Micro Economics 1 Manipal University Jaipur (MUJ)

MASTER OF ARTS IN ECONOMICS

SEMESTER 1

MICRO ECONOMICS 1

Unit 1: Concepts and Methods of Micro-economic Analysis 1

Micro Economics 1 Manipal University Jaipur (MUJ)

Unit 1
Concepts and Methods of Micro-economic
Analysis

Table of Contents

SL Topic Fig No / SAQ / Page No

No Table / Activity
Graph
1 Introduction - - 3-5
2 What is scarcity and choice in microeconomics - - 6
3 What is Optimization and equilibrium in - - 7
microeconomics

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Micro Economics 1 Manipal University Jaipur (MUJ)

1. INTRODUCTION
Concepts and Methods of Micro-economic Analysis
Economics is divided into two main branches: microeconomics and macroeconomics.
Microeconomic analysis deals with the study of individual economic units, such as
consumers, business firms, laborers, owners of land, and individual markets, and how their
behavior and interactions determine prices and quantities in the economy. Another
important aspect of microeconomics is how individual buyers and firms integrate to form
larger economic units, such as markets or industries. Macroeconomics discusses economic
events involving industries, states or different countries etc. This discipline of economics is
an aggregate economic quantities, such as the level and growth rate of national output,
interest rates, poverty, inflation and unemployment.

Here are some fundamental concepts and methods of microeconomic analysis:

Opportunity Cost: When an option is chosen from alternatives, the opportunity cost refers to
the value or benefit of the next best possible option that is forgone. If you are joining an MBA
course without joining a job, then the salary that you will be foregoing is the opportunity
cost.

Economic Value: Economic value is the benefit provided by a good or service to an economic
agent. Economic value can be monetary as well as non-monetary. For example, the wage an
individual is getting for a certain job is the economic value of that particular job. This may
also explain why a university professor who is teaching for much lesser number of hours as
compared to a primary school teacher, is getting a much higher salary than a primary school
teacher.

Utility: Utility is the amount of satisfaction that a consumer procures from consuming a good
or service. The utility will determine the level of preference for a good or service for a
particular consumer, the preference will determine the demand for it.

Economic Agent: An economic agent is the decision maker in an economics model or system.
Whoever decides what to buy or what to produce or the quantity of it, will be considered an
economic agent.

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Micro Economics 1 Manipal University Jaipur (MUJ)

Demand and Supply: Consumers' preferences and firms' production decisions vary with
different market conditions. Microeconomics teaches how quantities demanded and
supplied vary at different prices, and how an equilibrium is reached, where both the
consumer’s preference and the seller’s decision match.

Consumer Theory: Theory of consumption analyses how consumers make decisions about
what goods and services to consume, and in which quantity, considering factors like
consumer’s individual satisfaction, budget constraints, and relationship with other
commodities.

Elasticity: Assessing the responsiveness of quantity demanded or supplied to changes in

price of that good or service, or any other relevant factor, such as income or the prices of
related goods, provides an economic agent with decision making ideas. Studying elasticity
suggests us that in order to make profit whether price of a commodity should be increased
or not. Elasticity determines the level of revenue based on the characteristics of the product,
and the sellers need to determine the price accordingly.

Theory of Firm: Theory of firm has two components; (i) theory of production and (ii) theory
of cost. Theory of firm examines how firms make decisions about production levels and input
usage, given its budget constraint, and tries to find the optimum level of production. Theory
of cost estimates the optimal units of production in order to minimize cost to maximize
profits, understanding different cost components given a period of time. Overall theory of
firm explains relationships between inputs, outputs, and costs in production processes,
including concepts like production functions, cost curves, and economies of scale.

Market Structures: Microeconomics teaches us the existence of different types of market

structures, such as perfect competition, monopoly, monopolistic competition, and oligopoly,
and their intrinsic characteristics. It analyzes how market structure influences firms'
strategic behavior in terms of pricing and quantity of production and the resultant market
outcomes, based on the level of competition.

Market Efficiency: Evaluating whether markets allocate resources efficiently, considering

concepts like consumer and producer surplus and the conditions for market efficiency. There
are two types of efficiency; (a) allocative efficiency and (b) technical efficiency. Allocative

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Micro Economics 1 Manipal University Jaipur (MUJ)

efficiency studies whether the market supply is matching the market demand for all kinds of
goods and services or not. Allocative efficiency further discusses allocation of resources in
an efficient way so that the production of goods and services can meet consumers’
preferences. Technical efficiency teaches us whether the allocation of resources and the
decided quantity of supplies of a particular commodity lead the firm to either maximize cost
or minimize profit for the firm. A firm is said to be technically efficient if a firm is producing
the maximum output from the minimum quantity of inputs, such as labour, capital, and
technology.

Welfare Economics: This branch of economics examines how economic policies impact social
welfare of the community and/or efficiency of the economic process, including analysis of
consumer and producer surplus, deadweight loss, and the incidence of taxation or subsidies.
Welfare economics deals with income distribution and policies around it to ensure aggregate
utility maximization of a community

Game Theory: Applying mathematical models to analyze strategic interactions between

individuals or firms, considering factors like incentives, information, and cooperation.

Market Failures: Conditions of market failures arise if markets fail to allocate resources
efficiently, and identify a socially desired outcome at a socially desired price level. Such
market failures prevail in case of externalities, lack of competition, asymmetric information,
and irrational behaviours, government policies etc. Examining potential policy interventions
to address these failures is an important microeconomic learning. Market failures adversely
impact growth in an economy and societal welfare.

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Micro Economics 1 Manipal University Jaipur (MUJ)

2. WHAT IS SCARCITY AND CHOICE IN MICROECONOMICS

Economics studies conditions where the economic agents have unlimited wants or desire,
but limited resources to satisfy them. However, they need to satisfy their wants to some
extent, and within the boundaries of the constraints they must have a number of alternatives.
Choice is the act of selecting among alternatives. The consumers or producers need to select
the best alternative which means that they are making the optimal choices on how to allocate
the limited resources efficiently to fulfil their various needs and wants. A firm or producer
needs to efficiently allocate its scarce factors of production to get the highest outcome at
lowest cost. They also need to identify what to produce, how much to produce, how to
produce, and for whom to produce them. At the same time, an individual consumer will
decide on which bundles of goods and services should be purchased out of the available
options and given a budget constraint, so that he/ she can maximize the level of satisfaction.
These choices involve trade-offs, as allocating resources to one use often means forgoing the
opportunity to use them for another purpose. So, scarcity and choice are intertwined
concepts in microeconomics, with scarcity one needs to identify its choices, and choices
determine how scarce resources should be allocated among competing uses.

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Micro Economics 1 Manipal University Jaipur (MUJ)

3. WHAT IS OPTIMIZATION AND EQUILIBRIUM IN MICROECONOMICS

In microeconomics, optimization and equilibrium are fundamental concepts that describe
the ideal conditions where every rational individual and firm make decisions that determine
the market operations and outcomes.

Optimization: Optimization refers to the process by which individuals or firms make choices
to achieve the best possible outcome given certain constraints. This could involve
maximizing utility (satisfaction) for consumers or maximizing profit for firms. For example,
a consumer may optimize their utility by choosing the combination of goods and services
that gives them the most satisfaction given their budget constraint. Similarly, a firm may
optimize its profit by choosing the combination of inputs and outputs that yields the highest
profit given input prices and output demand.

Equilibrium: Equilibrium is a state in which there is no tendency for change, or even if there
is a change from the state of the equilibrium the economic agents’ rational decisions will
restore it back again. Market equilibrium occurs when the quantity demanded by consumers
equals the quantity supplied by producers at a particular price. This is often referred to as
the intersection of the demand and supply curves.

Price equilibrium: This occurs when the price at which consumers are willing to buy a good
or service (demand) matches the price at which producers are willing to sell it (supply).

Quantity equilibrium: This refers to the quantity of the good or service exchanged in the
market at the equilibrium price.

The concepts of optimization and equilibrium are closely related. In competitive markets,
individual optimization by consumers and firms leads to market equilibrium. At equilibrium,
no individual can improve their situation by unilaterally changing their behavior. Any
deviation from the equilibrium conditions would result in forces pushing the market back
towards equilibrium. These concepts serve as the foundation for analyzing how markets
allocate resources efficiently and how changes in factors such as prices, preferences, or
technology affect economic outcomes.

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