Microeconomics

Prepared by Mattupalli Associates

For Master Minds, No.1 for CA/CWA, Ph:0863-2242355

CHAPTER 1 : DEMAND Desire + ability to pay+Willing to buy = Demand

Types of Demand

Determinants of demand Price demand

#$

Income

Consumers(Fav-D#,Unfav-D$) 4Population(Pop#-D#,Pop$-D$)

#$

Income

#$

Price of Petrol

#$

#$

Y

$#

P

D

Q1

Q

D

Q1

Demand for Coffee

O

4Finance Minister 4Consumer 4Monopolist (In determination of Price)

about prices 4Irrational consumer

Fast Track Material for Micro Economics

O

Q1

Changes in demand

D X

Q1

Q

Demand

Caused by Change in price

Reasons for downward sloping demand curve

4New Buyers 4Old Buyers 4Income effect 4Substitution effect

Caused by Change in other factors Increase & Decrease

Extension & contraction

Shift in the demand curve

Movement along the same demand curve

Change in demand Change in quantity demanded Y

Increase Y

P1

# P

Decrease Y

D1

D

$

D2

D

P P

0,0

Price

P2

Page 1

X Q

Demand for Cars

Price

(Generally inferior goods) Demand curve-back ward bending 4Articles of distinction (Veblen goods) 4Demonstration effect

Importance Useful to: 4Farmers

Income

pa lli

Income

4Giffen's paradox

4Future expectations

X

Q

M at tu

Exceptions

D D

P

P1

X

O

I

Demand

$# D

P1

I1

O

Demand for car

Y

D

I

I

Demand for coffee

#$

Demand

Y

I D

I1

Law of Demand

All the determinants of demand are assumed to be constant except price

#$

Y

4Climate & Weather (Fav-D#,Unfav-D$) 4Gov't Policies(Fav-D#,Unfav-D$) 4Expectations about future prices

Assumptions

Demand

Price of Tea

Inferior goods

Q1

Q Q2 Quantity

D1

Price

Superior goods

4Tastes & Preferences of

Complementaries

Substitutes

Price of Petrol

#$

Demand

Price of Tea

Price

- Substitutes (P#$-D#$) -Complementaries (P#$-D$#) 4Income of consumers (I#$-D#$)

Cross demand

Income demand

A ss oc ia te s

4Price of commodity(P#$-D$#) 4Price of related commodities:

D2

D

X Q

Q1

Quantity

X

Q2

Q

Quantity

X

Don’t dare to copy. Copy rights reserved.



CHAPTER 2 : ELASTICITY OF DEMAND Price elasticity of demand

Degrees

Methods

Ed=¥

P

Q

X

Q1

Quantity Demanded

2) Perfectly inelastic (0) Y

1) Availability of Substitutes [If Available - Elastic If not Available - Inelastic]

Ed = lower segment Upper segment

2) Type of want [Necessary - Inelastic Comforts, luxuries - Elastic]

Y Ed=¥ Ed>1

P1

Price

Price of the Commodity

1) Point Method dq p Ep = x Or dp q

D

Ed=0

P P2

3) Consumer habits [Habitual consumers - Inelastic Others - Elastic]

Ed=1 Ed<1

O

Q

X

Ed=0

Quantity Demanded

Quantity

3) Unitary elastic (1)

d X

Ed = % Change In demand % Change in price 4) Relatively elastic (>1)

Dq p Dq p ´ = ´ q Dp Dp q 3) Arc Elasticity Method

q - q1 p + p2 Ed = 2 ´ 1 p 2 - p1 q1 + q 2 5) Relatively In elastic (<1) 4) Total out lay Method Price

#$ #$ #$

-

4) No of purposes (uses) [Can be used -elastic Can’t be used -inelastic]

M at tu

2) Percentage Method

T.Exp

5) Price Range [Very high /low -inelastic Middle range-elastic]

4Useful to business firms 4Determination of Price & output

4Determination of prices 4Useful to super markets 4Useful to finance minister 4Pricing factors of production 4Explains the paradox of plain

theory

=

% C h a n g e in d e m a n d % C h a n g e in in c o m e

=

Dq y ´ Dy q

Degrees Negative (<0) -Inferior goods Positive (>0) - Superior goods 0 to 1 - Necessaries >1 - comforts/ luxuries

4Nationalising an industry 4Granting protection toCross elasticity of demand industry Degrees

EC = =

Page 2

I

rates

Formula 7) Proportion of Expenditure [Small -inelastic High -elastic]

E

4Useful in foreign exchange

6) Postponement [Yes- elastic No -inelastic]

$# (Ed >1) #$ (Ed <1) Same(Ed =1)


Formula

Importance/uses

pa lli

Price of the Commodity

Y

Factors

A ss oc ia te s

8

1) Perfectly elastic( )

O

Income elasticity of demand

Negative (<0) - Complementaries Positive (>0) - Substitutes Zero - Unrelated goods/ Independent goods

% C h a n g e in d e m a n d o f x % C h a n g e in p r ic e o f y py Dq x ´ Dp y qx




CHAPTER 3: SUPPLY & ELASTICITY OF SUPPLY

SUPPLY

4Prices of Products 4Prices of related commodities 4Prices of factor of

production

Exceptions to law of supply

4Auction sale

Degrees of price elasticity of supply

4Perfectly elastic supply (=

Determinants ¥ )

4Fear of fall in prices 4Perfectly inelastic supply (=0) in future

4Relatively inelastic supply (<1)

4Rare commodities

4Government policy

4Land

4Relatively elastic supply (>1)

4Business policy

4Supply of labour

4Unit elastic supply (=1)

4Point elasticity Es =

(=1)

Es =

Caused by change in other factors Increase & decrease

Movement along the same supply curve

Shift in the supply curve

8

(= )

q 2 - q1 p + p2 ´ 1 p 2 - p1 q1 + q 2

Changes in supply

Extension & contraction

(>1)

Dq p ´ Dp q

4Arc elasticity

Caused by change in price

(<1)

MPrice at tu

4Agreement among producers

(=0)

Measurements

4Nature of commodity 4Effect of price 4Time 4Quasi rent 4Techniques of production 4Better for 4Estimates of future

pa lli

4State of technology

4Time

Importance

A ss oc ia te s

Determinants

Elasticity of supply

Quantity

Change in supply

Change in quantity supplied

Increase

S

Decrease

P1

Price

S

S

Q2

Q

Quantity

Page 3

S

P

P

P2


S2

S1

Price

Price

S

P

Q1

S2

S1 Q Quantity

Q1

S Q

Q1

Quantity




CHAPTER 4: THEORY OF CONSUMER’s BEHAVIOUR UTILITY

Cardinal (1,2,3...) Marginal Utility analysis developed by Marshall

Ordinal (I, II, III........) Indifference curve Analysis developed by Hicks & Allen

MU n = TU n - TU n -1

Assumptions

=

DTU DQ

Properties

4Rational consumer 4Scale of preference 4Diminishing marginal rate of

Assumptions: 4Measurability of utility

substitution

Indifference curve: - slopes downwards from left to right -are always convex to origin -can never intersect with each other -do not meet the axes -need not be parallel to each other -higher indifference curve gives higher level of satisfaction than lower one

4Assumptions are near to reality 4Non measurability of utility 4Marginal utility of money is not constant 4Explain cause for Giffen Goods 4Two commodity model 4Marginal rate of Substitution

pa lli

4Marginal utility of money is constant 4Independent utility

4Assumption of consistency 4More units, more preference 4Scale of preference is

Superiority

A ss oc ia te s

= TU n +1 - TU n

Law of Diminishing Marginal Utility

Assumptions

4Standard Units 4Identical Units 4No time interval 4No change in tastes & habits 4Some goods of special Nature 4Availability of substitutes &

Importance

4Price determination 4Finance minister 4Explains paradox of value 4Basis for economic laws 4Advantage to


M at tu

Marginal Utility Analysis

Law of Equi-Marginal Utility

MU a MU b MU n = = ... = = MU of money Pa Pb Pn Assumptions

Importance

4Indivisibility of goods 4Ignorance 4Unlimited resources 4Customs & fashions 4Measurability of Utility 4Constant utility of money Page 4

4Consumption 4Production 4Exchange 4Distribution 4Government

Theory of consumer’s surplus Consumers surplus=Willing price-Actual price Criticisms

4Imaginary 4Measures mental satisfaction

4Difficult to calculate willing price

4Marginal utility of money is not constant

4Apply only in inflation 4Prestigious goods 4Changes from person to

Importance

4Price determination 4Useful to finance minister

4Price discrimination in discriminating monopoly 4Understanding the Water-diamond paradox 4Assessment of




CHAPTER 5: PRODUCTION LAND

CAPITAL

ORGANISER

Features Features Capital is - result of labour - result of savings - productive - temporary - mobile factor - a passive factor - not a free gift

4Provides subsistence 4Provides employment 4Provides raw materials 4Provides means of transport 4Provides tools & machines 4Increases labour Productivity

Different possible

Capital formation

Stages

4Savings 4Mobilization of savings 4Investment of savings

Factors

M at tu

4Land is subject to law

4Ability to save 4Willingness to save a) Family affection b) Prudence, c) Habit, d) Social status

4Facilities to save 4Security 4Rate of interest 4Taxation Fast Track Material for Micro Economics

Qualities

Problems Problems relating to

objectives

-objectives

4Organic 4Economic 4Social 4Human

-location & size of plant -finance -organization structure -marketing -industrial relations -selecting & organising physical activities

4Real capital & human capital

4Moral quality 4knowledge of

resource co-ordination

4Fixed capital & Circulating capital 4Tangible capital & Intangible capital

Page 5

business

4Initiating a business enterprise &

4Individual capital & Social Capital

4Internal capital & external capital

labour

Functions

Forms of Capital

4Sunk capital & floating capital

4Far- sightedness 4courage 4leadership 4organising the 4experience 4Knowledge of

-legal formalities

pa lli

of production

Functions

A ss oc ia te s

4Free gift of nature 4No cost of production 4Limited in supply 4Permanent 4Land has no mobility 4Land is heterogenous 4Land has multiple uses 4Land is a specific factors

4Risk bearing or uncertainty bearing 4Innovations 4Organizing the business 4Managing the business 4Allocation of income 4Decision making



For Master Minds, No.1 for CA/CWA, Ph:0863-2242355 Labour

Features

Mobility of Labour

Factors affecting efficiency of Labour

LabourType

- Means human exertion

Factors

- Power is co-extensive -Involves intelligence and judgement -Is inseparable from labourer

Occupational (One job to another job in the same industry)

Geographical (One place to another place)

4Family-bond 4Information & knowledge 4means of transport & communication 4Level of literacy 4Poverty of

A ss oc ia te s

- Is perishable

-Has weak bargaining power -Power differ’s from labourer to labourer

Horizontal Vertical (In the same (Lower grade to -Make choice between hours of labour & grade or at the higher grade) leisure same level) -Is less mobile than other factors Division of Labour

labour

Types

4Professional specialisation (Auditors, Doctors, Engineers, Teachers, Carpenters)

4Specialisation by process (Pins manufacturing)

4Territorial specialisation (Cotton Mills in Gujarat, Cycle

M at tu

pa lli

-Efficiency of labour can increased

ADVANTAGES

4Increases production 4Employment opportunities 4Efficiency 4Saving in time 4Saving in tools 4Large scale production 4Best quality of product 4Possibility of Mechanization


DISADVANTAGES

4Monotony 4Loss of skill 4Mistake will multiply 4Loss of sense of responsibility 4Risk of job 4Hinders mobility of labour 4Difficulty in distribution of

Page 6

4Racial qualities 4Health & strength of workers 4Standard of Living 4Education 4Personal qualities 4Social & political security 4Chances of promotion 4Trade unions 4Labour Laws

LIMITATIONS

4Extent of market 4Nature of demand 4Inventions 4Capital availability 4Technical knowledge 4Nature of Industry 4Labour availability




CHAPTER 6: COST ANALYSIS Determinants of cost

4Prices of factors of production (If high- cost #, If low-cost $)

4Technology (Advanced-cost$,If not-cost#)

(Output level#-cost#, output level $-cost$)

4Period (Short run-cost#, long run-cost$)

from total cost

4Production overheads

(Prime cost+production over heads)

4When Average cost falls Marginal cost also falls 4When Average cost rises Marginal cost also raises 4Marginal cost cuts Average cost at its optimum

4Cost related to other functions

(Administrative over heads+selling over heads+

(Diminishing returns-cost#, increasing returns-cost$)

pa lli

4Law of returns operating

4Total cost

M at tu

(If stable-cost$, If unstable-cost#)

Different types of costs

4Managerial efficiency

(Remuneration paid to outside factors of

4Average cost and Marginal cost can be calculated

distribution over heads)

4Stability of output

4Explicit costs

(Direct material+direct wages+direct expenses)

A ss oc ia te s

4Capacity Utilization or output level

Relation between Average cost & Marginal Cost

4Production cost

(Big-cost$, small-cost#)

(Earnings of factors of production belonging to organizer himself)

4Prime cost

(Indirect material+indirect wages+indirect expenses)

4Size of plant

4Implicit costs

Components of cost

4Accounting costs (All payments made by the entrepreneur to the suppliers of various factors of production)

4Outlay costs

4Direct costs

(Actual outlay of funds like wages, material, rent)

4opportunity costs

(Identified & traced to a particular product)

4Indirect costs

(Cost related to foregone

4Economic costs (Accounting cost {explicit}


Page 7

(Can not be identified & traced to a particular

4Shutdown costs (Cost incurred after closing down of the business)

4Abandonment costs (Cost related to retirement of fixed asset from use)

4Money costs (Payment made to factors of production & other expenses)

4Real costs (Pains & sacrifices of labour or efforts &




CHAPTER7: PRODUCTION ANALYSIS PRODUCTION FUNCTION Short-Run Law of variable proportions [Fixed factors -constant Variable factors-vary]

Features

Assumptions of

(All factors are variable)

4Substitutability 4Complementary

production function

Law of returns to scale

4State of technology is constant 4Some inputs are kept to be fixed

1st stage

2nd stage

output > Input

output = Input Reasons

Reasons

Y

Stage II

Stage III

90

Stage I

4Indivisibility 4Specialization 4Dimensional

70

80

M

60

Point of Inflexion

TP

50

I

4Exists in short period only

4Balancing 4Increasing returns to

4Production function

3rd stage

implies to a given

output < Input Reasons

Economies

4Expansion 4Entrepreneur 4Decreasing returns

pa lli

4Law does not apply if they

Internal

4Technical : -Big machines -Bye- products -Research -Specilisation -Linking process -Workshops

10

20

M at tu

30

40

scale will not continue

R 1

2

3

4

5

AP

N 6

7

8

9

Amount of variable factor

1st stage Law of increasing returns Reasons

4Invisibility of fixed Factor of production

4Division of work &

10

11

X

MP

2nd stage Law of diminishing returns Reasons

4Distributing optimum proportion

4Imperfect substitutability


3rd stage Law of negative returns Reasons

4Too much of variable factors in relation to quantity of fixed

4Capital can be increased or decreased

A ss oc ia te s

Assumptions

Output

Long Run

Diseconomies

Internal

4Inefficient management

4Technical difficulties

External

4Pollution 4Strains on

4Managerial

External

4Cheaper source of raw materials & capital equipment

4Technical economies 4Development of skilled labour

4Growth of ancillary industries

4Better transportation &

infrastructure

4High factor

4Production 4Financial

Factor Page 8




CHAPTER8: MARKETS & CHAPTER 9 : PRICE &OUTPUT DETERMINATION

Features

Types

Factors effecting size of market

4Every market have some On the basis of

Basis of

Basis of period

area

competition

of time

4Area

4Perfectly competitive

4Local market ( buyers & sellers carry

Market

(large number of sellers

on business in a

selling homogeneous

particular locality)

products)

4National market

4Monopoly

and supplied all over the

Commodity having full

country)

control over the entire

M at tu

market)

and supplied all over the

fixed)

4Grading and sampling

4Short period market

(If - Yes#, If -No$)

variable factors only but

(single seller of the

( commodity is demanded

4Very short period Market 4Durability (If - Yes#, If -No$) 4Portability(If - Yes#, If -No$) (supply is more or less

(one can change

(commodity is demanded

4International market

4Adequate supply (If - Yes#, If -No$)

A ss oc ia te s

4Competition

pa lli

commodities

4Wide demand (If - Yes#, If -No$)

4Imperfect Competition (It is a combination of

4Transport and communications (If - Yes#, If -No$)

not fixed factors)

4Level of income(If - high#, If -low$)

4Long period market (both fixed and variable factors can be changed)

4Secular period Market

monopoly & perfect

(changes can take place

competition)

even in factors of

4Development of financial institutions (If - Yes#, If -No$) -Availability of banks and other financial Institutions -Credit and banking habits of people etc

4Oligopoly (only few sellers of a commodity each seller can influence the priceoutput policy of other


Page 9




CHAPTER 10: PRICE & OUTPUT DETERMINATION UNDER DIFFERENT MARKETS Monopoly

Perfect Competition Features

Monopolistic competition Features

Features

number of sellers

4Single seller of the product

4Free entry and free exist

of firms

4Perfect knowledge of the

market

4Restrictions to entry 4Price maker

4Perfect mobility of factors

of Production

Buyers

and seller

4Ignorance

4Control over price

4Indivisibility

4Freedom of entry or

exit

4Deliberate policy of

4Can’t control supply & price

conditions

4Large number of

4Product differentiation

of production

4No close-substitutes

4Products are homogeneous

4Immobility of factors

A ss oc ia te s

4Large number of buyers & Large

Sources

4Downward sloping demand

Oligopoly Features

4Interdependence 4Importance of advertising and selling costs

4Group behaviour 4Indeterminateness of demand curve

M at tu

pa lli

Discriminating Monopoly

Features

Degrees

41st Degree

4Difference in elasticity of demand 4Market imperfections 4Legal sanction 4Existence of monopoly

(In this the monopolist is able to sell each separate unit of his Product at different prices)

42nd degree (In this buyers are divided into different groups and different price will be charged to different groups)

43rd degree (In this seller divides his buyers into two or more than to sub markets & from each sub market a different price is charged)


Page 10


Microeconomics

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