ASIK

1. WEST BENGAL UNIVERSITY OF
ANIMAL AND FISHERY SCIENCES
An assignment on
Micro Economics, theory of Demand,
Supply and Market Equilibrium
FES-213
Submitted To:
Miss Arundhoti Sanyal
Dept. of FES
CONTENTS
SUBMITTED BY:
ASIK IKBAL
FS-06/13

2. 1) Introduction.
2) What is Microeconomics?
3) Assumptions and definitions.
4) Microeconomics topics.
5) What is applied microeconomics?
6) What is Behavioral economics?
7) What is Demand and Supply?
8) Demand - Definition, Factor affecting demand, Law of demand,
Market demand, Exception to the law of demand, Elasticity of demand,
Measurement of elasticity of demand, Special cases.
9) Supply- Definition, Quantity Supply, Law of Supply, Measurement of
elasticity of supply.
10)Market Equilibrium.
11) Conclusion.

3. 12)References.
Introduction:
Economics is the study of the ALLOCATION of SCARCE Resources
to meet UNLIMITED human wants. In the year 1976 Sir Adam Smith
used the term ‘economic’ in his book ‘The Wealth of Nation’. He called
‘Father of economics’.
Microeconomics is concerned with decision-making by individual
economic agents such as firms and consumers. (Subject matter of this
course). Macroeconomics is concerned with the aggregate
performance of the entire economic system. (Subject matter of the
following course). Empirical economics relies upon facts to present a
description of economic activity. Economic theory relies upon
principles to analyse behaviour of economic agents. Inductive logic
creates principles from observation. Deductive logic hypothesis is
formulated and tested.
Usefulness of economics -
Economics provides an objective mode of analysis, with rigorous
models that are predictive of human behaviour.
a. Scientific approach
b. Rational choice
Assumptions in Economics -
Economic models of human behaviour are built upon assumptions; or
simplifications that permit rigorous analysis of real world events,
without irrelevant complications.
a. model building
b. simplifications:
1. ceteris paribus - means all other things equal.
2. There are problems with abstractions, based on assumptions.
Too often, the models built are inconsistent with observed reality -
therefore they are faulty and require modification. When a model is so
complex that it cannot be easily communicated or its implications
easily understood - it is less useful.

4. a. POSITIVE economics is concerned with description of facts,
circumstances, relationship with economy etc.
b. NORMATIVE economics is concerned with what should be.
Microeconomics
Microeconomics (from Greek prefix mikro- meaning "small") is a
branch of economics that studies the behavior of individuals and small
impacting organizations in making decisions on the allocation of limited
resources (see scarcity).Typically, it applies
to markets where goods or services are bought and sold.
Microeconomics examines how these decisions and behaviors affect
the supply and demand for goods and services, which determines
prices, and how prices, in turn, determine the quantity supplied and
quantity demanded of goods and services. Mainly microeconomics
deals with the analysis of individual economic units such as
consumers, firms, groups of individual units such as industries and
markets.
This is in contrast to macroeconomics, which involves the "sum total of
economic activity, dealing with the issues of growth, inflation,
and unemployment." Microeconomics also deals with the effects of
national economic policies (such as changing taxation levels) on the
aforementioned aspects of the economy. Particularly in the wake of
the Lucas critique, much of modern macroeconomic theory has been
built upon 'micro foundations'—i.e. based upon basic assumptions
about micro-level behavior.
Assumptions and definitions
The fundamentals of Microeconomics lies in the analysis of
the preference relations. Preference relations are defined simply to be
a set of different choices that an actor can choose (a k-cell metric
space) that actors can also compare between any two bundles of
choices (completeness of the relationship.) In order to analyze the
problem further, the assumption of transitivity is added to the mix.

5. These two assumptions of completeness and transitivity that are
imposed upon the preference relations are what is termed rationality.
Microeconomic analysis are conducted mainly through imposition of
additional constraints on the preference relations or even relaxation of
the above stated assumptions (most often transitivity) although such
relaxation makes the problem much harder to analyze.
Microeconomic topics
The study of microeconomics involves several "key" areas:
Demand, supply, and equilibrium
Supply and demand is an economic model of price determination in
a market. It concludes that in a competitive market, the unit price for a
particular good will vary until it settles at a point where the quantity
demanded by consumers will equal the quantity supplied by producers
resulting in an economic equilibrium for price and quantity.
Measurement of elasticities
Elasticity is the measurement of how responsive an economic variable
is to a change in another variable. Elasticity can be quantified as the
ratio of the percentage change in one variable to the percentage
change in another variable, when the latter variable has a causal
influence on the former. It is a tool for measuring the responsiveness
of a variable, or of the function that determines it, to changes in
causative variables in a unit less way. Frequently used elasticities
include price elasticity of demand, price elasticity of supply, income
elasticity of demand, elasticity of substitution between factors of
production and elasticity of intertemporal substitution.
Consumer demand theory
Consumer demand theory relates preferences for the consumption of
both goods and services to the consumption expenditures; ultimately,
this relationship between preferences and consumption expenditures
is used to relate preferences to consumer demand curves. The link
between personal preferences, consumption and the demand curve is
one of the most closely studied relations in economics. It is a way of
analyzing how consumers may achieve equilibrium between

6. preferences and expenditures by maximizing utility subject to
consumer budget constraints.
Theory of production
Production theory is the study of production, or the economic process
of converting inputs into outputs. Production uses resources to create
a good or service that is suitable for use, gift-giving in a gift economy,
or exchange in a market economy. This can include manufacturing,
storing, shipping, and packaging. Some economists define production
broadly as all economic activity other than consumption. They see
every commercial activity other than the final purchase as some form
of production.
Costs of production
The cost-of-production theory of value is the price of an object or
condition is determined by the sum of the cost of the resources that
went into making it. The cost can comprise any of the factors of
production: labor, capital, land. Technology can be viewed either as a
form of fixed capital (ex: plant) or circulating capital (ex: intermediate
goods).
Perfect competition
Perfect competition describes markets such that no participants are
large enough to have the market power to set the price of a
homogeneous product. An example is EBay.
Perfect monopoly
A monopoly (from Greek monos μόνος (alone or single)
+ polein πωλε ν ῖ (to sell)) exists when a single company is the only
supplier of a particular commodity.
Oligopoly
An oligopoly is a market form in which a market or industry is
dominated by a small number of sellers (oligopolists). Oligopolies can
result from various forms of collusion which reduce competition and
lead to higher costs for consumers.
Market structure
The market structure can have several types of interacting market
systems. Different forms of markets is a feature of capitalism and
advocates of socialism often criticize markets and aim to substitute
markets with economic planning to varying degrees. Competition is the
regulatory mechanism of the market system.

7. · Monopolistic competition, also called competitive market, where
there is a large number of firms, each having a small proportion of
the market share and slightly differentiated products.
· Oligopoly, in which a market is run by a small number of firms
that together control the majority of the market share.
· Duopoly, a special case of an oligopoly with two firms.
· Monopsony, when there is only one buyer in a market.
· Oligopsony, a market where many sellers can be present but
meet only a few buyers.
· Monopoly, where there is only one provider of a product or
service.
· Natural monopoly, a monopoly in which economies of scale
cause efficiency to increase continuously with the size of the firm. A
firm is a natural monopoly if it is able to serve the entire market
demand at a lower cost than any combination of two or more
smaller, more specialized firms.
· Perfect competition, a theoretical market structure that features
no barriers to entry, an unlimited number of producers and
consumers, and a perfectly elastic demand curve.
Examples of markets include but are not limited to: commodity
markets, insurance markets, bond markets, energy markets, flea
markets, debt markets, stock markets, online auctions, media
exchange markets, real estate market.
Game theory
Game theory is a major method used in mathematical economics and
business for modeling competing behaviors of interacting agents.
Applications include a wide array of economic phenomena and
approaches, such as auctions, bargaining, mergers &
acquisitions pricing, fair division, duopolies, oligopolies, social
network formation, agent-based computational economics, general
equilibrium, design, and voting systems, and across such broad areas
as experimental, behavioral economics, information
economics, industrial organization, and political economy.
Labor economics
Labor economics seeks to understand the functioning and dynamics of
the markets for wage labor. Labor markets function through the
interaction of workers and employers. Labor economics looks at the

8. suppliers of labor services (workers), the demands of labor services
(employers), and attempts to understand the resulting pattern of
wages, employment, and income. In economics, labor is a measure of
the work done by human beings. It is conventionally contrasted with
such other factors of production as land and capital. There are theories
which have developed a concept called human capital (referring to the
skills that workers possess, not necessarily their actual work), although
there are also counter posing macro-economic system theories that
think human capital is a contradiction in terms.
Welfare economics
Welfare economics is a branch of economics that uses microeconomic
techniques to evaluate well-being from allocation of productive
factors as to desirability and economic efficiency within an economy,
often relative to competitive general equilibrium. It
analyzes social welfare, however measured, in terms of economic
activities of the individuals that compose the theoretical society
considered.
Accordingly, individuals, with associated economic activities, are
the basic units for aggregating to social welfare, whether of a group, a
community, or a society, and there is no "social welfare" apart from the
"welfare" associated with its individual units.
Economics of information
Information economics or the economics of information is a branch
of microeconomic theory that studies how information and information
systems affect an economy and economic decisions. Information has
special characteristics. It is easy to create but hard to trust. It is easy to
spread but hard to control. It influences many decisions. These special
characteristics (as compared with other types of goods) complicate
many standard economic theories.
Applied microeconomics
Applied microeconomics includes a range of specialized areas of
study, many of which draw on methods from other fields. Industrial
organization examines topics such as the entry and exit of firms,
innovation, and the role of trademarks. Labour examines wages,
employment, and labor market dynamics. Financial
economics examines topics such as the structure of optimal portfolios,
the rate of return to capital, econometric analysis of security returns,

9. and corporate financial behavior. Public economics examines the
design of government tax and expenditure policies and economic
effects of these policies (e.g., social insurance programs). Political
economy examines the role of political institutions in determining policy
outcomes. Health economics examines the organization of health care
systems, including the role of the health care workforce and health
insurance programs. Urban economics, which examines the
challenges faced by cities, such as sprawl, air and water pollution,
traffic congestion, and poverty, draws on the fields of urban geography
and sociology. Law and economics applies microeconomic principles
to the selection and enforcement of competing legal regimes and their
relative efficiencies. Economic history examines the evolution of the
economy and economic institutions, using methods and techniques
from the fields of economics, history, geography, sociology,
psychology, and political science.
Supply and demand
In microeconomics, supply and demand is an economic
model of price determination in a market. It concludes that in
a competitive market, the unit price for a particular good will vary until
it settles at a point where the quantity demanded by consumers (at
current price) will equal the quantity supplied by producers (at current
price), resulting in an economic equilibrium for price and quantity.
The price P of a product is determined by a balance between
production at each price (supply S) and the desires of those
with purchasing power at each price (demand D). The diagram
shows a positive shift in demand from D1 to D2, resulting in an
increase in price (P) and quantity sold (Q) of the product.
The four basic laws of supply and demand are:

10. 1. If demand increases (demand curve shifts to the right) and
supply remains unchanged, a shortage occurs, leading to a
higher equilibrium price.
2. If demand decreases (demand curve shifts to the left) supply
remains unchanged, a surplus occurs, leading to a lower
equilibrium price.
3. If demand remains unchanged and supply increases (supply
curve shifts to the right), a surplus occurs, leading to a lower
equilibrium price.
4. If demand remains unchanged and supply decreases (supply
curve shifts to the left), a shortage occurs, leading to a higher
equilibrium price.
Demand
The quantity demanded of a good is the amount that consumers plan
to buy during a time period at a particular price. Higher prices
decrease the quantity demanded for two reasons:
 Substitution effect — a higher relative price raises the
opportunity cost of buying a good and so people buy less of it.
 Income effect — a higher relative price reduces the amount of
goods people can buy. Usually this effect decreases the amount
people buy of the product that rose in price.
 Demand is the entire relationship
between the price of a good and the
quantity demanded. A demand
curve shows the inverse
relationship between the quantity
demanded and price, everything
else remaining the same. For each

11. quantity, a demand curve shows the highest price someone is
willing to pay for that unit.
Shift of demand curve
This highest price is the marginal benefit a consumer receives for that
unit of output.
 A change in the price of the product leads to a change in the
quantity demanded and a movement along the demand curve.
The higher the price of a good, the lower is the quantity
demanded. This relationship is shown in Figure: 1 with the
movement along __ from 4,000 to 2,000 street hockey balls
demanded per week in response to a rise in price from $2 to $4
for a street hockey ball.
A change in demand and a shift in the demand curve, occur when
any factor that affects buying plans, other than the price of the product
changes. An increase in demand means that the demand curve shifts
rightward, such as the shift from to in Figure crease in demand refers
to a shift leftward.
The demand Curve shifts from changes in the following:
 Prices of related goods — a rise in the price of a substitute
increases demand and the demand curve shifts rightward; a rise
in the price of a complement decreases demand and the
demand curve shifts leftward.
 Expected future prices — if a product’s price is expected to rise
in the future, the current demand for it increases and the demand
curve shifts rightward.
 Income — for a normal good, an increase in income increases
demand and the demand curve shifts rightward; for an inferior
good an increase in income decreases demand and the demand
curve shifts leftward.
 Population — an increase in population increases demand and
the demand curve shifts rightward.
 Preferences — if people decide they like a good more, its
demand increases and the demand curve shifts rightward.
Factor affecting demand:
 Price (price is inversely related to demand).
 Price of other commodities.

12.  Household income.
 Household’s taste and preference.
If we assume that among all these determinants the price of the
commodities only changes while other factors remain unaffected. Then
we say that quantity demand of any commodity by a household
depend on the price of same commodity only. This depend of quantity
demanded of any commodity on its price can be represented in terms
of a function which is called the demand function.
If ‘q’ represents quality and ‘p’ represents price then demand
function would be: qd =f (p)
Law of demand:
The law of demand states that other things remaining the same
if the price of any commodities decreases its quantity demand
increases and vice-versa.
Market demand:
The market demand refers to the sum of quantity demand by all
household at different prices .We can get different individual demand
curves for individual household. Each individual demand curves show
the quantity demand by a household at a particular price. By summing
all the quantities demanded by all the household at a particular price
we can get the market demand at that price. Market demand curves
are
also sloping. Market demand curve is drawn on the basis of the
assumption that all other prices, total household income and its
distribution among household and taste of household are held
constant. If any of this factor change the market demand curve will
shift from its position.
Exception to the law of demand:
1. If the commodity is the giffen commodity to an individual then
that individual the demand curve for that commodity will be
upward rising. This happens when the commodity will be
inferior and the the income effect of a fall in price is stronger
than the substitution effect. Such commodity is called
‘GIFFEN COMMODITY’.
2. When the price of any commodity increases the consumer
may expect the price of the commodity to rise further in future

13. in that case consumer may purchase more units of the
commodity even when its price rises. So in this case the
demand curve will be upward rising.
3. Sometimes the consumers judge the quantity of any
commodity by its price that is when the price of any
commodity increases. Some consumer may think that a
qualitative improvement has taken place. The consumer may
purchase more units of this commodity even when its price
increase. This effect is known as ‘VEBLEN EFFECT’.
4. In the share market it is found that as the price of any share
increase its demand also increases; the law of demand is
therefore not applicable on the share market.
Elasticity of demand:
The elasticity of demand is defined as the % change in quantity
demand due to 1% change in price.
Thus elasticity of demand =% Change in quantity demanded / %
change in price.
Here, % change in quantity demanded= (changing quantity
demand/total quantity demand) x 100
And % change in price = (changing price demand / total price demand)
x 100.
Elastic demand-If the absolute value elasticity of demand is greater
than 1.0(unit), is known as elastic demand.
Inelastic demand-If the absolute value of elasticity of demand is less
than 1.0, is known as inelastic demand.
Unit elastic demand-If the absolute value of elasticity of demand is
equal to 1.0; that is unity; is known as unit elastic demand.

14. Measurement of elasticity:
Here, AB is linear demand curve. Now
two points P and Q are considered on
AB. Then two perpendiculars are drawn
on oq axis PN and QS. Also MP and
RQ are drawn. PN and QR intersect
each other in T point.
Now MR=PT, QR=OS, TQ=NS.
Between point P and Q the change in
price demanded is PT (MR), change in
quantity demanded is NS.So Change in
quantity demand= (NS/ON) x 100. Change in price demand=
(MR/OM) x 100.
Elasticity of demand at point ‘P’ = (NS/ON) x (OM/OR)
= (OM/ON) x (NS/MR) [as triangle PTQ & PNB almost equal ]
= (OM/ON) x (TQ/PT) = (OM/ON) x (NB/PN)
= (PN/ON) x (NB/PN) = NB/ON
= Lower segment/Upper segment
Special Cases:
 All straight line demand curve having the
intercept from the price axis will have the
same elasticity of demand at each price even
if they have different slope. In the figure, from
a two demand curve AB and AC are drawn.
Linear demand
curve
For AB demand curve, elasticity of demand = PB/PA. For AC demand
curve, elasticity of demand =QC/QA. So
PB/PA=QC/QA.
 If two straight line demand curves
intersect each other and if we have to
compare their elasticity and demand at their

15. intersection point then it can see that the stepper demand curve have
lower absolute value of the elasticity of the demand and vice-versa.
Linear demand curve
In the figure both AB & CD intersect on the point ‘P’. For AB demand
curve, elasticity of demand= PB/PA. For CD demand curve, elasticity
of demand=PD/PC. So PD/PC>PB/PA.
If the demand curve is vertical it has the highest steepness and it’s
elasticity of demand is zero at all points on it. Figure-1
On the other hand if the straight line demand curve is parallel to the
horizontal axis it is perfectly flat and its elasticity is infinite at all.
Figure-2
Figure-1 Figure-2
Supply
If supply any commodity, we mean that the amount of that commodity
offered for sell at any price. The supply of any commodity may be
consider from two stand point.
First, we may consider the supply from the stand point of a single
seller or a single firm. This is known as ‘individual supply’.
Second, we may consider the supply from the stand point of the
market. This is known as market supply.
Quantity supply:
Whatever amount of commodity a firm/seller willing to supply. It
depends on several factors, such as:

16. a) The quantity supply is influence the price of the commodity. As
the price of the commodity increases the quantity supplied of the
commodity also increases. This is known as the law of supply.
Law of supply: It states that other things remaining the same as the
prices of any commodity increases the quantity supplies also
increases that their exist a direct relation between prices and
quantity supplies.
b) Quantity supplies is also influence by the prices of factors of
production. Other things remaining the same the higher price of
any factor of production used in the production of a commodity,
used in the less profitable will it be to produce the commodity.
That means the higher the price of the factor of the production
the lower will be the quantity supplied.
c) The quantity supplied is also influenced by the goals of the
producing firms. If the goals of firms is to get maximum sells
even at the cost of some profit then the quantity supply will be
higher than if it wants to make maximum profit. Similarly if a firm
reluctant to take risk we would expect a lower quantity supplied
by that firm.
d) The quantity supply is also influenced by state of technology. As
a result of improvement in that technique of production it is
possible to produce more output even with the employment of
the same factors of production. In that case the quantity supplied
will increase even if other things remain the same.
The quantity supplied will be a function of price
of that commodity only denoting the quantity
supplied of the commodity by quantity supply
and the price of the commodity by we can
express this supply function by the notion :
qs = f(p) . That is called function of supply.
The supply curve in the above figure is an
individual supplies of all seller at any price we
can get the market supply at that price plotting the market supply on
the horizontal axis and price of the commodity on the vertical axis we
can get the supply curve.

17. Distinction between the movement along the supply curve and a
shift along the supply curve:
A movement of supply curve takes place when
there is a change in price of the commodity
(other things remaining the same) the change
in quantity supplied therefore means
movement along the same supply curve from
one to another point.
Shift of supply curve
Measurement of Elasticity of Supply:
We take points ‘A’ & ‘C’ on SS’ supply curve. Considering point ‘C’,
Perpendicular CD and AE are drawn. So, % change in quantity supply
= (BD/OB) x 100. And % change in price = (CE/AB) x 100. Elasticity
of supply at point ‘C’ = (BD/OB) x (AB/CE) [as triangle ASB and AEC
are almost equal, so (SB/AB) = (AC/CE) and
BD=AE] = (AE/CE) x (AB/OB) = (SB/AB) x
(AB/OB) = SB/OB.
Similarly as demand, elastic supply>1.0;
inelastic supply<1.0; unit elastic supply=1.0
Linear supply curve
Market Equilibrium
The equilibrium price is determined by the intersection of the
demand and supply curves. It is the price at which the quantity
demanded equals the quantity supplied. The equilibrium quantity is
the quantity bought and sold at
the equilibrium price.
Now equilibrium price is that
price at which total demand for
any commodity in market is
equal to total supply of that
commodity in the market. We
assume that there exists perfect
competition in the commodity

18. market. This means that there are large number of buyers & sellers in
the market. Each buyer takes the price as given and decides to
demand certain unit of the commodity at that price. In this way each
buyer has an individual demand curve. Market
equilibrium curve
By summing all the individual demand curves, we can get the market
demand curve. In the same way, each seller takes the price as given
and decide to offer a certain quantity for sell in the market Thus each
seller has an individual supply curve and by summing these, we can
get market supply curves.
Equilibrium: Equilibrium is defined to be the price-quantity pair where
the quantity demanded is equal to the quantity supplied, represented
by the intersection of the demand and supply curves.
Market Equilibrium: A situation in a market when the price is such
that the quantity that consumers demand is correctly balanced by the
quantity that firms wish to supply.
Comparative static analysis: Examines the likely effect on the
equilibrium of a change in the external conditions affecting the market.
Changes in market equilibrium: Practical uses of supply and
demand analysis often center on the different variables that change
equilibrium price and quantity, represented as shifts in the respective
curves. Comparative statics of such a shift traces the effects from the
initial equilibrium to the new equilibrium.
Conclusion:
Micro economics is concerned with the determination of prices of
various commodities and factors of production and allocation of
resources among competing uses. On the other hand,
macroeconomics focuses on the level of utilisation of resources,
particularly the level of employment and the general level of prices.
Economics is also the mother-discipline for the academic areas,
roughly referred to as business administration. A solid foundation
microeconomics is going to make marketing, production management,
and finance far easier to master and apply. Price elasticity of demand
(and other elasticities) is much of the subject matter in marketing,
marginal analysis will again become central in the methods we use in
production management, and finance is concerned primarily with
capital markets. Therefore, microeconomics will follow throughout

19. academic career if we are a business major and throughout our real
world career if we make decisions.
References:
 Introduction to microeconomics- Dr. David A. Dilts
 www.google.com /wikipedia
Class notes
THANK YOU…..