🔹 Definition
Microeconomics is the branch of economics that studies the behaviour of individual economic units such as consumers, firms, and industries.
It focuses on how decisions are made regarding the allocation of scarce resources and the determination of prices of goods and services.
🔹 Main Objectives
- Determine product prices (how demand and supply interact).
- Allocate resources efficiently.
- Study consumer behaviour and producer decisions.
- Analyse welfare and market efficiency.
🔹 Major Concepts
1. Demand
- Meaning:Â Quantity of a commodity that buyers are willing and able to purchase at different prices in a given period.
- Law of Demand:
➜ Price ↓ → Quantity demanded ↑ (inverse relationship). - Determinants: Price of the commodity, income, taste & preferences, price of related goods.
- Exceptions:Â Giffen goods, prestigious goods, expectations of price change.
2. Elasticity of Demand
Measures the degree of responsiveness of quantity demanded to a change in price, income, or related goods’ price.
- Types:
- Price elasticity
- Income elasticity
- Cross elasticity
- Importance: Helps in pricing, taxation policy, and revenue forecasting.
3. Supply
- Meaning:Â Quantity of a commodity that sellers are willing to sell at different prices.
- Law of Supply: Price ↑ → Supply ↑ (direct relationship).
- Determinants:Â Cost of production, technology, number of sellers, government policies.
4. Equilibrium Price
Occurs when quantity demanded = quantity supplied.
→ Determines market price and quantity traded.
5. Consumer’s Behaviour
- Utility:Â Satisfaction derived from consumption.
- Law of Diminishing Marginal Utility:Â As more units of a good are consumed, additional satisfaction decreases.
- Indifference Curve Analysis:Â Represents different combinations of two goods providing equal satisfaction.
6. Production Function
Shows the technical relationship between inputs and output.
- Short-run: at least one factor is fixed.
- Long-run: all factors are variable.
- Laws of Production:
- Law of variable proportions
- Returns to scale
7. Cost Concepts
- Fixed Cost (TFC):Â Does not vary with output.
- Variable Cost (TVC):Â Varies with output.
- Total Cost (TC):Â TFC + TVC.
- Marginal Cost (MC):Â Change in TC from producing one extra unit.
- Average Cost (AC): TC ÷ Output.
8. Revenue Concepts
- Total Revenue (TR): Price × Quantity sold.
- Average Revenue (AR): TR ÷ Quantity.
- Marginal Revenue (MR):Â Change in TR from selling one more unit.
9. Market Structures
| Type | Features | Examples |
|---|---|---|
| Perfect Competition | Many buyers & sellers, homogeneous products, free entry & exit. | Agricultural markets |
| Monopoly | Single seller, no close substitutes, price maker. | Railways, utilities |
| Monopolistic Competition | Many sellers, differentiated products, brand competition. | Clothing, cosmetics |
| Oligopoly | Few sellers dominate market, interdependent pricing. | Telecom, automobiles |
10. Factor Pricing
Determines payments for factors of production:
- Land → Rent
- Labour → Wages
- Capital → Interest
- Entrepreneur → Profit
🔹 Importance of Microeconomics
- Helps in price determination
- Aids efficient allocation of resources
- Basis for business decision making
- Helps formulate economic policies
- Explains income distribution