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  Contents Foreword  iii  1. I1. I1. I1. I1. I NTRODUCTIONNTRODUCTIONNTRODUCTIONNTRODUCTIONNTRODUCTION 111111.1A Simple Economy11.2Central Problems of an Economy21.3Organisation of Economic Activities41.3.1The Centrally Planned Economy41.3.2The Market Economy51.4Positive and Normative Economics61.5Microeconomics and Macroeconomics61.6Plan of the Book6 2. T 2. T 2. T 2. T 2. T  HEORY HEORY HEORY HEORY HEORY    OF OF OF OF OF   CCCCC ONSUMER ONSUMER ONSUMER ONSUMER ONSUMER   BBBBB EHAVIOUR EHAVIOUR EHAVIOUR EHAVIOUR EHAVIOUR  888882.1The Consumer’s Budget82.1.1Budget Set92.1.2Budget Line102.1.3Changes in the Budget Set122.2Preferences of the Consumer132.2.1Monotonic Preferences142.2.2Substitution between Goods142.2.3Diminishing Rate of Substitution152.2.4Indifference Curve152.2.5Shape of the Indifference Curve162.2.6Indifference Map172.2.7Utility172.3Optimal Choice of the Consumer182.4Demand202.4.1Demand Curve and the Law of Demand212.4.2Normal and Inferior Goods242.4.3Substitutes and Complements252.4.4Shifts in the Demand Curve252.4.5Movements along the Demand Curve and Shifts26in the Demand Curve2.5Market Demand272.6Elasticity of Demand272.6.1Elasticity along a Linear Demand Curve292.6.2Factors Determining Price Elasticity of Demand for a Good312.6.3Elasticity and Expenditure32 3. P3. P3. P3. P3. P RODUCTIONRODUCTIONRODUCTIONRODUCTIONRODUCTION    AND AND AND AND AND  CCCCC OSTSOSTSOSTSOSTSOSTS 36363636363.1Production Function363.2The Short Run and the Long Run38  3.3Total Product, Average Product and Marginal Product383.3.1Total Product383.3.2Average Product393.3.3Marginal Product393.4The Law of Diminishing Marginal Product and the Law of40 Variable Proportions3.5Shapes of Total Product, Marginal Product and Average Product Curves413.6Returns to Scale423.7Costs423.7.1Short Run Costs433.7.2Long Run Costs47 4. T 4. T 4. T 4. T 4. T  HEHEHEHEHE  T  T  T  T  T  HEORY HEORY HEORY HEORY HEORY    OF OF OF OF OF     THE THE THE THE THE  F F F F F  IRMIRMIRMIRMIRM   UNDER UNDER UNDER UNDER UNDER   PPPPP ERFECT ERFECT ERFECT ERFECT ERFECT   CCCCC OMPETITIONOMPETITIONOMPETITIONOMPETITIONOMPETITION 52525252524.1Perfect competition: Defining Features524.2Revenue534.3Profit Maximisation554.3.1Condition 1554.3.2Condition 2564.3.3Condition 3564.3.4The Profit Maximisation Problem: Graphical Representation574.4Supply Curve of a Firm584.4.1Short Run Supply Curve of a Firm584.4.2Long Run Supply Curve of a Firm594.4.3The Shut Down Point604.4.4The Normal Profit and Break-even Point604.5Determinants of a Firm’s Supply Curve614.5.1Technological Progress614.5.2Input Prices614.5.3Unit Tax624.6Market Supply Curve624.7Price Elasticity of Supply644.7.1The Geometric Method65 5. M5. M5. M5. M5. M  ARKET  ARKET  ARKET  ARKET  ARKET   EEEEE QUILIBRIUMQUILIBRIUMQUILIBRIUMQUILIBRIUMQUILIBRIUM 69696969695.1Equilibrium, Excess Demand, Excess Supply695.1.1Market Equilibrium: Fixed Number of Firms705.1.2Market Equilibrium: Free Entry and Exit785.2Applications825.2.1Price Ceiling825.2.2Price Floor83 6. N6. N6. N6. N6. N ONONONONON ----- COMPETITIVECOMPETITIVECOMPETITIVECOMPETITIVECOMPETITIVE  MMMMM  ARKETS ARKETS ARKETS ARKETS ARKETS 86868686866.1Simple Monopoly in the Commodity Market866.1.1Market Demand Curve is the Average Revenue Curve876.1.2Total, Average and Marginal Revenues906.1.3Marginal Revenue and Price Elasticity of Demand916.1.4Short Run Equilibrium of the Monopoly Firm916.2Other Non-perfectly Competitive Markets956.2.1Monopolistic Competition956.2.2How do Firms behave in Oligopoly?96Glossary101 viii 
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