MICRO ECONOMICS

Meaning

The analysis of the decisions made by individuals and groups, the

factors that affect those decisions, and how those decisions affect
others.

It considers decisions by both firms and individuals

Need and significance

Essential for understanding the total economic system.

Helpful for solving economic problems.

Deciding economic policy

Economic decisions of individual units

Demand Analysis

Types of demand

Negative Demand: Product is disliked in general. The product might be beneficial

but the customer does not want it.
For example: for dental care, and others have a negative demand for air travel.

No demand: Target consumers may be unaware and uninterested about the

product.
For examples: Farmers may be not interested in new farming method. College
students may not be interested in foreign language course.

Latent demand: Consumers may share a strong need that cannot be satisfied by
any existing product.
For examples: Harmless cigarette, safer neighborhood,more fuel efficient car.

Declining demand: When the demand of the product or service becomes lower.
For examples Private colleges have seen application falls.

Irregular demand: Demand varies on a seasonal, daily and hourly basis.

For examples: Museums are under visited in week days and overcrowded on
week days.

Full demand: When the organization is pleased with their volume of business.
For example Ideal Situation where supply is equal to demand.

Overfull demand: Demand level is higher that the organization can and want
to handle.
For example National park is terribly overcrowded in the summer.

Unwholesome demand: Those kinds of demands, not acceptable by the

society.
For example Cigarettes, hard drings, alcohol.

Law of demand:

Demand Curve

 The law of demand says Demand for an item increases with

a fall in price and diminishes with rise in price, while other

determinants are held constant.

Factors Influencing Demand:

The shape of the demand curve is influenced by the following factors:
Income of the people
Price of item or product
Prices of related goods Substitutes and Complements
Tastes and Preferences of customers.
Expectations

Exceptions to the Law of Demand

1.

Commodities which are used as status symbol.

Ex Ornaments, Luxury Cars

2.

Expectations of change in the price of the commodity in the future.

3.

Giffen goods inferior goods, in whose case income effect is

stronger than the substitution effect.

10

Law of Supply:
Supply is derived from a suppliers desire to maximize profits.

P- Price
Q-quantity

11

Factors Influencing Supply:

The shape of the supply curve is influenced by the following factors:
i.

Costs of the inputs

ii.

Technology

iii. Weather

12

Equilibrium of Demand and Supply

Equilibrium Point

Ep
Eq

13

Opportunity cost

A benefit, profit, or value of something that must be given up

to acquire or achieve something else.

Since every resource can be put to alternative uses, every action, choice,
or decision has an associated opportunity cost.

Examples

Contd

The opportunity cost of going to college is the money you would have earned
if you worked instead. On the one hand, you lose four years of salary while
getting your degree; on the other hand, you hope to earn more during your
career, thanks to your education, to offset the lost wages.

Short and long term costs

In the short run, there are both fixed and variable costs.

In the long run, there are no fixed costs.

Efficient long run costs are sustained when the combination of outputs that
a firm produces results in the desired quantity of the goods at the lowest possible
cost.

Variable costs change with the output. Examples of variable costs include
employee wages and costs of raw materials.

The short run costs increase or decrease based on variable cost as well as the rate of
production. If a firm manages its short run costs well over time, it will be more
likely to succeed in reaching the desired long run costs and goals.

variable cost
A cost that changes with the change in volume of
activity of an organization.
fixed cost
Business expenses that are not dependent on the
level of goods or services produced by the business.
/

Short run costs

Short run costs are accumulated in real time throughout the production
process.

Fixed costs have no impact of short run costs, only variable costs
and revenues affect the short run production. Variable costs change with the
output.

Examples of variable costs include employee wages and costs of raw

materials. The short run costs increase or decrease based on variable cost as
well as the rate of production. If a firm manages its short run costs well over
time, it will be more likely to succeed in reaching the desired long run costs
and goals.

Long run costs

Long run costs are accumulated when firms change production levels over time in
response to expected economic profits or losses. In the long run there are no
fixed factors of production.
The land, labour, capital goods, and entrepreneurship all vary to reach the long run
cost of producing a good or service. The long run is a planning and implementation
stage for producers
Examples of long run decisions that impact a firm's costs include changing the
quantity of production, decreasing or expanding a company, and entering or
leaving a market.

Marginal cost

The change in total cost that comes from making or producing one additional
item.

The purpose of analysing marginal cost is to determine at what point an

organization can achieve economies of scale.

The calculation is most often used among manufacturers as a means of

isolating an optimum production level.

Utility

Utility is a measure of the satisfaction that we get from purchasing and

consuming a good or service

Total utility: The total satisfaction from a given level of consumption

Marginal utility: The change in satisfaction from consuming an extra unit

Marginal utility

The additional satisfaction a consumer gains from consuming one more unit of
a good or service.

Marginal utility is an important economic concept because economists use it

to determine how much of an item a consumer will buy.

Positive marginal utility is when the consumption of an additional item

increases the total utility.

Negative marginal utility is when the consumption of an additional item

decreases the total utility.

Contd
Quantity (Q)
1
2
3
4
5

Total Utility
100
170
190
180
140

Marginal Utility
100
70
20
-10
-40

In the above example, total utility (190) is maximized after just three pieces of chocolate cake.

Macro-economics

Study of the behaviour of the whole (aggregate) economies or economic

systems instead of the behaviour of individuals, individual firms, or markets.

Macroeconomics is concerned primarily with the forecasting of national

income, through the analysis of major economic factors that show
predictable patterns and trends, and of their influence on one another.

These factors include level of employment/unemployment, gross national

product (GNP), and prices (deflation or inflation).

GNP

Gross National Product GNP is the total value of

all final goods and services produced within a nation in a particular year,
plus income earned by its citizens (including income of those located abroad),
minus income of non-residents located in that country.

Gross domestic product (GDP) is the monetary value of all the finished goods
and services produced within a country's borders in a specific time period.
Though GDP is usually calculated on an annual basis, it can be calculated on
a quarterly basis as well.

GDP includes all private and public consumption, government outlays,

investments and exports minus imports that occur within a defined territory.
Put simply, GDP is a broad measurement of a nations overall economic
activity.

GDP = C + G + I + NX
where

C is equal to all private consumption, or consumer spending, in a nation's

economy, G is the sum of government spending, I is the sum of all the
country's investment, including businesses capital expenditures and NX is the
nation's total net exports, calculated as total exports minus total imports (NX
= Exports - Imports).