MICROECONOMICS

BASICS
By
Currenc-I, The Economics and International
Business Affairs club of IIM Indore

Anubha | Mohit | Pratik | Yashvardhan |

Macro Vs Micro
The two major divisions are Macro and Micro Economics
Macro : Provides a holistic view about the economy that

covers GDP, Inflation, Monetary and fiscal policies,

Unemployment, BOP ( balance of payment) and growth
rate of the economy etc.
Micro : Analyses the individual decision making units
which covers the factors that affect the demand and
supply, prices of the goods and elasticity etc.

Micro Economics
Demand & Supply
Demand- Quantity expected to be

purchased by consumers at different

price levels
Supply- Quantity supplied by the
industry at different price levels
As the price of good increases
demand falls (consumers do not
prefer the good due to high price) and
supply increases (manufacturers gets
more revenue due to increased price)
Hence demand is a downward sloping
and supply is an upward sloping curve
Equilibrium level is given by the point

Elasticity
Elasticity is a measure of ratio of percentage change in

one variable to percentage change in other variable

Price Elasticity Measures change in quantity demanded
in response to change in price of the good
Price Elasticity = Q(%age Change in Demand) / (P
%age change in Price)
Income Elasticity- Measures percentage change in
quantity demanded due to change in income
Income Elasticity = Q(%age Change in Demand) /
I(%age change in Income)
Note- The above quantities measure price and income
elasticity of demand. Similarly there can be elasticity of
supply where the numerator is replaced with change in
quantity of supply.

Perfect Elasticity
The demand is perfectly elastic

at price $15
At any other price point demand
is zero
This is an example of perfectly
elastic demand curve
The curve is also called infinitely
elastic curve

Perfectly Inelastic
This curve represents

perfectly inelastic or zero

elastic demand curve
The curve shows that the
demand remains at a
particular quantity
irrespective of the price level
The same can be applied for
the supply side curve E.G.
There can be perfectly
inelastic supply curve

Diminishing Marginal Utility

Every additional unit of input produces lesser benefit than

the previous. This law applies to:

1. The number of pizzas you have. The more you have
the lesser satisfaction u get from consuming an
additional pizza
2. The number of labor you employ for production.
. In all types of market the firm maximizes the profit by
increasing the factors of production to that limit where
additional benefit is just equal to the cost of production.

Indifference Curve
The indifference
curve
An indifference curve is a line
that shows all the possible
combinations of two goods
between which a person is
indifferent. In other words, it is
a line that shows the
consumption of different
combinations of two goods that
will give the same utility
(satisfaction) to the person.

The optimum consumption point

A rational, maximizing consumer would

prefer to be on the highest possible
indifference curve given their budget
constraint.

Consumer and Producer Surplus

Consumer Surplus
is the difference in what
consumers are willing to pay for the
price of the product and what they
are actually paying for it in the
market.

Producer Surplus
is the difference in what
suppliers are willing to sell the
product for and what they are
actually receiving for it in the
market.

Types of Markets
There are four different types of markets
Perfectly competitive
Monopoly
Monopolistic competition
Oligopoly

Perfectly Competitive Market

There are many players with each one holding a small

market share
There are no entry and exit barriers i.e. It is easy to enter
and exit the business
All the products produced by different manufacturers are
identical
Prices are determined by demand and supply of the
product, not by the firm
Perfectly competitive firms have perfectly elastic demand
curve

Monopoly
There is one supplier in the entire market who produces a

product which is exclusive and has no good substitutes

The barriers to entry are very high
Legal Barriers
Natural Barriers

Patents copyrights and government franchisees are few

legal barriers
Natural Barriers- A firm can reduce the cost of production
by producing more (Economies of Scale) and they sell at
a cheaper price which cannot be done by other players

Monopolistic Competition
Large number of competitors produce differentiated

products
Product differentiation gives degree of market power to
each firm
Firms compete on price quality and marketing due to
product differentiation. Quality is a significant product
differentiation characteristic and price is set by the firms
based on the demand supply relation
Barriers to entry and exit are low and hence it is easy to
enter and exit the business

Oligopolistic Competition
The market is characterized by small number of sellers
There is interdependence amongst the sellers and hence

decision by player is affected by other players decisions

Products may be differentiated or similar
Significant barriers to entry due to which each firm has
large economies of scale. Due to significant barriers of
entry there are very few players who supply the entire
market hence they have large economies of scale

THANK YOU!!!
For any queries contact
currenci@iimidr.ac.in