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Semester 1: MICROECONOMICS-I
Definitions of Economics, Nature and Scope of Microeconomics, Positive and Normative Approaches, Inductive and Deductive Approaches, Consumers and Firms Decision Making, Fundamental Economic Problems, Market Mechanism and Resource Allocation
MICROECONOMICS-I
B.A.
ECONOMICS
1
PERIYAR UNIVERSITY
Core Course - I
Definitions of Economics
Economics is defined as the study of how individuals and societies allocate scarce resources to satisfy unlimited wants. It encompasses various definitions, including the study of production, distribution, and consumption of goods and services.
Nature and Scope of Microeconomics
Microeconomics focuses on individual units within the economy, such as consumers and firms. It analyzes how these entities make decisions, how they interact in markets, and how they respond to changes in resource allocation.
Positive and Normative Approaches
Positive economics deals with objective analysis of economic behavior and factual statements. Normative economics involves subjective judgments and opinions about what ought to happen in the economy.
Inductive and Deductive Approaches
Inductive reasoning involves forming generalizations based on specific observations. Deductive reasoning starts with general principles and applies them to specific cases. Both approaches are essential in developing economic theories.
Consumers and Firms Decision Making
Consumers make decisions based on preferences and budget constraints, aiming to maximize utility. Firms decide on production methods and pricing strategies to maximize profits while considering market conditions.
Fundamental Economic Problems
The fundamental economic problems include scarcity, choice, and opportunity cost. These problems arise due to limited resources in comparison to unlimited wants.
Market Mechanism and Resource Allocation
The market mechanism determines resource allocation through supply and demand. Prices act as signals for producers and consumers, facilitating efficient distribution of resources.
Utility Analysis, Ordinal and Cardinal Utility, Law of Diminishing Marginal Utility, Law of Equi-Marginal Utility, Indifference Curves, Marginal Rate of Substitution, Budget Line, Price and Substitution Effects, Optimal Consumer Choice, Revealed Preference Theory
Utility Analysis
Definition of Utility
Utility refers to the satisfaction or pleasure derived from consuming goods and services. It is a central concept in economics that helps to analyze consumer behavior.
Ordinal and Cardinal Utility
Ordinal utility focuses on the rank order of preferences among options whereas cardinal utility measures the utility in quantitative terms, allowing for the comparison of the satisfaction levels.
Law of Diminishing Marginal Utility
This law states that as a consumer consumes more units of a good, the additional satisfaction or utility derived from each subsequent unit decreases.
Law of Equi-Marginal Utility
This law implies that consumers allocate their resources in such a way that the last unit of currency spent on each good provides the same level of marginal utility, leading to maximum satisfaction.
Indifference Curves
Indifference curves represent combinations of two goods that give the consumer the same level of satisfaction. They help to visualize consumer preferences and trade-offs.
Marginal Rate of Substitution
The marginal rate of substitution is the rate at which a consumer is willing to give up one good for another while maintaining the same level of utility. It is represented by the slope of the indifference curve.
Budget Line
The budget line represents the combinations of two goods that a consumer can purchase given their income and the prices of the goods. It illustrates the trade-offs a consumer faces.
Price and Substitution Effects
Price effect is the change in quantity demanded due to a change in the price of a good, while substitution effect is the change in quantity demanded as consumers switch between goods due to price changes.
Optimal Consumer Choice
The optimal choice occurs where the budget line is tangent to the highest possible indifference curve, maximizing consumer satisfaction under budget constraints.
Revealed Preference Theory
This theory suggests that consumer preferences can be revealed by their purchasing habits, emphasizing observable choices rather than hypothetical preferences.
Demand and Supply Analysis, Types of Goods, Law of Demand, Determinants, Exceptions, Giffen Paradox, Veblen Effect, Elasticity of Demand, Engels Law, Law of Supply, Market Equilibrium, Consumer Surplus, Producer Surplus
Demand and Supply Analysis
Introduction to Demand and Supply
Demand and Supply are the fundamental concepts of microeconomics that describe how prices are determined in a market economy. Demand refers to the quantity of a good or service that consumers are willing to purchase at various prices. Supply refers to the quantity that producers are willing to sell at various prices.
Types of Goods
Goods can be categorized into different types based on their characteristics: 1. Normal Goods: Demand increases as income increases. 2. Inferior Goods: Demand decreases as income increases. 3. Giffen Goods: A special case where demand increases with an increase in price due to the income effect outweighing the substitution effect. 4. Veblen Goods: Goods whose demand increases as price increases, associated with status or luxury.
Law of Demand
The Law of Demand states that, all else being equal, as the price of a good decreases, the quantity demanded increases, and vice versa. This relationship creates a downward-sloping demand curve.
Determinants of Demand
Factors that can cause a shift in the demand curve include: 1. Income: Changes in consumer income can affect demand. 2. Prices of Related Goods: Substitutes and complements can influence demand. 3. Consumer Preferences: Changes in tastes can lead to shifts in demand. 4. Expectations: Future price expectations can alter current demand.
Exceptions to the Law of Demand
There are exceptions to the Law of Demand such as Giffen goods and Veblen goods, where higher prices may result in higher demand due to perceived value or necessity.
Giffen Paradox
The Giffen Paradox occurs when an increase in the price of a good leads to an increase in its demand because of the inferior nature of the good, where consumers cannot afford more expensive substitutes.
Veblen Effect
The Veblen Effect describes a scenario where luxury goods see an increase in demand as their prices rise, driven by the desire for status and exclusivity.
Elasticity of Demand
Elasticity of Demand measures how much the quantity demanded responds to a change in price. If demand changes significantly with price changes, it is elastic. If it changes little, it is inelastic.
Engel's Law
Engel's Law states that as income increases, the proportion of income spent on food decreases, while the proportion spent on luxury goods increases.
Law of Supply
The Law of Supply states that, all else being equal, an increase in price results in an increase in the quantity supplied. This creates an upward-sloping supply curve.
Market Equilibrium
Market Equilibrium occurs when the quantity demanded equals the quantity supplied at a certain price. This is the point where the demand and supply curves intersect.
Consumer Surplus
Consumer Surplus is the difference between what consumers are willing to pay for a good and what they actually pay. It measures the benefit to consumers.
Producer Surplus
Producer Surplus is the difference between what producers are willing to accept for a good and the actual price received. It shows the benefit to producers.
Production Analysis, Production Function, Law of Variable Proportions, Laws of Returns to Scale, Iso-quants, Cobb-Douglas and CES Production Function, Economies and Diseconomies of Scale
Production Analysis
Production Function
The production function defines the relationship between inputs and outputs in the production process. It can be represented mathematically as Q = f(L, K), where Q is the quantity of output, L is labor, and K is capital.
Law of Variable Proportions
This law states that as the quantity of one input increases, holding other inputs constant, the marginal product of that input will eventually decrease. This phenomenon highlights the diminishing returns that occur in production.
Laws of Returns to Scale
Returns to scale refer to how the quantity of output changes as all inputs are increased. Increasing returns to scale occur when output increases by a greater proportion than inputs. Decreasing returns happen when output increases by a lesser proportion. Constant returns means output increases in the same proportion as inputs.
Iso-quants
Iso-quants are curves that represent different combinations of inputs that produce the same level of output. They are similar to indifference curves in consumer theory and help to analyze the trade-offs between inputs.
Cobb-Douglas Production Function
The Cobb-Douglas production function is a specific functional form that illustrates the relationship between inputs and outputs, characterized by constant elasticity of substitution. It is usually formulated as Q = A * L^α * K^β, where A is total factor productivity, and α and β are the output elasticities of labor and capital.
CES Production Function
The Constant Elasticity of Substitution production function generalizes the Cobb-Douglas function by allowing for different elasticity of substitution between inputs. It can be expressed as Q = A * (δL^(ρ) + (1-δ)K^(ρ))^(1/ρ), where δ is the distribution parameter and ρ defines the substitution elasticity.
Economies of Scale
Economies of scale refer to the cost advantages that a business obtains due to the scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out.
Diseconomies of Scale
Diseconomies of scale occur when a company grows so large that the costs per unit increase. This can happen due to factors like communication issues, inefficiencies, or management complications.
Cost and Revenue Concepts, Fixed and Variable Costs, Average, Marginal, and Total Costs, Short Run and Long Run Costs, Implicit, Explicit, Sunk and Imputed Cost, Total, Average and Marginal Revenue, Profit Maximization Rule
Cost and Revenue Concepts
Understanding Cost Concepts
Cost refers to the value of resources used in the production of goods and services. There are different classifications of costs that are essential for decision making in business.
Fixed and Variable Costs
Fixed costs remain constant regardless of production levels, such as rent and salaries. Variable costs change with the level of production, like materials and labor costs.
Average, Marginal, and Total Costs
Total cost is the sum of fixed and variable costs. Average cost is the total cost divided by the number of units produced. Marginal cost is the additional cost incurred by producing one more unit of a good.
Short Run and Long Run Costs
In the short run, at least one factor of production is fixed, leading to the inability to adjust all costs. In the long run, all factors of production can be varied, allowing for flexibility in cost management.
Implicit, Explicit, Sunk, and Imputed Costs
Explicit costs involve direct monetary payment for resources. Implicit costs represent the opportunity cost of using resources. Sunk costs are past expenditures that cannot be recovered, while imputed costs are estimated costs for which no actual payment is made.
Total, Average, and Marginal Revenue
Total revenue is the total income from sales. Average revenue is the total revenue divided by the number of units sold, typically equal to the price per unit. Marginal revenue is the additional revenue generated from selling one more unit.
Profit Maximization Rule
To maximize profit, firms should produce where marginal cost equals marginal revenue. This determines the optimal level of output.
