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Micro Economics PDF
Micro Economics PDF
Micro Economics PDF
• Consumer Behaviour
• Demand
• Supply
• Different Markets
Micro Economics : ‘mikros ’(small)
Area of Study :
• Consumer Behaviour.
• Product Pricing
• Factor pricing
• Study of Firms
• Location of Industry.
Central Economic Problems :
• What to Produce ?
• Eg . Cotton
Whom to Produce ?
Factors Of Production :
• Land
• Labour
• Capital
• Entrepreneurship
Production Possibilities Curve (PPC):
• The law states that, all else being equal, as the price of a
product increases, quantity demanded falls; likewise, as the
price of a product decreases, quantity demanded increases.
Rational for Law of Demand :
• Income.
• Tastes
• Propensity to consume.
• Price of related commodities.
Right Shift of demand curve : When more is demanded at each price
,can be caused by rise in income ,rise in price of substitute ,fall in
price of a complement increase in population etc.
Leftward shift in the demand curve : When less is demanded at each
price can be caused by a fall in income ,a fall in the price of substitute
,a rise in the price of a complement , a decrease in population.
Movement along demand curve vs shift of curve:
• Change in Demand
• Availability of Substitutes.
Coca-cola –Pepsi(elastic), Common salt (in-elastic)
• Consumer habits.
Taste
Income Elasticity of Demand :
Cross Elasticity :
Comforts : These are the goods that are not essential for living but
are required for happy living .
Luxuries : These are those wants that are superfluous and expensive
.
Total Utility: It is the sum of the utility derived from an different units
of a commodity consumed by a consumer .
Total Utility = the sum total of all marginal utility
• Each want is satiable the consumer consumes more than and more
units of a good ,the intensity of his wants for the good goes on
decreasing and a point is reached where the consumer no longer
wants it .
Conclusions :
• When the Total Utility rises the maximum utility diminishes .
• When the total utility is maximum then the marginal utility is zero.
• When the total utility is diminishing then the marginal utility is
negative.
• Law fails for prestigious goods : The Law may not apply to articles like
gold,cash, where a greater quantity may increase the lust for it .
• Case of related goods : The shape of the utility curve may be affected by
the presence or absence of articles which are substitutes or
complements .The Utility obtained from tea may be seriously affected if
no sugar is available.
• Consumer Surplus :
What a consumer is ready to pay –What he actually pays.
Indifference Curve Analysis :
• The Consumer is rational and possesses full information about all the
relevant aspects of economic environment in which he lives.
• Prices of goods X and Y are given and are fixed for him.
Supply : The term supply refers to the amount of a good or service that
the producers are willing and able to offer to the market at various prices
during a period of time .
Determinants of Supply :
Price of the Good : The higher the price of a good the higher the supply
(cost is directly related to profits).
Price of Related Goods :If the price of other goods rises then ,the supply
of the considered good will reduce . eg : Rice and Pulses/Coarse Seeds.
Price of factors of production : eg. Rise of land price will affect Wheat and
Automobile production differently.
State of technology : As technology improves ,the efficient utilisation of
goods results in increased supply for the same amount of factors of
production.
Government Policy : Taxes, Subsidies and other price policies can also
affect the supply.
Total Product : Total product is the total output resulting from the efforts
of all the factors of production combined at any time .
Average Product : Average product is the total per unit of the variable
factor .
This happens because fixed factors are more intensively and efficiently
utilised .
Stage2:Law of diminishing returns : Total product continues to increase at a
diminishing rate until it reaches maximum point at H .
This happens because the fixed factor then becomes inadequate relative to
the quantity of the variable factor .
Constant returns to scale : It means that that with the increase in the
scale in some proportion ,output increase in the same proportion.
Internal Economies :
• Technical economies and diseconomies .
Big machines
• Managerial economies and diseconomies .
Division of Labour
• Commercial economies and diseconomies.
Bulk orders
• Financial economies and diseconomies.
Easy finance
• Risk bearing economies and diseconomies .
Accounting costs: the prices he pays for the factor which are employed for
production .
Eg: wages , prices of raw materials ,interest on money .
Fixed Costs and variable costs : These are not a function of output, they
do not vary with output up to a certain level of activity. Eg: rent,
property taxes, interest on loans .
Variable costs : These are costs that are function of output in the
production period. Eg wages and cost of raw materials .
Short run total costs :
• Increase in demand :
Decrease in demand :
Increase in Supply :
Decrease in Supply :
Simultaneous change in demand and supply :
Price Determination in Different Markets :
Market : We can define market simply as all those buyers and sellers of a
good or service who influence the price .
Classification of a Market :
Area :
• Local Market :
• Regional Market :
• National market :
• International Market :
Volume of Business
• Whole sale market
• Retail Market
Competition
• Perfectly Competitive
• Imperfect Competition
Perfect Competition : Perfect competition is characterised by many sellers
selling identical products to many buyers.
Monopoly :It is a situation of a single seller producing for many buyers. Its
product is necessarily extremely differentiated since there are no competing
sellers producing near substitute products.
Oligopoly : There are few sellers completing products for many buyers .
Assumption Market Types
Pure Monopolistic Oligopoly Monopoly
Competition Competition
Number of Many Many A few One
sellers
Product none slight None to Extreme
Differentiation substantial
Characteristics :
• There are a large number of buyers and sellers who compete among
themselves and their number is so large that no buyer or seller is in a
position to influence the demand and supply in the market .
• Price Takers : All the suppliers have to sell them at a uniform price or
same price.
• Monopoly : means “alone to sell ”
• There is only single seller, in practise we don’t find pure monopoly ,but
public utilities like transport, water and electricity we find monopoly .
Features :
• Single Seller of the product.
• Restrictions to entry.
• No close substitutes ,so cross elasticity is zero and price elasticity is less
than one .
Price Discrimination :
• Price discrimination is a method of pricing adopted by the monopolist
in order to earn abnormal profit .it refers to the practices of charging
different prices for the different unit of the same commodity.
Types of Oligopoly :
• Open and closed Oligopoly : In open Oligopoly new firms can enter
market and compete with the existing firms .but in closed oligopoly
entry is restricted.
• If the firm increase the price the competitor may not increase
the price hence a large change in product sold will be observed.
Form of market Number of Nature of Price Elasticity Degree of
Structure Firms Product of Demand of control over
a firm price
Perfect Large Homogeneous Infinite None
Competition Number of
firms
Monopoly One Unique Small Very
Product Considerable
without close
substitute
Imperfect
competition
• Monopolistic Large Differentiated large some
Competition number of Products
firms