MICROECONOMICS

Lecture 1: Introduction
 What is economics?
• Economics is a science which studies human
behavior as a relationship between ends and
scarce which have alternatives.
• The study of how scarce resources are or
should be allocated.
• Economics is a social science that analyzes the
production, consumption and distribution of
goods and services
 Nature of economics
• Positive economics:
• Positive economics is concerned with what
actually happen or what would happen under
various conditions. That is what is going on
• atomic energy plant
• road construction
• building(savar)
• bridge
• Normative economics:
• Normative economics consider what would be
the best methods of economic organization
from the point of view of both equity and
efficiency. That is what should do.
 Scope of Economics
• Microeconomics:
• It examines how production and consumption
• are organized what is produced and who
benefits.

• Macroeconomics :
• It consider how aggregates such as output
employment and the general price level are
determine.
 Basic Economic Problems

• What to produce
• How to produce
• For whom to produce

What to produce :
This implies that society has to decide which
goods and in what quantities are to be
produced.
We can show the upper situation in a diagram
which is called production possibility curve.
• Production possibility curve which shows the
various combinations of two goods which the
economy can produce with a amount of
resources.
• Fundamental goods, machinery product, atom
bomb, school, hospital etc…..
How to produce :
• This means what combination of resources
society decides to produce goods.
• A combination of resources or factories
implies a technique of production.
• For whom to produced:
For whom to produce implies how the
national product is to be distributed among
the members of the society.
Demand and supply
 What is demand?
• The demand for a commodity is the amount of it
that a consumer will purchase or will be ready to
take off from the market at various given prices at
a given amount of time.
• In a short we can say three things ensure quantity
of demand. They are as follows-
• willingness to obtain
• willingness to pay(Desire to purchase)
• Ability to pay(purchasing power)
 Demand function
The demand of a good depends upon various
things, these things are called factor
influencing demand or determinants of
demand.
q = f ( p x , P1 , p2 , Y , T , N )
d
 Law of Demand

Other things remaining constant the higher the price , the

lower the quantity demand is and vice-versa

P↑ Q↓
P↓ Q ↑
 Law of Demand

The Law of Demand Expresses the Functional

relationship between Price and Quantity
Demanded.
According to this law: When Other things
remain constant, If the Price of a commodity
falls, the quantity demanded of it will rise and
if the price of the commodity rises, its
quantity demanded will decline.
 Demand Schedule
Demand schedule is a list of prices and corresponding quantities.
Point Price Quantity
A 1 20
B 2 16
C 3 12
D 4 8
E 5 4
Extension and Contraction in Demand
 Increase and Decrease Demand
Increase in demand occurs due to the following reasons :

•The fashion for a good increases or people’s taste and

preferences become more favorite for the food
•Consumer’s income increases
•Prices of substitutes of the good have risen
•Prices of complementary goods have fallen
•Propensity to consume of the
people has increased
•Owing to the increase in population and
as a result of expansion in
market the number of
consumers of the good has increased
• Determinants of demand:-
Fashion (taste and preferences)
Consumer income
Prices of substitutes goods have risen
Prices of complementary goods have fallen
Propensity to consume of the people has
increased
Population expand
What is market demand?
❖Market demand consists of several
individuals. That is market demand function is
obtained by summing up the demand function
of the individuals constituting the market.
 Q = 40 − 2 p
A

Q = 25.5 − 0.75 p
B

Q = 30 − .25 p
C

then,
Q = Q +Q +Q
D A B C

Here
Q =demand of individual A
A

Q =demand of individual B
B

Q =demand of individual C
C

Q =market demand
D
 SUPPLY
Supply is a fundamental economic concept
that describes the total amount of a specific
good or service that is available to
consumers. The quantity supplied is the
number of units that sellers want to sell
over a specific period of time.
 Law of Supply
There is direct relationship between the price of a
commodity and its quantity offered fore sale over a
specified period of time. When the price of a goods
rises, other things remaining the same, its quantity
which is offered for sale increases as and price falls, the
amount available for sale decreases. This relationship
between price and the quantities which suppliers are
prepared to offer for sale is called the law of supply.
 Supply Function

• The amount of a goods or service offered for

sale . The supply function relates supply to the
factors which determine its level.
• Supply depends upon various things which is
called factor influencing supply. This things are
called Determinants of Supply
.
Qs = f ( p , p , p ,T ,T ,T
1 2 3
, E ,W )
x 1 2

p =Own price
x

p , p =Prices of other things

1 2

T =Technology
1

T =Tax and subsidy

2

T =Time duration
3

E = Input price
W = Weather
Supply schedule and supply curve
Point price supply
A 1 6
B 2 9
C 3 12
D 4 15
E 5 18
 Supply
Technically, supply refers to the quantity of a
commodity that a firm is willing and able to
supply at a given period of time, at a given
price. Observe that this definition has four
essential dimensions-
quantity of a commodity,
willingness to sell,
price of commodity and
period of time.
 Law of Supply
There is direct relationship between the price of a
commodity and its quantity offered fore sale over a
specified period of time. When the price of a goods
rises, other things remaining the same, its quantity
which is offered for sale increases as and price falls, the
amount available for sale decreases. This positive
relationship between price and the quantities which
suppliers are prepared to offer for sale is called the law
of supply.
 Law of Supply
Supply curve
 Shifting of supply curve
The factors other than price affect the supply curve in a
different manner. These factors cause the supply curve
to shift. Of course, this shift is also categorized into two
which are- a leftward and rightward shift.
Note that, this shift occurs because the price is
constant when studying the effect of other factors on
supply. A rightward shift indicates a positive effect on
the curve whereas a leftward shift indicates a negative
effect on the supply curve. We have already studied
the various factors other than price and their
relationship with the supply of a commodity. The
factors can either have a direct or an inverse
relationship with the quantity of commodity supplied.
Shifting of supply curve
Movement along the Supply Curve
When the price of a commodity changes, other factors kept
constant, the quantity supplied of a commodity changes
suitably. This is because of the direct relationship between
the two. This is known as a change in quantity supplied.
Graphically it causes movement along the supply curve. A
change in price either causes supply curves to expand or
contract.
If the prices increase, other factors kept constant, there is
an increase in the quantity supplied which is referred to as
an expansion in supply. Graphically, this is represented as
an upward movement along the same supply curve.
Conversely, if the prices decrease, keeping other factors
constant, firms tend to decrease the supply. This is referred
to as a contraction in supply. Graphically, this is represented
as a downward movement along the same supply curve.
Movement along the Supply Curve
 Market Equilibrium
• Definition: Market equilibrium is an economic state
when the demand and supply curves intersect and
suppliers produce the exact amount of goods and
services consumers are willing and able to consume.
This is the point where quantity
demanded and quantity supplied is equal at a given
time and price. There is no surplus or shortage in this
situation and the market would be considered stable.
In other words, consumers are willing and able to
purchase all of the products that suppliers are willing
and able to produce. Everyone wins.
 Market Equilibrium
When the supply and demand curves
intersect, the market is in equilibrium. This is
where the quantity demanded and quantity
supplied are equal. The corresponding price is
the equilibrium price or market-clearing price,
the quantity is the equilibrium quantity.
Market Equilibrium: Graph
 Market Equilibrium
• Putting the supply and demand curves from the
previous sections together. These two curves will
intersect at Price = $6, and Quantity = 20. In this
market, the equilibrium price is $6 per unit, and
equilibrium quantity is 20 units.
• At this price level, market is in equilibrium.
Quantity supplied is equal to quantity demanded
( Qs = Qd).
• Market is clear.
 Market equilibrium

Market equilibrium is a situation in which two

opposition forces (like demand and supply)
are in balance.
Demand Function Qd =a- bp
Q =- c+dp
Supply Function s

We know, Qd = Q s
a – bp = -c +dp
or , dp+bp=a+c
or ,p(b+d)=a+c
then , p=a+c/b+d
again ,
we know ,
Q = -c+dp
s

= -c+d (a+c)/(b+d)
= (-bc-dc+ad+dc)/(b+d)
=(ad-bc)/(b+d)
Q = ad-bc/ b+d
How is equilibrium established?
 How is equilibrium established?

At a price higher than equilibrium, demand will be

less than 1000, but supply will be more than 1000
and there will be an excess of supply in the short
run.
Graphically, we say that demand contracts
inwards along the curve and supply extends
outwards along the curve. Both of these changes
are called movements along the demand or
supply curve in response to a price change.
 How is equilibrium established?
Demand contracts because at the higher price, the income effect and substitution
effect combine to discourage demand, and demand extends at lower prices
because the income and substitution effect combine to encourage demand.
In terms of supply, higher prices encourage supply, given the supplier’s expectation of
higher revenue and profits, and hence higher prices reduce the opportunity cost of
supplying more. Lower prices discourage supply because of the increased
opportunity cost of supplying more. The opportunity cost of supply relates to the
possible alternative of the factors of production. In the case of a college canteen
which supplies cola, other drinks or other products become more or less attractive
to supply whenever the price of cola changes. Changes in demand and supply in
response to changes in price are referred to as the signaling and incentive effects
of price changes.
If the market is working effectively, with information passing quickly between buyer
and seller (in this case, between students and a college canteen), the market will
quickly readjust, and the excess demand and supply will be eliminated.
In the case of excess supply, sellers will be left holding excess stocks, and price will
adjust downwards and supply will be reduced. In the case of excess demand,
sellers will quickly run down their stocks, which will trigger a rise in price and
increased supply. The more efficiently the market works, the quicker it will readjust
to create a stable equilibrium price.