CLASS - XII

What is
Micro Economics?

2
 Micro Economics
 A.K.A Price Theory/Partial Analysis

 MIKRO means Small

 Study of individual units of the economy

 Explains price determination in both commodity and factor

market

 Based on price mechanism which depends on demand and

supply

3
 Importance of Micro Economics
• Functioning of Free Market Economy
• To frame suitable policies by Government
• Ways and Means for maximum social welfare
• Determination of Exchange Rates in I.Trade
• Distribution of commodity tax b/w P & C
• To study analytical techniques
Important questions studied in
microeconomics…
1. What is the level of total output in the economy?
2. How is the total output determined?
3. How does the total output grow over time?
4. Are the resources of the economy (eg labour) fully
employed?
5. What are the reasons behind the unemployment
of resources?
6. Why do prices rise?
Table of Contents

W.R.T NCERT-XII
 TOPICS
1. INTRODUCTION
2. THEORY OF CONSUMER BEHAVIOUR
3. PRODUCTION AND COSTS
4. THEORY OF FIRM UNDER PERFECT COMPETITION
5. MARKET EQUILIBRIUM
6. NON-COMPETITIVE MARKETS
 1. INTRODUCTION
1.1 A Simple Economy
1.2 Central Problems of an Economy
1.3 Organisation of Economic Activities
1.3.1 The Centrally Planned Economy
1.3.2 The Market Economy
1.4 Positive and Normative Economics
1.5 Microeconomics and Macroeconomics
 2. THEORY OF CONSUMER BEHAVIOUR
2.1 The Consumer’s Budget
2.1.1 Budget Set
2.1.2 Budget Line
2.1.3 Changes in the Budget Set
2.2 Preferences of the Consumer
2.2.1 Monotonic Preferences
2.2.2 Substitution between Goods
2.2.3 Diminishing Rate of Substitution
2.2.4 Indifference Curve
2.2.5 Shape of the Indifference Curve
2.2.6 Indifference Map
2.2.7 Utility
2.3 Optimal Choice of the Consumer
2.4 Demand
2.4.1 Demand Curve and the Law of Demand
2.4.2 Normal and Inferior Goods
2.4.3 Substitutes and Complements
2.4.4 Shifts in the Demand Curve
2.4.5 Movements along the Demand Curve and Shifts in the Demand Curve
2.5 Market Demand
2.6 Elasticity of Demand
2.6.1 Elasticity along a Linear Demand Curve
2.6.2 Factors Determining Price Elasticity of Demand for a Good
2.6.3 Elasticity and Expenditure
 3. PRODUCTION AND COSTS

3.1 Production Function

3.2 The Short Run and the Long Run
3.3 Total Product, Average Product and Marginal Product
3.3.1 Total Product
3.3.2 Average Product
3.3.3 Marginal Product
3.4 The Law of Diminishing Marginal Product and the Law of Variable
Proportions
3.5 Shapes of Total Product, Marginal Product and Average Product Curves
3.6 Returns to Scale
3.7 Costs
3.7.1 Short Run Costs
3.7.2 Long Run Costs
 4. THE THEORY OF THE FIRM UNDER
PERFECT COMPETITION
4.1 Perfect competition: Defining Features
4.2 Revenue
4.3 Profit Maximisation
4.3.1 Condition 1
4.3.2 Condition 2
4.3.3 Condition 3
4.3.4 The Profit Maximisation Problem: Graphical Representation
4.4 Supply Curve of a Firm
4.4.1 Short Run Supply Curve of a Firm
4.4.2 Long Run Supply Curve of a Firm
4.4.3 The Shut Down Point
4.4.4 The Normal Profit and Break-even Point
4.5 Determinants of a Firm’s Supply Curve
4.5.1 Technological Progress
4.5.2 Input Prices
4.5.3 Unit Tax
4.6 Market Supply Curve
4.7 Price Elasticity of Supply
4.7.1 The Geometric Method
 5. MARKET EQUILIBRIUM

5.1 Equilibrium, Excess Demand, Excess Supply

5.1.1 Market Equilibrium-Fixed Number Firms
5.1.2 Market Equilibrium: Free Entry & Exit
5.2 Applications
5.2.1 Price Ceiling
5.2.2 Price Floor
 6. NON-COMPETITIVE MARKETS

6.1 Simple Monopoly in the Commodity Market

6.1.1 Market Demand Curve is the A.R Curve
6.1.2 Total, Average and Marginal Revenues
6.1.3 Marginal Revenue and Price Elasticity of Demand
6.1.4 Short Run Equilibrium of the Monopoly Firm
6.2 Other Non-perfectly Competitive Markets
6.2.1 Monopolistic Competition
6.2.2 How do Firms behave in Oligopoly
 1. INTRODUCTION
1.1 A Simple Economy
1.2 Central Problems of an Economy
1.3 Organisation of Economic Activities
1.3.1 The Centrally Planned Economy
1.3.2 The Market Economy
1.4 Positive and Normative Economics
1.5 Microeconomics and Macroeconomics
PRODUCTION
 Production
Perishable
Consumer
Consumer
Goods
Free Goods Goods
Goods Durable
Goods Goods
Economic Capital
Economic Single Use
Product Goods
Goods
goods C.G
Services Intermediary Durable
Goods
Use C.G

•The Output of an economy is called PRODUCT

Raw Intermediat
Final Goods
Materials e goods
1.1 A Simple Economy
• Rent + Wages + Interest + Profit = Factor Cost (10)
• Factor Cost (10)+ Taxes(2) = MRP(12)
• Anything sold below the factor cost is ‘Subsidy’
• Factor Cost (10) = Actual Cost (8)+ Subsidy(2)
• Net Taxes = Taxes – Subsidy (Taxes > Subsidy)
• Factor Cost + Net Taxes = MRP
• Value = price × quantity
 1.2 Central Problems of an Economy
• What is produced & in what quantities?
– Consumer Goods
– Producer Goods
• How are these goods produced?
– Labour Intensive Technique (L.I.T)
– Capital Intensive Technique (C.I.T)
• For whom are these goods produced?
– Personal Distribution
– Functional Distribution
1.3 ORGANISATION OF ECONOMIC
ACTIVITIES
 (A) Capitalist Economy
• The capitalist or free enterprise economy is the oldest form of
economy. Earlier economists supported the policy of ‘laissez fair’
meaning leave free.
• They advocated minimum government intervention in the economic
activities. The following are the main features of a capitalist economy;

 Free enterprise
 Private property
 Freedom of Contract
 Profit Motive
 Competition
 Consumer’s Sovereignty
Capitalist Economy
 Capitalist Economy
Pros Cons
• Production of cheap and • Inequalities of Income
better products • Labour Exploitation
• Reward • Inefficient distribution of
• Innovation fruits
• Competition
• Efficiency
 (B) Socialist Economy
• In the socialist or centrally planned economies all the
productive resources are owned and controlled by the
government in the overall interest of the society.

• The socialist economy has the following main features

Collective Ownership of means of Production

Social Welfare Objective
Central Planning
Reduction in Inequalities
No class conflict
 (C) Mixed Economy
• A mixed economy combines the best features of capitalism and
socialism. Thus mixed economy has some elements of both free
enterprise or capitalist economy as well as a government
controlled socialist economy. The public and private sectors co-
exist in mixed economies.

• The main characteristics of a mixed economy are as follows:

Co-existence of public and private sectors.

Individual Freedom
Economic Planning
Price Mechanism
 1.5 MICROECONOMICS AND
MACROECONOMICS
MICROECONOMICS MACROECONOMICS
• In microeconomics, we • In macroeconomics, we
study, study,
– the behaviour of individual – an understanding of the
economic agents economy as a whole
– try to figure out how prices – aggregate measures like
and quantities of goods and – total output, Total
services are determined employment and aggregate
– interaction of individuals in price level.
these markets.
 2. THEORY OF CONSUMER BEHAVIOUR
2.1 The Consumer’s Budget
2.1.1 Budget Set
2.1.2 Budget Line
2.1.3 Changes in the Budget Set
2.2 Preferences of the Consumer
2.2.1 Monotonic Preferences
2.2.2 Substitution between Goods
2.2.3 Diminishing Rate of Substitution
2.2.4 Indifference Curve
2.2.5 Shape of the Indifference Curve
2.2.6 Indifference Map
2.2.7 Utility
2.3 Optimal Choice of the Consumer
2.4 Demand
2.4.1 Demand Curve and the Law of Demand
2.4.2 Normal and Inferior Goods
2.4.3 Substitutes and Complements
2.4.4 Shifts in the Demand Curve
2.4.5 Movements along the Demand Curve and Shifts in the Demand Curve
2.5 Market Demand
2.6 Elasticity of Demand
2.6.1 Elasticity along a Linear Demand Curve
2.6.2 Factors Determining Price Elasticity of Demand for a Good
2.6.3 Elasticity and Expenditure
2.1 The Consumer’s Budget
Budget Set & Budget Line
 Indifference Curve
• Indifference curves are graphical
representations of various combinations of
two commodities which an individual
considers equally valuable.
• They are used to
– analyze consumer preferences.
• Four important properties of indifference
curves:
– Indifference curves are downward sloping
– higher indifference curves are preferred to lower
ones
– indifference curves cannot intersect
– indifference curves are convex (i.e. bowed
inward).
 Budget Line
&
Indifference Curve
 Market
• Place where buyer & Seller meets.
• Edwards defined ‘Market as a mechanism by
which buyer and sellers are brought together.’
P.P.C ?
Production Possibilities Curve (PPC):

Production Possibilities Curve (PPC) or

“Production Possibilities Frontier (PPC)” or
“transformative curve” is a graph that shows the different rates of
production of two goods that an individual of group can efficiently
produce with limited resources.
 BENEFITS OF P.P.C
• SCARCITY
• TRADE-OFFS
• OPPORTUNITY COST
• EFFICIENCY
 HERO
OF
MARKET ECONOMY
HERO OF TOLLYWOOD
DEMAND AND SUPPLY
• DEMAND
– LAW OF DEMAND
– REASONS FOR CHANGES IN DEMAND
– DECREASE IN DEMAND
– INCREASE IN DEMAND
– DETERMINERS OF DEMAND SHIFT
– DEMAND vs DEMAND QUANTITY
 REASONS
• SUBSTITUTION EFFECT
• INCOME EFFECT
• LAW OF DIMINISHING MARGINAL UTILITY
DECREASE IN DEMAND
INCREASE IN DEMAND
 DETERMINERS OF DEMAND SHIFT
• TASTE OR PREFERENCES
• NUMBER OF CONSUMERS
• PRICE OF RELATED GOODS
– SUBSTITUE GOODS
– COMPLIMENT GOODS
• INCOME
– NORMAL GOODS
– INFERIOR GOODS
• EXPECTATIONS
• SUPPLY
– LAW OF SUPPLY
– DECREASE IN SUPPLY
– INCREASE IN SUPPLY
– DETERMINERS OF SUPPLY SHIFT
SUPPLY GRAPH
INCREASE IN SUPPLY
DECREASE IN SUPPLY
 DETERMINERS OF SUPPLY SHIFT
• PRICE OF RESOURCES
• NUMBER OF PRODUCERS
• CHANGE IN TECHNOLOGY
• TAXES AND SUBSIDIES
• EXPECTATIONS
Equilibrium Price
Elasticity and the Total Revenue
• Elasticity is used to determine how changes in
product demand and supply relate to changes
in consumer income or the producer's price.
• The elastic product means that any change in
price can result in changes in supply or
demand. 
• The inelastic product means that changes in
price do not affect to a noticeable degree the
supply or demand.
 3. PRODUCTION AND COSTS

3.1 Production Function

3.2 The Short Run and the Long Run
3.3 Total Product, Average Product and Marginal Product
3.3.1 Total Product
3.3.2 Average Product
3.3.3 Marginal Product
3.4 The Law of Diminishing Marginal Product and the Law of Variable
Proportions
3.5 Shapes of Total Product, Marginal Product and Average Product Curves
3.6 Returns to Scale
3.7 Costs
3.7.1 Short Run Costs
3.7.2 Long Run Costs
Cost & Price?
 Cost & Price
• The cost is the amount spent by a business
making the product. 

• The price is the amount customers pay for a

product. 
TOTAL COST CURVES
• What is Profit/Gain?
(Revenue – Cost)
• What is Loss?
(Cost- Revenue)
PROFIT MAXIMISATION
 Production Function

• Short Run – No Variation

• Long Run - Variation
 Law of Diminishing Marginal Product

• The economic concept shows

– increasing one production variable while keeping
everything else the same will initially increase
overall production but will generate less returns
the more that variable is increased.
– In other words, increasing one factor of
production while keeping everything else the
same will not be productive past a certain point.
 4. THE THEORY OF THE FIRM UNDER
PERFECT COMPETITION
4.1 Perfect competition: Defining Features
4.2 Revenue
4.3 Profit Maximisation
4.3.1 Condition 1
4.3.2 Condition 2
4.3.3 Condition 3
4.3.4 The Profit Maximisation Problem: Graphical Representation
4.4 Supply Curve of a Firm
4.4.1 Short Run Supply Curve of a Firm
4.4.2 Long Run Supply Curve of a Firm
4.4.3 The Shut Down Point
4.4.4 The Normal Profit and Break-even Point
4.5 Determinants of a Firm’s Supply Curve
4.5.1 Technological Progress
4.5.2 Input Prices
4.5.3 Unit Tax
4.6 Market Supply Curve
4.7 Price Elasticity of Supply
4.7.1 The Geometric Method
4.1 PERFECT COMPETITION: DEFINING
FEATURES
DETERMINANTS OF A FIRM’S SUPPLY CURVE

• Technological Progress
– More Technology : Right Side
– Less Technology : Left Side
• Input Prices
– High Input Prices : Left Side
– Less Input Prices : Right Side
• Unit Tax
– More Unit Taxes : Left Side
– Less Unit Taxes : Right Side
• For a price-taking firm
– Average Revenue is equal to Market Price.
– Marginal Revenue is equal to Market Price.
 5. MARKET EQUILIBRIUM

5.1 Equilibrium, Excess Demand, Excess Supply

5.1.1 Market Equilibrium-Fixed Number Firms
5.1.2 Market Equilibrium: Free Entry & Exit
5.2 Applications
5.2.1 Price Ceiling
5.2.2 Price Floor
Equilibrium Price
In a perfectly competitive market, equilibrium occurs where market demand
equals market supply.
 Price Ceiling
• The government-imposed upper limit on the
price of a good or service is called price
ceiling.
• It is fixed below the market-determined price
• Price ceiling is generally imposed on necessary
items - wheat ice, kerosene, sugar
Imposition of price ceiling below the equilibrium price leads to an excess demand.
• The government imposed lower limit on the
price that may be charged for a particular
good or service is called price floor.
• Price flooring Examples:
– Agricultural Price Support Programmes
– minimum wage legislation.
Imposition of price floor above the equilibrium price leads to an excess supply
QUIZ
1. In Duopoly, there is/are

A. Many firms
B. Two firms controlling the Market
C. Large corporations
D. None of the above
2. Model of Monopolistic Competition (i.e
Imperfect competition) is characterized by

A. Homogeneous goods
B. Differentiated goods
C. Substitute Goods
D. All of the above
3. Price discrimination is a situation when a
producer

A. charges different prices in different markets

B. charges same price
C. Charges many prices
D. All of the above.
4. Monopoly is a form of market where there is

A. large number of buyer

B. Small number of buyer
C. A single firm controlling the market
D. Any of the above
5. Shape of Total Fixed Cost(TFC) Curve is

A. Verticle
B. Horizontal
C. 45 degree line
D. None of the above
6. Production Functions Shows

A. Prices of input and output

B. Relationship between output and input
C. various combinations of inputs
D. All of the above
7. Law of Demand states that

A. with the increase in price, Quantity increases

B. with the increase in price, quantity decreases
other things remaining the same.
C. quantity does not change with any increase in
price.
D. All of the above.
• 8. What Microeconomics is about?

A. Study of Business Environment

B. Study of financial position of the economy
C. Study of the Economy at Micro Level
D. None of the above
•
9. While in Perfect Competition

A. Firms are price taker

B. Buyers are independent
C. Input prices are given
D. None of the above