What is Micro Economics? 2
Micro Economics A.K.A Price Theory/Partial Analysis MIKRO means Small Study of individual units of the economy Explains price determination in both commodity and factor market Based on price mechanism which depends on demand and supply 3
Important questions studied in microeconomics
1. What is the level of total output in the economy? 2. How is the total output determined? 3. How does the total output grow over time? 4. Are the resources of the economy (eg labour) fully employed? 5. What are the reasons behind the unemployment of resources? 6. Why do prices rise?
Table of Contents W.R.T NCERT-XII
TOPICS 1. INTRODUCTION 2. THEORY OF CONSUMER BEHAVIOUR 3. PRODUCTION AND COSTS 4. THEORY OF FIRM UNDER PERFECT COMPETITION 5. MARKET EQUILIBRIUM 6. NON-COMPETITIVE MARKETS
1. INTRODUCTION 1.1 A Simple Economy 1.2 Central Problems of an Economy 1.3 Organisation of Economic Activities 1.3.1 The Centrally Planned Economy 1.3.2 The Market Economy 1.4 Positive and Normative Economics 1.5 Microeconomics and Macroeconomics
2. THEORY OF CONSUMER BEHAVIOUR 2.1 The Consumer s Budget 2.1.1 Budget Set 2.1.2 Budget Line 2.1.3 Changes in the Budget Set 2.2 Preferences of the Consumer 2.2.1 Monotonic Preferences 2.2.2 Substitution between Goods 2.2.3 Diminishing Rate of Substitution 2.2.4 Indifference Curve 2.2.5 Shape of the Indifference Curve 2.2.6 Indifference Map 2.2.7 Utility 2.3 Optimal Choice of the Consumer 2.4 Demand 2.4.1 Demand Curve and the Law of Demand 2.4.2 Normal and Inferior Goods 2.4.3 Substitutes and Complements 2.4.4 Shifts in the Demand Curve 2.4.5 Movements along the Demand Curve and Shifts in the Demand Curve 2.5 Market Demand 2.6 Elasticity of Demand 2.6.1 Elasticity along a Linear Demand Curve 2.6.2 Factors Determining Price Elasticity of Demand for a Good 2.6.3 Elasticity and Expenditure
3. PRODUCTION AND COSTS 3.1 Production Function 3.2 The Short Run and the Long Run 3.3 Total Product, Average Product and Marginal Product 3.3.1 Total Product 3.3.2 Average Product 3.3.3 Marginal Product 3.4 The Law of Diminishing Marginal Product and the Law of Variable Proportions 3.5 Shapes of Total Product, Marginal Product and Average Product Curves 3.6 Returns to Scale 3.7 Costs 3.7.1 Short Run Costs 3.7.2 Long Run Costs
4. THE THEORY OF THE FIRM UNDER PERFECT COMPETITION 4.1 Perfect competition: Defining Features 4.2 Revenue 4.3 Profit Maximisation 4.3.1 Condition 1 4.3.2 Condition 2 4.3.3 Condition 3 4.3.4 The Profit Maximisation Problem: Graphical Representation 4.4 Supply Curve of a Firm 4.4.1 Short Run Supply Curve of a Firm 4.4.2 Long Run Supply Curve of a Firm 4.4.3 The Shut Down Point 4.4.4 The Normal Profit and Break-even Point 4.5 Determinants of a Firm s Supply Curve 4.5.1 Technological Progress 4.5.2 Input Prices 4.5.3 Unit Tax 4.6 Market Supply Curve 4.7 Price Elasticity of Supply 4.7.1 The Geometric Method
5. MARKET EQUILIBRIUM 5.1 Equilibrium, Excess Demand, Excess Supply 5.1.1 Market Equilibrium-Fixed Number Firms 5.1.2 Market Equilibrium: Free Entry & Exit 5.2 Applications 5.2.1 Price Ceiling 5.2.2 Price Floor
6. NON-COMPETITIVE MARKETS 6.1 Simple Monopoly in the Commodity Market 6.1.1 Market Demand Curve is the A.R Curve 6.1.2 Total, Average and Marginal Revenues 6.1.3 Marginal Revenue and Price Elasticity of Demand 6.1.4 Short Run Equilibrium of the Monopoly Firm 6.2 Other Non-perfectly Competitive Markets 6.2.1 Monopolistic Competition 6.2.2 How do Firms behave in Oligopoly
PRODUCTION
Production Product Goods Services Free Goods Economic Goods goods Consumer Goods Capital Goods Intermediary Goods Perishable Goods Durable Goods Single Use C.G Durable Use C.G The Output of an economy is called PRODUCT Raw Materials Intermediate goods Final Goods
Rent + Wages + Interest + Profit = Factor Cost (10) Factor Cost (10)+ Taxes(2) = MRP(12) Anything sold below the factor cost is Subsidy Factor Cost (10) = Actual Cost (8)+ Subsidy(2) Net Taxes = Taxes Subsidy (Taxes > Subsidy) Factor Cost + Net Taxes = MRP Value = price quantity
Factors of Production Land Labour Capital Entrepreneur Factor Payments Rent Wages Interest Profit
Based on Ownership of F.O.P
(A) Capitalist Economy The capitalist or free enterprise economy is the oldest form of economy. Earlier economists supported the policy of laissez fair meaning leave free. They advocated minimum government intervention in the economic activities. The following are the main features of a capitalist economy; Free enterprise Private property Freedom of Contract Profit Motive Competition Consumer s Sovereignty
Capitalist Economy
Capitalist Economy Pros Production of cheap and better products Reward Innovation Competition Efficiency Cons Inequalities of Income Labour Exploitation Inefficient distribution of fruits
(B) Socialist Economy In the socialist or centrally planned economies all the productive resources are owned and controlled by the government in the overall interest of the society. The socialist economy has the following main features Collective Ownership of means of Production Social Welfare Objective Central Planning Reduction in Inequalities No class conflict
(C) Mixed Economy A mixed economy combines the best features of capitalism and socialism. Thus mixed economy has some elements of both free enterprise or capitalist economy as well as a government controlled socialist economy. The public and private sectors co-exist in mixed economies. The main characteristics of a mixed economy are as follows: Co-existence of public and private sectors. Individual Freedom Economic Planning Price Mechanism
Market Place where buyer & Seller meets. Edwards defined Market as a mechanism by which buyer and sellers are brought together.
Cost & Price?
Cost & Price The cost is the amount spent by a business making the product. The price is the amount customers pay for a product.
What is Profit/Gain? (Revenue Cost) What is Loss? (Cost- Revenue)
P.P.C?
Production Possibilities Curve (PPC): The Production Possibilities Curve (PPC) or transformative curve is a graph that shows the different rates of production of two goods that an individual of group can efficiently produce with limited resources.
BENEFITS OF P.P.C SCARCITY TRADE-OFFS OPPORTUNITY COST EFFICIENCY
HERO OF MARKET ECONOMY
HERO OF TOLLYWOOD
DEMAND AND SUPPLY
DEMAND LAW OF DEMAND REASONS FOR CHANGES IN DEMAND DECREASE IN DEMAND INCREASE IN DEMAND DETERMINERS OF DEMAND SHIFT DEMAND vs DEMAND QUANTITY
REASONS SUBSTITUTION EFFECT INCOME EFFECT LAW OF DIMINISHING MARGINAL UTILITY
DECREASE IN DEMAND
INCREASE IN DEMAND
DETERMINERS OF DEMAND SHIFT TASTE OR PREFERENCES NUMBER OF CONSUMERS PRICE OF RELATED GOODS SUBSTITUE GOODS COMPLIMENT GOODS INCOME NORMAL GOODS INFERIOR GOODS EXPECTATIONS
SUPPLY LAW OF SUPPLY DECREASE IN SUPPLY INCREASE IN SUPPLY DETERMINERS OF SUPPLY SHIFT
SUPPLY GRAPH
INCREASE IN SUPPLY
DECREASE IN SUPPLY
DETERMINERS OF SUPPLY SHIFT PRICE OF RESOURCES NUMBER OF PRODUCERS CHANGE IN TECHNOLOGY TAXES AND SUBSIDIES EXPECTATIONS
Equilibrium Price
Elasticity and the Total Revenue
Elasticity is used to determine how changes in product demand and supply relate to changes in consumer income or the producer's price.
The elastic product means that any change in price can result in changes in supply or demand. The inelastic product means that changes in price do not affect to a noticeable degree the supply or demand.
What is Contract Theory? Oliver Hart from Harvard and MIT professor Bengt Holmstrom won this year's Nobel Memorial Prize in Economics for their study of contracts and human behaviour in business. What is Contract Theory? How contracts are designed defines our incentives in various situations in the real world. Contracts can be o formal or informal, depending on whether they are enforced by law or social norms o complete or incomplete, which is based on whether they take into account all possibilities that lay in the future Contract theory is, partly at least, an attempt to understand the nuances in our contracts and how those contracts could be better constructed. The two economists provided "a comprehensive framework for analysing many diverse issues in contractual design, like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatisation of public-sector activities. It has become especially relevant in the years after the 2008 financial crisis, which was blamed on the short-term risk encouraged by huge cash bonuses paid to investment bankers. It also touches on themes of moral hazard, which arises where those that take the risks don't share in the costs of failure.
QUIZ
1. In Duopoly, there is/are A. Many firms B. Two firms controlling the Market C. Large corporations D. None of the above
2. Model of Monopolistic Competition (i.e Imperfect competition) is characterized by A. Homogeneous goods B. Differentiated goods C. Substitute Goods D. All of the above
3. Price discrimination is a situation when a producer A. charges different prices in different markets B. charges same price C. Charges many prices D. All of the above.
4. Monopoly is a form of market where there is A. large number of buyer B. Small number of buyer C. A single firm controlling the market D. Any of the above
5. Shape of Total Fixed Cost(TFC) Curve is A. Verticle B. Horizontal C. 45 degree line D. None of the above
6. Production Functions Shows A. Prices of input and output B. Relationship between output and input C. various combinations of inputs D. All of the above
7. Law of Demand states that A. with the increase in price, Quantity increases B. with the increase in price, quantity decreases other things remaining the same. C. quantity does not change with any increase in price. D. All of the above.
8. What Microeconomics is about? A. Study of Business Environment B. Study of financial position of the economy C. Study of the Economy at Micro Level D. None of the above
9. While in Perfect Competition A. Firms are price taker B. Buyers are independent C. Input prices are given D. None of the above