 per pound, consumers are
likely to buy more apples.

2. Changes in Demand:

Changes in demand refer to movements along the demand curve due to changes in
the price of the good or service. This results in a change in the quantity demanded.

Movement Along the Demand Curve:

Increase in Demand: If the price of a good decreases, there is a movement down

the demand curve to a higher quantity demanded.

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Decrease in Demand: If the price increases, there is a movement up the demand
curve to a lower quantity demanded.

3. Shifts in Demand:

Shifts in demand occur when a non-price determinant (such as income, consumer

preferences, or prices of related goods) changes, resulting in a new demand curve.

Rightward Shift (Increase in Demand):

Causes:

Increase in consumer income (for normal goods)

Increase in the price of substitutes

Decrease in the price of complements

Changes in consumer preferences favoring the good

Leftward Shift (Decrease in Demand)

Causes:

Decrease in consumer income (for normal goods)

Decrease in the price of substitutes

Increase in the price of complements

Changes in consumer preferences away from the good

4. Changes in Supply:

Similar to demand, changes in supply refer to movements along the supply curve
due to changes in the price of the good or service.

Movement Along the Supply Curve:

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Increase in Supply: A decrease in price leads to an increase in quantity supplied
(movement down the curve).

Decrease in Supply: An increase in price leads to a decrease in quantity supplied

(movement up the curve).

5. Shifts in Supply:

Shifts in supply occur when a non-price determinant (such as production costs or

technology) changes.

Rightward Shift (Increase in Supply):

Causes:

Technological advancements that reduce production costs

Decrease in the prices of inputs

Increase in the number of suppliers in the market

Leftward Shift (Decrease in Supply):

Causes:

Increase in production costs

Natural disasters or disruptions in supply chains

Decrease in the number of suppliers

Consumer Surplus (CS)

Definition: Consumer surplus is the difference between the maximum price that
consumers are willing to pay for a good or service and the actual price they pay. It
represents the benefit consumers receive when they pay less than what they are
willing to spend.

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Formula:Consumer Surplus=Total Willingness to Pay−Total Amount Paid

Producer Surplus (PS)

Definition: Producer surplus is the difference between the actual price received by
producers for a good or service and the minimum price they are willing to accept to
produce it. It reflects the benefit producers receive when they sell at a higher price
than their minimum acceptable price.

Formula:Producer Surplus=Total Amount Received−Total Minimum Willingness

to Accept

Equilibrium Price

Definition: The equilibrium price is the price at which the quantity of a good or
service demanded by consumers equals the quantity supplied by producers. It is the
point where the demand and supply curves intersect on a graph.

Key Features:

At equilibrium, there is no surplus (excess supply) or shortage (excess demand) in

the market.

Changes in demand or supply can shift the equilibrium price.

Price Regulations

Price regulations are government-imposed limits on the prices that can be charged
for goods and services. They can take two main forms: price ceilings and price
floors.

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Price Ceilings

Definition: A price ceiling is a maximum price set by the government that sellers
can charge for a good or service. It is typically set below the equilibrium price to
protect consumers from high prices.

Effects:

Shortage: When the price is set below equilibrium, demand exceeds supply,
leading to a shortage.

Examples: Rent control in housing markets.

Price Floors

Definition: A price floor is a minimum price set by the government that must be
paid for a good or service. It is usually set above the equilibrium price to protect
producers.

Effects:

Surplus: When the price is set above equilibrium, supply exceeds demand,
resulting in a surplus.

Examples: Minimum wage laws in labor markets.

1. Perfect Competition

Definition: A market structure where numerous small firms compete against each
other, and no single firm can influence the market price.

Characteristics:

Many buyers and sellers

Homogeneous products (identical goods)

Free entry and exit from the market

Perfect information

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Example: Agricultural products like wheat and corn.

2. Monopolistic Competition

Definition: A market structure with many firms competing with differentiated

products, allowing them to have some control over pricing.

Characteristics:

Many sellers

Differentiated products (similar but not identical)

Some barriers to entry

Some degree of market power

Example: Restaurants, clothing brands, and beauty products.

3. Oligopoly

Definition: A market structure dominated by a small number of large firms, leading

to limited competition and potential collusion.

Characteristics:

Few large sellers

Homogeneous or differentiated products

Significant barriers to entry

Interdependence among firms (price setting, output decisions)

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Example: Automobile manufacturers and smartphone companies.

4. Monopoly

Definition: A market structure where a single firm controls the entire market for a
good or service, with no close substitutes.

Characteristics:

Single seller

Unique product with no close substitutes

High barriers to entry

Price maker (the firm can set the price)

Example: Utility companies (water, electricity) in a region.

5. Monopsony

Definition: A market structure where there is only one buyer for many sellers,
giving the buyer significant control over prices.

Characteristics:

One dominant buyer

Many sellers

The buyer can influence the price and quantity

Example: A single employer in a small town hiring most of the available labor
force.

6. Duopoly

Definition: A specific type of oligopoly where only two firms dominate the market.

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Characteristics:

Two major firms competing

Can produce either identical or differentiated products

Strategic interdependence between the firms

Example: Coca-Cola and Pepsi in the soft drink market.

7. Factor Market

Definition: A market where factors of production (land, labor, capital, and

entrepreneurship) are bought and sold.

Characteristics:

Interactions between employers (demand) and workers (supply)

Prices are determined by supply and demand for labor and capital

Example: Labor markets where employers seek workers and negotiate wages.

8. Auction Market

Definition: A market where buyers and sellers come together to bid on goods or
services.

Characteristics:

Price is determined through bids and offers

Transparency in pricing process

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Can be either ascending (English auction) or descending (Dutch auction)

Example: Art auctions or online auction platforms like eBay.

9. Online Marketplaces

Definition: Virtual platforms where buyers and sellers interact to exchange goods
and services.

Characteristics:

Wide range of products and services

Convenience of online shopping

Competitive pricing due to global reach

Example: Amazon, eBay, and Etsy.

Production Functions

A production function describes the relationship between the quantity of inputs

used in production and the quantity of output produced. It can be divided into two
time frames: the short run and the long run.

Short Run Production Function

Definition: In the short run, at least one factor of production is fixed (e.g., capital
or land), while others can be varied (e.g., labor).

Characteristics:

Fixed Inputs: At least one input cannot be changed.

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Diminishing Returns: As additional units of variable input are added, the increase
in output will eventually diminish.

Example: A factory with a fixed number of machines may increase production by

hiring more workers, but after a certain point, each additional worker adds less to
output than the previous one.

Long Run Production Function

Definition: In the long run, all factors of production can be varied, allowing firms
to change their production capacity.

Characteristics:

Variable Inputs: All inputs can be adjusted.

Returns to Scale: Refers to how output changes when all inputs are increased
proportionately:

Increasing Returns to Scale: Output increases more than proportionally.

Constant Returns to Scale: Output increases in direct proportion to inputs.

Decreasing Returns to Scale: Output increases less than proportionally.

Example: A firm can expand its factory size, hire more workers, and increase
machinery to enhance production.

Cost Concepts

Cost refers to the expenses incurred in the production of goods or services.

Understanding different types of costs is essential for decision-making in business.

Fixed Costs (FC)

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Definition: Costs that do not change with the level of output.

Examples: Rent, salaries of permanent staff, and insurance.

Variable Costs (VC)

Definition: Costs that change with the level of output.

Examples: Raw materials, hourly wages, and utility costs associated with
production.

Total Cost (TC)

Definition: The sum of fixed costs and variable costs at any level of production.

Average Cost (AC)

Definition: The cost per unit of output, calculated by dividing total cost by the
number of units produced.

Marginal Cost (MC)

Definition: The additional cost incurred from producing one more unit of output. It
reflects changes in total cost when output is increased by one unit.

Opportunity Cost

Definition: The cost of forgoing the next best alternative when making a decision.
It’s not always measured in monetary terms but rather in the benefits lost from the
alternative choice.

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