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Microeconomics is that part of economic theory which deals with the behaviour of
individual units of an economy such as a household, a firm, etc. It is the analysis of economy’s
constituent elements households, firms and industries. Micro is a Greek word meaning ‘small’.
Thus, microeconomics means economics of small.

As the name suggests, microeconomics takes microscopic view of the economy. It is

like dealing with individual trees in the economic forest. “Microeconomics is the study of firm,
particular household, individual price, wage, income, industry and particular commodity.” It is
primarily concerned with the determination of prices of Individual commodities and factors. It
explains how prices of wheat, cloth, shoes, pens and thousands of other goods are determined.

Similarly, how prices (remuneration) of factors of production (i.e., rent, wages, interest,
etc.) are determined. Thus, the theory of product pricing and theory of factor pricing fall within
the domain of microeconomics. Since prices of products and factors occupy the central place,
microeconomics is, therefore, also called ‘Price Theory’. Examples of microeconomics are:
individual income, individual saving, consumer equilibrium, price determination of a good,
demand of a commodity, etc.

In microeconomics, problems of individual economic units are studied such as

equilibrium of a consumer (i.e., state of maximum satisfaction), equilibrium of a firm (i.e., state
of maximum profit) and an industry. It explains how a consumer; a producer and an industry
attain equilibrium. An individual household (or consumer) is said to be in equilibrium if it gets
maximum satisfaction from allocation of its expenditure on various goods and services.

On the other hand, a firm is said to be in equilibrium if it is getting maximum profit

determined by its Marginal Cost and Marginal Revenue. An industry is assumed to be in
equilibrium if there is no tendency among its constituent firms to either leave the industry or
for outside firms to enter it. (Remember, an industry is a whole group of firms producing the
same product.


Does a change in consumers’ tastes lead to a movement along the demand curve or a shift in
the demand curve? Does a change in price lead to a movement along the demand curve or a
shift in the demand curve? Explain your answers.

In economic 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
any given price. It is a graphic representation of a market 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, assuming independent decision-making.

Demand curves are used to estimate behaviours in competitive markets, and are often
combined with supply curve 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. Demand curves are usually considered as theoretical structures that are expected
to exist in the real world, but real-world measurements of actual demand curves are difficult
and rare. Below is an example of a demand curve shifting. The shift from D1 To D2 means an
increase in demand with consequences for the other variables

The demand curve relates the quantity of a good or service purchased as a function of
the price of that good or service, holding all other things equal. That means that anything other
than changes in the price of that good or service can shift the curve itself. Changes in price are
represented by movements along the curve. If consumer tastes change in favour of peanut
butter, the demand curve for peanut butter will shift rightwards, meaning that consumers are
willing to buy more peanut butter at any given price. The demand curve depicts the quantity
demanded of a good or service as a function of the price of that good or service, holding all
other things equal. As a result, changes in the price of that good or service produce movements
along a given demand curve. All other changes all exceptions to the proviso that “all other
things be held equal” produce shifts in the demand curve. Examples include changes in the
prices of other goods and services, changes in consumer tastes, and changes in consumer

Change in taste creates a shift in the demand curve. The number of people willing to
buy the project at a given price point has changed. A shift in the demand curve then causes a
movement of the location of where the supply and demand curves cross which is the
equilibrium point for that market. So, we can also say that the equilibrium point has moved
along the demand curve as a result. But if the supply curve doesn’t change, and the demand
curve does change, it’s more accurate to say the equilibrium point has moved along the supply
curve due to a shift in the demand curve.


Does a change in producers’ technology lead to a movement along the supply curve or a shift in
the sup- ply curve? Does a change in price lead to a movement along the supply curve or a shift in
the supply curve?

A change in producers’ technology leads to a shift in the supply curve. A change in

price would also lead to a shift in the supply curve. A technological change would lead to a
shift in supply curve. Only when quantity supplied gets affected by a change in price of that
commodity, movement would happen along the supply curve. And that’s because supply curve
is a graphical representation of quantity supplied at different price levels of a commodity.

As regards to change in supply caused by factor other than price of the commodity, that
would lead to a shift in supply curve. Like the case that has been mentioned in the question.
Technological change. Intuitively, I would assume a better technology use with time. And this
would mean increase in production and hence increased willingness to supply at each price
level by producers which would shift supply curve to the right. An inferior technology on the
other hand would shift the supply curve leftwards indicating producers are willing to supply
less at each price. A supply curve shows how quantity supplied will change as the price rises
and falls, assuming ceteris paribus no other economically relevant factors are changing. If other
factors relevant to supply do change, then the entire supply curve will shift. A shift in supply
means a change in the quantity supplied at every price.

Say we have an initial supply curve for a certain kind of car. Now imagine that the price
of steel an important ingredient in manufacturing cars rises so that producing a car becomes
more expensive. In the example below, we saw that changes in the prices of inputs in the
production process will affect the cost of production and thus the supply. Several other factors
affect the cost of production, too.

Shifts in supply: a car example

Because of the higher manufacturing costs, the supply curve shifts to the left,
toward \text S_1S1S, start subscript, 1, end subscript. Firms will profit less per car, so they are
motivated to make fewer cars at a given price, decreasing the quantity supplied. A decrease in
costs would have the opposite effect, causing the supply curve to shift to the right, toward \text
S_2S2S, start subscript, 2, end subscript. Firms would profit more per car, so they would be
motivated to make more cars at a given price, increasing the quantity supplied.


Describe the role of prices in market economies.

In the current competitive economy, any entities from non-profit to multinational

organizations that are considered as cash cow are in high demand for economic knowledge to
survive. Economic system is the system by which the economy is organized. In this paper we
are going to discuss about different types of economic systems, their variety, advantages and
disadvantages. The price of goods plays a crucial role in determining an efficient distribution
of resources in a market system.

Price acts as a signal for shortages and surpluses which help firms and consumers
respond to changing market conditions. If a good is in shortage price will tend to rise. Rising
prices discourage demand and encourage firms to try and increase supply. If a good is in surplus
price will tend to fall. Falling price encourage people to buy, and cause firms to try and cut
back on supply. Prices help to redistribute resources from goods with little demand to goods
and services which people value more. Below is an Example of how price influences a market.
As the supply of oil falls, the price rises.

In the short-term, demand is price inelastic and so there is only a small fall in demand.
However, markets do not stay static. If price rises, the profitability of producing oil increases.
Firms can now make super-normal profit because the marginal revenue is greater than marginal
cost. Therefore, this higher price acts as an incentive for firms to try and increase supply. For
example, at a low price, it was not worth drilling for oil in the North Sea, but with the higher
price, it is an incentive.

Figure: Fall in supply causes higher price


Consider the following events: Scientists reveal that eating oranges decreases the risk of
diabetes, and at the same time, farmers use a new fertilizer that makes orange trees produce
more oranges. Illustrate and explain what effect these changes have on the equilibrium price
and quantity of oranges

There will be shifts of both demand and supply. If oranges decrease the risk of diabetes we will
see more people consume oranges. The demand line will shift to the right, independently this
would cause price and quantity to increase. If at the same time, a new fertilizer makes orange
trees more productive this will increase the supply, farmers will be willing to supply more
oranges at all prices. Independently the increase in supply would cause price to fall and quantity
to increase. Taken together, we know with certainty that quantity will increase but we don’t
know what will happen to price.

Demand ↑⇒ P rice ↑ Quantity ↑

Supply ↑⇒ P rice ↓ Quantity ↑


Economy that arises because a single firm can supply a good or service to an entire
market at a smaller cost than could two or more firms. The business practice of selling the same
good at different prices to different customers. An example is putting a copyright on a novelist's
book, so that they are the sole seller/must give permission for others to sell it. This has both
benefits and costs, it gives increased incentive for creative activity, however the monopoly
pricing offsets this benefit to some extent.

As a market expands, a natural monopoly can evolve into a competitive market. For
example, when a population is small in a town, the bridge may be a natural monopoly. A single
bridge a satisfy the entire demand for trips across the river at the lowest cost. Yet, as the
population grows, and the bridge becomes more congested, satisfying the entire demand may
require more bridges across the same river. For a monopoly, marginal revenue is lower than
price because a monopoly faces a downward-sloping demand curve. When a monopoly
increases production by one unit, it must reduce the price it charges for every unit it sells, and
this cut in price reduces revenue on the units it was already selling.

As a result, a monopoly's marginal revenue is less than its price. Yes marginal revenue
can be negative when the price effect on revenue is greater than the output effect. If regulators
are to set price equal to marginal cost, that price will be less than the firm's average total cost,
and the firm will lose money. This will cause the monopoly firm to exit the industry. Solving
this problem through subsidies or allowing the monopolist to charge a price higher than the
marginal cost will result in deadweight losses. Charging a different price for movie tickets for
different ages- maximizes profit for monopoly business-based movie theatres.

Charging two different audiences a different price for a book maximizes profit for the
publisher. The deadweight loss is represented by the area of the triangle between the demand
curve (the value of the good to consumers) and the marginal cost curve (the costs of the
monopoly producer). The point where total surplus is maximized is the one a benevolent social
planner would choose- the area where the demand curve and the marginal-cost curve intersect.


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