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Microeconomics

Introduction
The term economics owes its origin to the Greek word oikonomia meaning Household. The
definition of economics in terms of using scarce resources to satisfy human wants is correct
but it is incomplete. On one hand the productive capacity of modern economics has grown
tremendously. Population and labor force have increased; new resources of raw material
have been discovered. While on the other hand, the resulting growth in production and
income has not been smooth.
Economics, therefore, concerts itself not just with how a nation allocates to various uses its
scarce productive resources, important as that may be. It also deals with the process by
which the productive capacity of these recourses is increased and with the factors which in
the past have led to sharp fluctuations in the rate of utilization of resources. The study of
economics will help in analyzing the possible causes contributory to these problems and
might suggest a number of alternative courses, which could be adopted for tackling these
problems. Economics cannot ensure that all the problems can be tackled.
The term micro is derived from Greek word Mikros meaning small.
Microeconomics is the study of particular firms, particular households, individual,
price, wages, incomes, individual industries and particular commodities, according
to K.E.Boulding.
The subject matter of micro economics fundamentally covers the following areas:
Theory of value (product pricing and factor pricing)
Theory of Economic Welfare.
According to Maurice Dobb, micro economics is a microscopic study of the
economy.
Adam smith is considered as the founder of microeconomics (The Wealth of
Nations).
Micro economic theory is often called as the Price Theory or the value theory because it
is primarily concerned with determination of relative prices of different goods. Its
approach is always specific or non aggregative.
Themes of Microeconomics
Much of microeconomics is about limits-the limited incomes that consumers can spend on
goods and services, the limited budgets and technical know-how that firms can use to
produce things, and the limited number of hours in a week that a worker can allocate to
labor and leisure. But microeconomics is also about ways to make the most of these limits.
More precisely, it is about allocation of scarce resources.
In a planned economy such as that of Cuba, North Korea, or the former Soviet union< these
allocation decisions are made by the government. Firms are told what and how much to
produce, and how to produce it; workers have little flexibility in choice of jobs, hours
worked, or even where they live; and consumers typically have a very limited set of goods
to choose from. As a result, many of the tools and concept of microeconomics are of limited
relevance in those countries.
Trade-offs
Microeconomics describes the trade-offs that consumers, workers, and firm face, and
shows how these trade-offs are best made. The following are the various types of trade-offs
Consumers
Consumers have limited incomes, which can be spent on a wide variety of goods and
services, or saved for the future. Consumer theory describes how consumers, based on
their preferences, maximize their well-being by trading off the purchase of more of some
goods for the purchase of less of others.
Workers
Workers also have to face constraints and make trade-offs. They face trade-offs in their
choice of employment. Some chose to work for larger companies while some chose to work
with smaller companies. Finally, workers must decide how many hours per week they wish
to work, thereby trading off labor for leisure.
Firms
Firms also face limits in terms of the kinds of products that they can produce, and the
resources available to produce them. For example, iBall Company is very good at producing
computers and headphones, but it does not have the ability and capital to produce
pharmaceuticals or airplanes. The theory of firms describes how these trade-offs can best
be made.
Prices and Markets
A second important theme of microeconomics is the role of prices. All of the trade-offs
described above are based on the prices faced by consumers, workers, or firms.
Microeconomics also describes how the prices are determined. In a centrally planned
economy, prices are set by the government. In a market economy, prices are determined by
the interactions of workers, consumers and firms. These interactions occur in markets and
a good price is determined.
Equilibrium
Equilibrium refers to a condition which is stable and has no tendency to change. If a person
or an economic entity considers a situation as the best attainable under the prevailing
conditions, it implies that any change from it is undesirable. For example, a firm attains
equilibrium when it maximizes profit, given the cost and revenue conditions. The concept
of Equilibrium is very important for economic analysis.
Ceterisparibus
Economists use the term ceteris paribus as a ''short hand'' for all other variables remaining
the same.
What are these other variables? Some of the factors that affect demand include consumers'
incomes, their tastes and preferences; the season... there are many factors that affect
demand. We will investigate some of these in more depth later.
Demand, in a market economy, means the behavior of consumers who are able to buy the
commodity. If you have no money, your tastes and preferences are simply ignored.
When we talk about demand, we are talking about effective demand.
Theories and Models
Like any science economics is concerned with the explanations of observed phenomena.
The explanations and prediction are based on theories.
Economic theories are also the basis for making predictions. When evaluating a theory, it is
important to keep in mind that is invariably imperfect. This is the case in every branch of
science. In physics, for example, Boyles law relates the volume, temperature, and pressure
of a gas. This law has assumptions and conditions as well. The situation is the same in
economics. For example, because firms do not maximize their profits all the time, the
theory of the firm has had only limited success in explaining certain aspects of firms
behavior, such as the timing of capital investment decisions. The theory does explain a
broad range of phenomena regarding the behavior, growth, and evolution of firms and
industries, and has thus become an important tool for managers and policymakers.
Equilibrium
In economics, economic equilibrium is a state of the world where economic forces are
balanced and in the absence of external influences the (equilibrium) values of economic
variables will not change. It is the point at which quantity demanded and quantities
supplied are equal. Market equilibrium, for example, refers to a condition where a market
price is established through competition such that the amount of goods or services sought
by buyers is equal to the amount of goods or services produced by sellers. This price is
often called the equilibrium price or market clearing price and will tend not to change
unless demand or supply change.
When the price is above the equifferent points of economic equilibrium. In most simple
microeconomic stories of supply and demand in a market a static equilibrium is observed
in a market; however, economic equilibrium can exist in non-market relationships and can
be dynamic. Equilibrium may also be multi-market or general, as opposed to the partial
equilibrium of a single market.
In economics, the term equilibrium is used to suggest a state of "balance" between supply
forces and demand forces. For example, an increase in supply will disrupt the equilibrium,
leading to lower prices. Eventually, a new equilibrium will be attained in most markets.
Then, there will be no change in price or the amount of output bought and sold until
there is an exogenous shift in supply or demand (such as changes in technology or tastes).
That is, there are no endogenous forces leading to the price or the quantity.
Not all economic equilibria are stable. For an equilibrium to be stable, a small deviation
from equilibrium leads to economic forces that returns an economic sub-system toward the
original equilibrium. For example, if a movement out of supply/demand equilibrium leads
to an excess supply (surplus, or glut), that excess induces price declines which return the
market to a situation where the quantity demanded equals the quantity supplied. If supply
and demand curves intersect more than once, then both stable and unstable equilibria are
found.
Most economists e.g., Paul Samuelson, caution against attaching a normative meaning
(value judgments) to the equilibrium price. For example, food markets may be in
equilibrium at the same time that people are starving (because they cannot afford to pay
the high equilibrium price).


Demand

Dr. Alfred Marshall has defined Demand as the desire for a commodity, backed by the
ability to buy and willingness to pay for it, at a given price during particular period of time.

DEMAND = DESIRE + ABILITY TO BUY + WILLINGNESS TO PAY

There are various determinants of demand. Some of them are as following

Fashion: some goods are demanded on account of fashion, goods out of fashion will
cease to have demand.
Utility: demand for any commodity arises because of its utility to the consumer. The
higher the utility, the greater is the demand for it and vice versa.
Quality of a commodity: the better the quality of the good, the more will be the
demand for it and vice versa.
Good's own price: The basic demand relationship is between potential prices of a
good and the quantities that would be purchased at those prices. Generally the
relationship is negative meaning that an increase in price will induce a decrease in
the quantity demanded. This negative relationship is embodied in the downward
slope of the consumer demand curve. The assumption of a negative relationship is
reasonable and intuitive. If the price of a new novel is high, a person might decide to
borrow the book from the public library rather than buy it. Or if the price of a new
piece of equipment is high a firm may decide to repair existing equipment rather
than replacing it.
Price of related goods: The principal related goods are complements and
substitutes. A complement is a good that is used with the primary good. Examples
include hotdogs and mustard, beer and pretzels, automobiles and gasoline. (Perfect
complements behave as a single good.) If the price of the complement goes up the
quantity demanded of the other good goes down. The other main categories of
related goods are substitutes. Substitutes are goods that can be used in place of the
primary good. The mathematical relationship between the price of the substitute
and the demand for the good in question is positive. If the price of the substitute
goes down the demand for the good in question goes down.
Personal Disposable Income: In most cases, the more disposable income (income
after tax and receipt of benefits) you have the more likely you buy.
Tastes or preferences: The greater the desires to own a good the more likely you
are to buy the good. There is a basic distinction between desire and demand. Desire
is a measure of the willingness to buy a good based on its intrinsic qualities. Demand
is the willingness and ability to put one's desires into effect. It is assumed that tastes
and preferences are relatively constant.
Consumer expectations about future prices and income: If a consumer believes
that the price of the good will be higher in the future he is more likely to purchase
the good now. If the consumer expects that her income will be higher in the future
the consumer may buy the good now. In other words positive expectations about
future income may encourage present consumption.


Demand Curve:
In economics, the demand curve is the graph depicting the relationship between the
price of a certain commodity, and the amount of it that consumers are willing and able
to purchase at that given price. It is a graphic representation of a demand schedule. The
demand curve for all consumers together follows from the demand curve of every
individual consumer: the individual demands at each price are added together.
Demand curves are used to estimate behaviors in competitive markets, and are often
combined with supply curves to estimate the equilibrium price (the price at which
sellers together are willing to sell the same amount as buyers together are willing to
buy, also known as market clearing price) and the equilibrium quantity (the amount of
that good or service that will be produced and bought without surplus/excess supply or
shortage/excess demand) of that market. In a monopolistic market, the demand curve
facing the monopolist is simply the market demand curve.
According to convention, the demand curve is drawn with price on the vertical axis and
quantity on the horizontal axis. The function actually plotted is the inverse demand
function.
The demand curve usually slopes downwards from left to right; that is, it has a negative
association (for two theoretical exceptions, see Veblen good and Giffen good). The negative
slope is often referred to as the "law of demand", which means people will buy more of a
service, product, or resource as its price falls. The demand curve is related to the marginal
utility curve, since the price one is willing to pay depends on the utility. However, the
demand directly depends on the income of an individual while the utility does not. Thus it
may change indirectly due to change in demand for other commodities.


Supply
In economics, supply is the amounts of some product producers are willing and able to sell
at a given price all other factors being held constant. Usually, supply is plotted as a supply
curve showing the relationship of price to the amount of product businesses are willing to
sell.

Factors affecting supply
Innumerable factors and circumstances could affect a seller's willingness or ability to
produce and sell a good. Some of the more common factors are:
Goods own price: The basic supply relationship is between the price of a good and the
quantity supplied. Although there is no "Law of Supply", generally, the relationship is
positive or direct meaning that an increase in price will induce and increase in the
quantity supplied.
Price of related goods: For purposes of supply analysis related goods refer to goods
from which inputs are derived to be used in the production of the primary good. For
example, Spam is made from pork shoulders and ham. Both are derived from Pigs.
Therefore pigs would be considered a related good to Spam. In this case the
relationship would be negative or inverse. If the price of pigs goes up the supply of
Spam would decrease (supply curve shifts up or in) because the cost of production
would have increased. A related good may also be a good that can be produced with the
firm's existing factors of production. For example, a firm produces leather belts. The
firm's managers learn that leather pouches for smart phones are more profitable than
belts. The firm might reduce its production of belts and begin production of cell phone
pouches based on this information. Finally, a change in the price of a joint product will
affect supply
Conditions of Production: The most significant factor here is the state of technology. If
there is a technological advancement in one's good's production, the supply increases.
Other variables may also affect production conditions. For instance, for agricultural
goods, weather is crucial for it may affect the production outputs.
Expectations: Sellers expectations concerning future market condition can directly
affect supply. If the seller believes that the demand for his product will sharply increase
in the foreseeable future the firm owner may immediately increase production in
anticipation of future price increases. The supply curve would shift out. Note that the
outward shift of the supply curve may create the exact condition the seller anticipated,
excess demand.
Price of inputs: Inputs include land, labor, energy and raw materials. If the price of
inputs increases the supply curve will shift in as sellers are less willing or able to sell
goods at existing prices. For example, if the price of electricity increased a seller may
reduce his supply because of the increased costs of production. The seller is likely to
raise the price the seller charges for each unit of output.
Number of suppliers - the market supply curve is the horizontal summation of the
individual supply curves. As more firms enter the industry the market supply curve will
shift out driving down prices.
Government policies and regulations: Government intervention can have a
significant effect on supply. Government intervention can take many forms including
environmental and health regulations, hour and wage laws, taxes, electrical and natural
gas rates and zoning and land use regulations.
Supply Curve:
The relationship of price and quantity supplied can be exhibited graphically as the supply
curve. The curve is generally positively sloped. The curve depicts the relationship between
two variables only; price and quantity supplied. All other factors affecting supply are held
constant. However, these factors are part of the supply curve and are present in the
intercept or constant term.
There is no such thing as a monopoly supply curve. Perfect competition is the only market
structure for which a supply function can be derived. A function is a rule which assigns to
each value of a variable one and only one value of the function. In a perfectly competitive
firm the price is given. A manager of a competitive firm can tell you precisely what quantity
of goods will be supplied for any price by simply referring to the firm's marginal cost curve.
To generate his supply function the seller could simply initially set price equal to zero and
then incrementally increase the price at each price level he could calculate the quantity
supplied using the supply equation following this process the manager could trace out the
complete supply function. A monopolist cannot replicate this process. A change in demand
can result in the "changes in price with no changes in output, changes in output with no
changes in price or both".

There is simply not a one to one relationship between price and
quantity supplied.

There is no single function that relates price to quantity supplied.


Elasticity of Demand
Elasticity of demand is a measure used in economics to show the responsiveness,
or elasticity, of the quantity demanded of a good or service to a change in its price. More
precisely, it gives the percentage change in quantity demanded in response to a one
percent change in price (holding constant all the other determinants of demand, such as
income). It was devised by Alfred Marshall.
Price elasticity is almost always negative, although analysts tend to ignore the sign even
though this can lead to ambiguity. Only goods which do not conform to the law of demand,
such as Veblen and Giffen goods have a positive ED. In general, the demand for a good is
said to be inelastic (or relatively inelastic) when the ED is less than one (in absolute value):
that is, changes in price have a relatively small effect on the quantity of the good demanded.
The demand for a good is said to be elastic (or relatively elastic) when its ED is greater than
one (in absolute value): that is, changes in price have a relatively large effect on the
quantity of a good demanded.
Revenue is maximized when price is set so that the ED is exactly one. The ED of a good can
also be used to predict the incidence (or "burden") of a tax on that good. Various research
methods are used to determine price elasticity, including test markets, analysis of historical
sales data and conjoint analysis.




Factors affecting the elasticity of demand


Availability of substitute goods
Breadth of definition of a good
Percentage of income
Necessity
Duration
Brand loyalty
Who pays


Ed = 0: Perfectly inelastic demand E
d
= - : Perfectly elastic demand



- 1 < E
d
< 0: Inelastic or relatively inelastic demand
E
d
= - 1: Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand
- < E
d
< - 1: Elastic or relatively elastic demand


Elasticity of supply
In economics, price elasticity of supply is an elasticity defined as a numerical measure of
the responsiveness of the supply of a given good to a change in the price of that good.
Price elasticity of supply is a measure of the sensitivity of the quantity of a good supplied in
a market to changes in the market price for that good, ceteris paribus.
Per the law of supply, it is posited that at a given price and corresponding quantity supplied
in a market, a price increase will also increase the quantity supplied.PES is a numerical
measure (coefficient) of by how much that supply is affected.






In other words, PES is the percentage change in quantity supplied that one would expect to
occur after a 1% change in price. For example, if, in response to a 10% rise in the price of a
good, the quantity supplied increases by 20%, the price elasticity of supply would be
20%/10% = 2.


Factors affecting elasticity of supply


Availability of raw materials
Length and complexity of production
Time to respond
Excess capacity
Inventories

Production Function
In microeconomics and macroeconomics, a production function is a function that
specifies the output of a firm, an industry, or an entire economy for all combinations
of inputs. This function is an assumed technological relationship, based on the current state
of engineering knowledge; it does not represent the result of economic choices, but rather
is an externally given entity that influences economic decision-making. Almost all economic
theories presuppose a production function, either on the firm level or the aggregate level.
In this sense, the production function is one of the key concepts of mainstream
neoclassical theories. Some non-mainstream economists, however, reject the very concept
of an aggregate production function.
In micro-economics, a production function is a function that specifies the output of a firm
for all combinations of inputs. A meta-production function(sometimes met production
function) compares the practice of the existing entities converting inputs into output to
determine the most efficient practice production function of the existing entities, whether
the most efficient feasible practice production or the most efficient actual practice
production. In either case, the maximum output of a technologically-determined
production process is a mathematical function of one or more inputs. Alternatively, a
production function can be defined as the specification of the minimum input requirements
needed to produce designated quantities of output, given available technology. It is usually
presumed that unique production functions can be constructed for every production
technology.
The primary purpose of the production function is to address allocative efficiency in the
use of factor inputs in production and the resulting distribution of income to those factors.
Under certain assumptions, the production function can be used to derive a marginal
product for each factor, which implies an ideal division of the income generated from
output into an income due to each input factor of production.
Cost of Production
In economics, the cost-of-production theory of value is the theory that the price of an
object or condition is determined by the sum of the cost of the resources that went into
making it. The cost can compose any of the factors of production (including labor, capital,
or land) and taxation.
The theory makes the most sense under assumptions of constant returns to scale and the
existence of just one non-produced factor of production. These are the assumptions of the
so-called non-substitution theorem. Under these assumptions, the long run price of a
commodity is equal to the sum of the cost of the inputs into that commodity, including
interest charges.
Market price is an economic concept with commonplace familiarity; it is the price that a
good or service is offered at, or will fetch, in the marketplace; it is of interest mainly in the
study of microeconomics. Market value and market price are equal only under conditions
of market efficiency, equilibrium, and rational expectations.
In economics, returns to scale and economies of scale are related terms that describe what
happens as the scale of production increases. They are different terms and are not to be
used interchange
Cost of production per unit is the costs associated with production divided by the number
of units produced. The difficulty in calculating the cost of production is usually thought to
be in assembling all the costs associated with production and there are volumes written
about the correct procedures. However, the question of the relationship of the cost of
production to the price of the product is seldom discussed. One reason for this is the
relationship seems very straightforward. In single product enterprises, the cost of
production can be compared directly to the price of the product, regardless of the method
used to calculate the cost of production.
Determining the relationship between cost of production and the products price in joint
product enterprises is more difficult. A joint product enterprise in one in which two or
more products are produced from one production practice and the costs associated with
the production of each individual product cannot be measured with existing information.


Competitive Markets
In economics, market structure (also known as the number of firms producing identical
products).
Monopolistic competition, also called competitive market, where there are a large
number of firms, each having a small proportion of the market share and slightly
differentiated products.
Monopoly, where there is only one provider of a product or service.
Natural monopoly, a monopoly in which economies of scale cause efficiency to
increase continuously with the size of the firm. A firm is a natural monopoly if it is able
to serve the entire market demand at a lower cost than any combination of two or more
smaller, more specialized firms.
Oligopoly, in which a market is dominated by a small number of firms that together
control the majority of the market share.
Duopoly, a special case of an oligopoly with two firms.
Perfect competition is a theoretical market structure that features unlimited
contestability (or no barriers to entry), an unlimited number of producers and
consumers, and a perfectly elastic demand curve.


Market
Structure
Seller Entry
Barriers
Seller
Number
Buyer Entry
Barriers
Buyer
Number
Oligopoly No Many No Many
Monopoly Yes One No Many




Case study
iBall Your eyeball view, Our technology new

In September 2001, iBall introduced its first mouse in India. iBall today has grown into a
leading brand with over 275 products spread across 19 categories. iBall is a well accepted
brand in the corporate world and is fast becoming a household name throughout the
country.
iBall today is Rs.3000 million enterprises.
But even iBall had competition, when it entered the Indian market. They came up with new
products in the IT market. The design and efficient production of iBalls products involved
not only impressive engineering but a lot of economics as well. First, iBall had to think
carefully about the public would react to the design and performance of its products. How
strong would demand be initially, and how fast would it grow? How would demand depend
on the prices that iBall charged? Understanding consumer preferences and trade-offs and
predicting demand and its responsiveness to price are essential to iBall and every other
manufacturer.
Next iBall had to be concerned with the cost of manufacturing these products. How high
would production costs be? How would costs depend on the number of products produced
each year? How much and how fast would costs decline as managers and workers gained
experience with the production process? And to maximize profits, how many of these new
products should iBall plan to produce each year?
iBall also had to design a pricing strategy and consider how competitors would react to it.
For example, if iBall charges a low price for the basic version of the assembled computer
but high price for individual options, such as keyboard? Or would it be more profitable to
make these options standard items and charger higher price for the assembled
computer? Whatever strategy iBall used how were the competitors going to react?
As launching any new products requires large investment in new capital equipment, iBall
had to consider both the risks and possible outcomes of its decisions. Some as due to
uncertainty over the wages that ford would have to pay its workers. What would happen if
the government increases tax on imports and exports? How should iBall take these
uncertainties into account when making investment decisions? iBall also had to worry
about organizational problems. iBall is an integrated firm in which separate divisions
produce engines and parts and then assemble finished products. How should manager of
different divisions be rewarded?
Finally, iBall had to think about its relationship to the government and the effects of
regulatory policies. For example, all of iBalls products must meet safety regulations. How
might these regulations and standards change over time? How might they affect costs and
profits?


equilibrium
demand, supply
and elasticity of
demand
production
function
cost of
production
competitive
markets
To deal with the competitive market iball launched many other products like keyboards,
speakers, headsets, LCD monitors, laptops and many more products. It launched seven new
models of mobile phones for senior citizens in India in the year 2009-2010 as well as
floating and water proof headsets.
Golden Rhino Awards - 2007 (360 Magazine Survey)
No.1 Mouse Brand
No.1 Cabinet Brand
No.1 Speaker Brand
No.1 Keyboard Brand
iball is growing rapidly in the oligopolistic market.
The company entered the Tablet market this year with the new iball slide. It runs on the
android operating system and is available for Rs.13,995.

Bibliography
Google
iBall company
Pearson






Made by
Mahaan Bhosle (10112)
Shreya Chande (10132)
Raunak Sharma (10082)
Nishant Tahilramani (10087)
Deep Ramkumar (10094)