Micro Economics; Introduction (Session1)

 Deals with behavior of individual economic units: consumers, workers, investors, owners
of land, any individual entity that plays a role in the functioning of the economy; how and
why these units make decisions.
 Interaction of microeconomic units to form larger units-- markets and industries, e.g.
what price to fix? how much to invest? how much to produce? And how these decisions
are affected by government policies and global economic conditions.
 Limits: allocation of resources by consumers, workers, investors, firms, and any other
unit.
 Trade-Offs: striking the optimal trade-offs—consumers, workers, and firms.
 Prices and Markets: All the trade–offs are based on the prices faced by consumers,
workers, and firms; price mechanism and government regulation.
 Theories and Models: theories explain observed phenomena on the basis of set rules and
conditions; how consumers, workers and producers make decisions given the set
conditions. Theories also serve as basis for making predictions.
Model is a mathematical representation based on economic theories, e.g. GST will
increase GDP by 2pc.
 Positive versus Normative Analysis: the former describes relationship between cause and
effect; the latter examining questions of what ought to be, as well as designing what
ought to be.
 Markets: collection of buyers and sellers and their interactions determine the price;
arbitrage—buying low at one place and selling high at another place.
 Types of Markets:
i. Competitive: large number of buyers and sellers, e.g. agricultural products
ii. Non – Competitive: few sellers, e.g., airlines and oil markets
iii. Monopoly, duopoly, oligopoly and monopolistic markets
 Market Price: price that prevails in a very short period, e.g., market of perishable
commodities.
 Short – Run Price: price that prevails in a short – run market (output can be changed by
changing the variable factors)
 Long – Run Price: price that prevails in the long – run period and also termed as normal
price (output can be changed by changing all variable and fixed factors).
 Extent of a Market: boundaries of a market in terms of geography and in terms of range
of products produced and sold within it. E.g. market for petrol and disel.
 Real versus Nominal Prices: nominal price is current – dollar price and real price is
constant – dollar price (price adjusted for inflation)
Real Price = CPI in base year/CPI in current year X nominal price
E.g. Real Price in 1990 in 1970 dollars = CPI in 1970/CPI 1990 X 1990 Price