INTRODUCTION TO MICRO ECONOMICS

Macro Economics- Economy- infrastructural

Micro Economics- studies studies about economy network which provides
about individual units as a whole a livelyhood

Positive Economics- Normative Economics-

introduction
What is- based on facts what ought to be- based
on value judgements

Opportunity cost- Next Central Problems of an Production Possibility Curve-

best Fore gone Economy combination of 2 goods that can
alternative be produced with in the given
resources and technology

What to
Produce?-
Problem of
Choice

How to
Produce?-
problem of
choice of
technology

For Whom to
Produce?-
Problem- of
Distribution
of Income
 CONSUMER’S EQUILIBRIUM AND DEMAND

Total Marginal
Average
Utility- Utility-
Utility-
∑MU Tun-Tun-1
TU/Output

Ordinal Utility- measured

Cardinal Utility- measured
Utility- want in ranks/Preferences-
in numbers- quantitative
Satisfying qualitative
power of a
commodity
Law of Diminishing MU- More and more Indifference Curve Analysis-
we consume less and less satisfaction we MRSxy=Px/Py
derive.
Convex to the origin

One commodity case- Mux= Px Never intersect eachother

Higher IC higher satisfaction

Law of Equi- Marginal Utility- Mux/Px= MUy/Py
Never touches the axes

Slopes downward from left to right

Budget Line- Px.Qx+ Py.Qy= M

Budget Set- Px.Qx+ Py.Qy ≤ M

Price of the good

Demand – willingness to buy
Taste and preferences
and ability to pay for a good
Expectations on price

Government policies
Price of the related good- substitute good- inverse
relation between price and demand and Size and composition of population
complementary good direct relation between price
and demand Distribution of Income

Income of the consumers- Normal Good- Direct

Law of demand- other things remain the
relationship between demand and income and
same there is an inverse relation between
Inferior Good- Inverse Relationship between
price and quantity demanded- exceptions-
demand and income
Giffen good. Auspicious consumption -
luxury goods and Auspicious necessity-life
saving medicines
 Shift in demand curve- change in
Movement along demand demand
curve- change in quantity
demanded-
Price constant, other factors varies

Income increases demand also increase- increase in

Price varies- other factors remain constant
demand – rightward shift
Price decreases demand increases- expansion in demand
Income decreases demand also decrease- decrease
Price increases demand decreases- contraction in demand in demand – leftward shift

Expansion and contraction shown in the same To show the shift,new demand curves will be drawn
demand curve

Percentage method-
% change in quantity
Price Elasticity of Demand
demanded/ %
change in price

=∆Q/Q *100
Perfec ∆P/P*100
Perfec Elastic Inelast tly
tly dema ic inelast
elastic nd- Dema ic
dema Ed=>1 nd- Proportionate
dema
nd- ED<1 Method-∆Q/∆P* P/Q
nd-
ed=∞ ED=0
Unitar Total Expenditure
y Method- P*Q
elastic
dema
nd-
ED=1
 Short run production
function- only one factor is
PRODUCER’S BEHAVIOUR AND SUPPLY variable other factors
constant
Production function-
Production- Q=f (L, K)
transformation of inputs
into output. Long run production
function- all the factors are
variable

Total Product=
Law of Variable Proportion:- one factor variable,
∑MP
keeping other factors constant, TP and MP first
increase at increasing rate, then TP increases at
diminishing rate and MP starts to fall, When MP
become zero, TP reaches its maximum and when MP is Average
negative TP starts to fall. Product=
TP/Output
Phase 1- increasing returns to a factor

Phase 2- Diminishing returns to a factor

Phase 3- Negative returns to a factor. Marginal

Product= TPn-
TPn-1
 COST

Explicit cost- out of pocket cost of a firm Implicit cost- opportunity cost of reources already
owned by the firm and used in the business

Fixed cost- do not vary with the level of output- straight line
parallel to x-axis
Total cost=
COST:- TFC= AFC * Output or TFC= TC-TVC
Fixed Cost +
monetary+ Variable Cost-
non-monetary positively sloped
expenses -starts from TFC
Variable Cost- varies with the level of output- positively sloped

TVC= AVC* output or TVC= TC-TFC

AFC- the total fixed cost of

AVC-the variable cost of
producing per unit of the
commodity- rectangular producing per unit of the
hyperbola Average Cost-cost per unit of commodity.- u shaped curve
output produced AVC= TVC/Output
AFC= TFC/Output
AC= TC/Output AVC= AC-AFC
AFC= AC-AVC
AC=AFC+ AVC

Marginal Cost- addition made to Total Variable cost or total

cost when one more unit of output is produced- U shaped

MCn= TCn- TCn-1

MCn= TVCn- TVCn-1

 REVENUE Total Revenue- the total receipts a seller can receive from
his sales

TR= P * Q
Revenue is the money received by In a perfectly competitive market- TR is a straight line,
the producer after the sales sloping upward from the origin.
Revenue= Cost + Profit

Average Revenue- revenue that is earned per

unit of output.

AR = TR/Q
Marginal Revenue- the increase in revenue from
the sale of one additional unit of product P* Q/Q
MRn= TRn-TRn-1 = AR= P
In a perfectly competitive market- MR is a In a perfectly competitive market- AR is a straight
straight line parallel to X axis line parallel to X axis

In a perfectly competitive market-

AR =MR=Price

Producer’s Equilibrium:- Maximum Profit and Minimum Cost

Conditions:-

1st MR=MC

2nd Condition, After equilibrium MC>MR

Market Equilibrium

Market Demand= Market Supply