contains the basic fundamentals of micro economics

1. Submitted By :
BIBASWAN MOHANTY
M.Sc (Prev.)
Dept. of Economics
IGKV, Raipur
MICRO ECONOMICS

2. MONOPOLISTIC
COMPETITION
 Monopolistic competition refers to the
market situation where there are many
firms selling a differentiated product
 Monopolistic competition refers to the
market organization in which there are
many firms selling closely related but
not identical commodities.

3. Many sellers
 There are many firms competing for the
same group of customers.
Product examples include books, CDs,
movies, computer games, restaurants,
piano lessons, cookies, furniture etc.

4. Product Differentiation
 Each firm produces a product that is at
least slightly different from those of
other firms.
 Rather than being a price taker, each
firm faces a downward-sloping
demand curve.

5. Free Entry or Exit
 Firms can enter or exit the market without
restriction.
 The number of firms in the market adjusts
until economic profits are zero.

6. OLIGOPOLY MARKET
 Oligopoly is a market situation in
which there are a few firms selling
homogenous or differentiated
products.
 An oligopoly industry produces either
a homogenous product or
heterogeneous product. The former is
called pure or perfect oligopoly and
the latter is called imperfect or
differentiated oligopoly.

7. Features
 Few sellers
 Ability to set price
 Homogeneous or distinctive product
 Blockaded entry or exit
 Interdependence
 High cross elasticities
 Constant struggle
 Lack of uniformity
 Lack of certainty
 Price rigidity

8. Kinked Demand Curve
 The kinked demand curve or the average
revenue curve is made of
i. Relatively elastic demand curve
ii. Relatively inelastic demand curve
 At given price P, there is a kink at point K
on demand curve DD. DK is the elastic
segment and KD is the inelastic segment
of the curve.
 Here implies abrupt change in the slope
of demand curve. Before the kink the
demand curve is flatter, after the kink it
becomes steeper.

9. The kinked Demand Curve
D
D
Price
Elastic
Inelastic
K
Quantity

10. If the cost shift up slightly, but MC still intersects MR in the
vertical segment, there will be no change in price. This
price rigidity is seen in real world oligopoly markets.
D
D
Price
K
Quantity
MC’
MC
MR

11. CONSUMER SURPLUS
 Consumer buy goods because it
makes them better off (or provide
utility). Consumer Surplus measures
how much better off they are.
 Consumer Surplus
from each unit : the amount a buyer is
willing to pay for a good minus the amount
the buyer actually pays for it.

12. Definition
 The excess of the price which he
would be willing to pay rather than go
without the thing, over that which he
actually does pay, is the economic
measure of the surplus satisfaction. It
is called “consumer surplus”
 Emphasis on market demand- of
those in the market there are some
who are willing to pay higher prices
than the market prices.

13. Consumer Surplus
D=marginal utility
P
Price
In
Rs.
Quantity
demanded
5
20
Market price = Rs. 5 20 consumers will pay Rs. 5
15 consumers willing to pay Rs. 9
9
15
15 consumers get 15 X Rs. 4 of
Consmuer surplus
Total utility = value represented
By blue and gold area
Blue area is the amount
Paid to aquire the good
Gold area=total
consumer surplus

14. Price
P1
P2
Q1 Q2 Quantity

15. PRODUCER SURPLUS
 Difference between the market price
received by the seller and the price
they would have been prepared to
supply at
 Difference between the lowest price
available and highest price paid
across the economy
 Price received – linked to factor cost +
element of normal profit
 Producer surplus = abnormal profit

16. Producer Surplus
S
Price
in Rs
10
60
Market price = Rs. 10
At Rs. 10, supplier is
willing to offer 60 for
sale
Total Revenue = Blue
area
Rs. 10 X 60 = 600
Quantity supplied
6
35
Some suppliers would have
offered 35 for sale at Rs. 6
Produce Surplus = 35 X Rs. 4 =Rs
140Golden area = Producer
surplus

17. PROFIT
 Profit is the making of gain in business
activity for the benefit of the owners of
the business.
Profit = Total Revenue – Total Cost
Types of Profit
1.Supernormal Profit
2.Normal Profit
3.Negative Profit or Loss

18. PROFIT MAXIMIZATION
 A monopolist maximizes profit by
choosing a quantity where marginal
revenue equals marginal cost.
 A process that companies undergo to
determine the best output and price
levels in order to maximize its return.
 The firm maximizes its profits when it
satisfies to rules-
i. MC=MR
ii. MC curve cuts the MR curve from
below

19. Assumptions
I. The objective of the firm is to maximize its
profits where profits are the difference
between the firm revenue and costs.
II. The entrepreneur is the sole owner of the
firm.
III. Tastes and habits of the given customers
are given and constant
IV. Techniques of production are given
V. The firm produces a single, perfectly
divisible and standardized commodity.
VI. The firm has complete knowledge about the
amount of output which can be sold at each
price.

20. INDIFFERENCE CURVE
 An indifference curve is the locus of
points representing all the different
goods which yield equal level of utility
to the consumer.
 Indifference schedule
◦ Indifference schedule is a list of
combination if commodities which are
equally satisfactory to the consumer
concerned.

21.  The IC shows all possible combination of apples
and mangoes between which a person is
indifferent. Point A shows consumption bundle
consisting of 15 apples and one mango. Moving
from point A to B, we are willing to give up 4
apples to get a second mango (total utility is
same at point A and B)
0
2
4
6
8
10
12
14
16
1 2 3 4 5
A
P
P
L
E
s
MANGOES
A
B
E
D
C

22. INDIFFERENCE MAP
IC1
IC2
IC3
A Graph showing a whole
set of indifference curves is
called an indifference map.
All points on the same curve
give equal level of
satisfaction, but each point
on higher curve gives higher
level of satisfaction.
4321 5
5
10
15
20
25
A
P
P
L
E
s
MANGOES

23. CONSUMER EQUILIBRIUM
IC
A Consumer is in
equilibrium when he
maximizes his utility,
given his income and
market prices
- Koutsayiannis
201
5
105 25
3
6
9
12
15
E
A
P
P
L
E
s
MANGOES

24. MARKET EQUILIBRIUM
 Market equilibrium is point where
buyers and sellers reach the
compromise and settle down the price
of the commodity. At this price quantity
demanded is equal to the quantity
supplied. In diagram both curves
intersect at this equilibrium level. This
is a stable equilibrium.

25. Point “e” is market equilibrium
point
P Qd Qs
1 12 4
2 10 6
3 8 8
4 6 10
5 4 12
e
S
D
1
2
3
4
5
0
4 6 8 10 12
P
R
I
C
E
Quantity
S>D
S<D
e

26. PRICE DISCRIMINATION
 Price discrimination occurs when a
business charges a different price to
different groups of consumers for the
same good or services, for reasons
not associated with costs.

27. Two main conditions required for
price discrimination to work
1. Differences in price elasticity
a. Charges a higher price to group with low Price
Elasticity of Demand
b. Charges a lower price to consumers with a more
price elastic demand.
2. Prevent resale/ consumer switching
a. Easier with services than goods
b. Time limits- product bought at certain time
c. Photo cards / identification
d. Electronic / digital ways of protecting usage

28. Types of Price Discrimination
 Third-degree price discrimination occurs
when different prices are charged to groups
of buyers in totally separate markets.
 First-degree price discrimination occurs when
each unit of output is sold at a different price
such that all consumer surpluses go to the
seller.
 Second-degree price discrimination occurs
when the seller prices the first block of output
at a higher price than subsequent blocks of
output.
 The hurdle method of price discrimination
exists when the seller offers a lower price,
coupled with an inconvenience that rich
consumers prefer to avoid.

29. PRICE ELASTICITY OF
DEMAND
 The change in quantity demanded of a
product due to change in its price is
known as Price Elasticity of Demand.
Thus the sensitiveness or responses
of demand to change in price is called
elasticity of demand.

30. Elasticity of demand
D
P
Price
Perfectly Elastic
Demand Curve
Perfectly inelastic
Demand Curve
Relatively Elastic
Demand Curve
Relatively inelastic
Demand Curve
Unit Elastic Demand
Curve
Demand

31. CROSS ELASTICITY OF
DEMAND
 Cross elasticity of demand express a
relationship between the change in the
demand for a given product in
response to a change in the price of
some other product.
 E.g. if the X tea demand reduces
tremendously than it effect could be
seen in demand of sugar and milk.

32. Types of Cross Elasticity of
Demand
 Cross Elasticity of Demand Equal to
Unity or One
 Cross Elasticity of Demand Greater
than Unity or one
 Cross Elasticity of Demand less than
unity or one

33. Cross Elasticity of Demand
P
Price
of
Y
Cross Elasticity of
Demand for
Substitutes
Cross Elasticity of
Demand for
Complementary
Products
Cross Elasticity of
Demand for
Neutral Products
Demand of X

34. WELFARE ECONOMICS
 Deals with topics on justice, equity,
freedom and other pertinent topics
geared toward economic growth and
progress.
 It is concerned with the welfare of
individuals. The individuals are us, the
consumers. Welfare economics
assumes that individuals are the best
judges of their own welfare.

35. THANK YOU