1 . INTRODUCTION O 1
1.1 A Simple Economy 1
1.2 Central Problems of an Economy 2
1.3 Organisation of Economic Activities 4
1.3.1 The Centrally Planned Economy 4
1.3.2 The Market Economy 5
1.4 Positive and Normative Economics 6
1.5 Microeconomics and Macroeconomics 6
1.6 Plan of the Book 6
2. T HEORY OF CONSUMER BEHAVIOUR 8
2.1 The Consumer’s Budget 8
2.1.1 Budget Set 9
2.1.2 Budget Line 10
2.1.3 Changes in the Budget Set 12
2.2 Preferences of the Consumer 13
2.2.1 Monotonic Preferences 14
2.2.2 Substitution between Goods 14
2.2.3 Diminishing Rate of Substitution 15
2.2.4 Indifference Curve 15
2.2.5 Shape of the Indifference Curve 16
2.2.6 Indifference Map 17
2.2.7 Utility 17
2.3 Optimal Choice of the Consumer 18
2.4 Demand 20
2.4.1 Demand Curve and the Law of Demand 21
2.4.2 Normal and Inferior Goods 24
2.4.3 Substitutes and Complements 25
2.4.4 Shifts in the Demand Curve 25
2.4.5 Movements along the Demand Curve and Shifts 26
in the Demand Curve
2.5 Market Demand 27
2.6 Elasticity of Demand 27
2.6.1 Elasticity along a Linear Demand Curve 29
2.6.2 Factors Determining Price Elasticity of Demand for a Good 31
2.6.3 Elasticity and Expenditure 32
3. PRODUCTION D AND COSTS 36
3.1 Production Function 36
3.2 The Short Run and the Long Run 38

3.3 Total Product, Average Product and Marginal Product 38
3.3.1 Total Product 38
3.3.2 Average Product 39
3.3.3 Marginal Product 39
3.4 The Law of Diminishing Marginal Product and the Law of 40
Variable Proportions
3.5 Shapes of Total Product, Marginal Product and Average Product Curves 41
3.6 Returns to Scale 42
3.7 Costs 42
3.7.1 Short Run Costs 43
3.7.2 Long Run Costs 47
4. THE THEORY OF THE FIRM UNDER PERFECT COMPETITION M E I N 52
4.1 Perfect competition: Defining Features 52
4.2 Revenue 53
4.3 Profit Maximisation 55
4.3.1 Condition 1 55
4.3.2 Condition 2 56
4.3.3 Condition 3 56
4.3.4 The Profit Maximisation Problem: Graphical Representation 57
4.4 Supply Curve of a Firm 58
4.4.1 Short Run Supply Curve of a Firm 58
4.4.2 Long Run Supply Curve of a Firm 59
4.4.3 The Shut Down Point 60
4.4.4 The Normal Profit and Break-even Point 60
4.5 Determinants of a Firm’s Supply Curve 61
4.5.1 Technological Progress 61
4.5.2 Input Prices 61
4.5.3 Unit Tax 62
4.6 Market Supply Curve 62
4.7 Price Elasticity of Supply 64
4.7.1 The Geometric Method 65
5 . MARKET EQUILIBRIUM 69
5.1 Equilibrium, Excess Demand, Excess Supply 69
5.1.1 Market Equilibrium: Fixed Number of Firms 70
5.1.2 Market Equilibrium: Free Entry and Exit 78
5.2 Applications 82
5.2.1 Price Ceiling 82
5.2.2 Price Floor 83
6. N ON-COMPETITIVE MARKETS 86
6.1 Simple Monopoly in the Commodity Market 86
6.1.1 Market Demand Curve is the Average Revenue Curve 87
6.1.2 Total, Average and Marginal Revenues 90
6.1.3 Marginal Revenue and Price Elasticity of Demand 91
6.1.4 Short Run Equilibrium of the Monopoly Firm 91
6.2 Other Non-perfectly Competitive Markets 95
6.2.1 Monopolistic Competition 95
6.2.2 How do Firms behave in Oligopoly? 96