Management Education

&
Research Institute
E-Notes of Micro Economics
BCom(H) 2024-2028
Semester I

Compiled By: Bindu Sharma

Assistant Professor
MERI, Janak Puri
 Syllabus of
B.COM(H) 103 Micro Economics
 Concept of Economics

Meaning - Micro Economic

Micro Economics Vs Macro Economics

4
Basic Problems of an Economy

5
Application of Economic Theories in Decision Making

6
Marginalism & Incrementalism

7
Market Forces & Equilibrium
 Micro Economics
Unit 1
What is concept of Economics ?

Economics is a Social Science.

Economics is the science which studies human behavior as a

relationship between ends and scarce means which have alternative
uses.---Lionel Robbins

In other words human beings have endless wants to satisfy but the
resources and ‘means’ which are available to them at any time are
limited therefore, people try to make the best possible use of their
resources so that they could satisfy, maximum number of their wants
with the available means
 Micro Economics
What is meaning and scope of Micro Economics ?
Economics is divided into two major branches; Microeconomics and Macroeconomics. The
two terms “Microeconomics and Macroeconomics were first coined by Ragnar Frisch, a
German economist in 1933.
When an economy study deals with economic behavior of an individual decision unit
(consumer and producer) or an economic variable (price and quantity of a good) it is
Microeconomics.
In other words the study of the decision –making behavior of the individual or groups
of individual forms the subject matter od Microeconomics.
Scope of Micro-
economics

Theory of Theory of
Theory of Economic
Product Pricing Factor Pricing Welfare

Demand Efficiency in
Analysis Rent Production

Supply
Efficiency in
Analysis
Wages Consumption

Overall
Economic
Interest Efficiency

Profit
 2 Branches of Economics

Micro Economics Macro Economics

❖ Micro > Mikros > Small ❖ Macro > Makros > Whole
❖ Study of individual economic ❖ Study of Whole economy- All
units like –consumer , consumers All producers etc.
producer ,firm or market. ❖ Macroeconomics studies a
❖ Deals with various issues like nation’s economy, as whole
demand, supply, factor and its various aggregates.
pricing , product pricing, ❖ Deals with various issues like
economic welfare, national income, distribution,
production ,consumption and employment, general price
more. and more
❖ Central Problems-Price ❖ Central Problems-
Determination and Resources Determination of income and
allocation employment.
 Basic Problems of an Economy
1.What to Produce?
No country can produce all the goods because there are limited resources available to them. Therefore,
a choice has to be made between the different types of commodities that a countrycan produce
with its available resources. For instance, a farmer who has a piece of land can produce either wheat
or rice. Similarly, the government of a country needs to decide where to allocate its resources
whether in consumer goods or defence goods or both, if both, then whatwill be the proportion
of allocation of resources in the two categories of goods.
2. How to Produce?
This economic problem is concerned with the technique of producing a commodity. This problem
arises only when there is more than one way of manufacturing goods. The techniques of
production can be classified into two broad categories:
Labour Intensive techniques (extensive use of labour)
Capital Intensive techniques (extensive use of machinery)
Labour intensive technique is known to promote employment, whereas capital intensive
techniques promote growth and efficiency in manufacturing.
3. For whom to Produce?
All wants of people in a society can not be satisfied. So, a decision has to be made on who should
get the amount of total output of goods and services produced. Society decides on the amount of
luxury and standard goods that have to be produced. The further distribution of these goods
directly relates to the purchasing power of the economy.
 Application of Economic Theories in Decision Making

Decision making aims at maximizing profits through taking effective and efficient
decisions using Economic Theories. Businessmen have to take decisions and fulfill their
activities in an atmosphere of uncertainty. Uncertainty element is considered to be a
special feature of business enterprises.

The Application Of Economic Theory In Decision Making is explained as

follows:-

1 ) Economic concepts like price elasticity, income elasticity, cross elasticity, supply
elasticity, costs of production etc. are useful for estimating the volume of business in future.
2 ) Economic laws are also useful for forecasting the profits, demand, output, costs, price
determination etc. As the business organizers manage their production activities under
uncertainty conditions, such estimates help them for making economic decisions and plans.
3) Economic laws help the businessmen to understand the government’s policy with regard
to business cycles, changes in national income, taxation, foreign trade, industrial relations,
monopoly control, industrial licensing, price control etc. Businessmen can form their
business methods suitable to the policy of the government. They make and implement
business policies after carefully analyzing the impact of the above factors.
 Marginalism
Marginalism is the economic principle that economic decisions are made and economic behavior occurs
in terms of incremental units, rather than categorically. The key focus of marginalism is that asking how
much, more or less, of an activity (production, consumption, buying, selling, etc.) a person or business
will engage in is a more fruitful question to further economic inquiry than categorical questions.

what does Marginalism mean?

Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods
and services by reference to their secondary, or marginal, utility. Thus, while the water has greater total
utility, the diamond has greater marginal utility.
 Marginalism & Incrementalism

Marginalism has formed one of the foundational principles of economic theory and
research since its adoption in the 1870s, known as the Marginal Revolution. Concepts
that originate from the principle of marginalism include marginal utility; marginal costs
and benefits; marginal rates of substitution and transformation; and marginal
propensities to consume, save, or invest choice and demand.

Beside above, what is Incremental analysis or Incrementalism and how is it used by

management? Incremental analysis or Incrementalism is an accounting tool used to help
a business make short-term decisions. The process looks at the
incremental changes in costs and revenues arising from the alternative options available,
and selects the one which gives either the lowest cost or the highest net income.
 Market Forces & Equilibrium

Market Forces
Demand & Suppy
Meaning of Market Equilibrium
Market equilibrium is a market state where the supply in the
market is equal to the demand in the market. The equilibrium
price is the price of a good or service when the supply of it is
equal to the demand for it in the market. If a market is at
equilibrium, the price will not change unless an external factor
changes the supply or demand, which results in a disruption of
the equilibrium.
Demand , Suppy & Equilibrium
If a market is not at equilibrium, market forces tend to move it to equilibrium. Let's break this concept down.
If the market price is above the equilibrium value, there is an excess supply in the market (a surplus), which
means there is more supply than demand. In this situation, sellers will tend to reduce the price of their good or
service to clear their inventories. They probably will also slow down their production or stop ordering new
inventory. The lower price entices more people to buy, which will reduce the supply further. This process will
result in demand increasing and supply decreasing until the market price equals the equilibrium price.
If the market price is below the equilibrium value, then there is excess in demand (supply shortage). In this case,
buyers will bid up the price of the good or service in order to obtain the good or service in short supply. As the
price goes up, some buyers will quit trying because they don't want to, or can't, pay the higher price.
Additionally, sellers, more than happy to see the demand, will start to supply more of it. Eventually, the upward
pressure on price and supply will stabilize at market equilibrium.
 Examples of Market Equilibrium
Flat Screen TVs

Imagine that you make flat screen televisions. Your flagship model is a 72-inch plasma
that currently wholesales to your retailers at $2,500. Unfortunately, your warehouse
has recently been filling a bit too quickly with 72-inch plasmas. This is probably
because each of your three largest competitors has finally gotten around to
introducing their own 72-inch televisions, which means that there are a bunch more
72-inch televisions on the market. You decide to lower your wholesale price to $2,250
and see what happens. You also decide to cut production down by 25% for the next
month to clear out existing inventory.
When you reviewed the numbers at the end of the month, the price reduction did
work, but not quite well enough. So you decide to reduce the wholesale price once
again to $2,100 and keep production at the same level. When you reviewed the
numbers at the end of the month, you see that you barely have any inventory and the
purchase orders from your retailers have started to go up a bit. In the following
months, orders have kept up with production and inventory is where it is suppose to
be. It appears that the price for your television has reached market equilibrium.
References: 1. Microeconomic Theory By D. N. Dwiedi, Vikas Publication
2. Business Economics By D.D. Chaturvedi, International Book
House Pvt. Ltd.