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 Revision Notes
Class - 12 Micro Economics
Chapter 1 - Introduction

Economy:
● The economy of a society is a web of organisations and institutions that
help or hinder the production and distribution of goods and services.
● The distribution of a society's resources, the value of goods and services,
and even what can be traded or bartered in exchange for those services and
goods are all determined by the economy.

Different types of economy:

1. Centrally Planned Economy: A centrally planned economy is one in which
the government or a central authority plans all the economy’s major activities.
All major decisions regarding the production, exchange, and consumption of
goods and services are made by the government. The central authority attempts
to achieve a specific resource allocation and also the distribution of the final
combination of goods and services that is deemed desirable for the society as a
whole. The primary goal is social welfare.

2. Market Economy: All economic activities in a market economy are organised

through the market. Free interaction of individuals who pursue their respective
economic activities takes place in a market.
In other words, a market is a collection of arrangements in which economic agents
freely exchange their endowments or products with one another. Also, no
interference of government takes place, and there exists the influence of the
private sector. The forces of demand and supply, as well as the behaviour of
economic participants determines the economy. The main objective is profit
maximisation

3. Mixed Economy: The economy in which both the government and the private
sector own and operate production factors. Profit maximisation in the private
sector and social welfare in the public sector are the primary goals. The central
planning authority and the price mechanism solve central problems.

Economics:
● It is a branch of social science that studies the production, distribution, and
consumption of goods and services.
Class XII Micro Economics www.vedantu.com 1
 ● The origin of economics can be traced back to Adam Smith’s 1776 book,
‘An Inquiry into Nature and Causes of Wealth of Nature.’ Economics was
defined as managing a home with limited funds in the most cost-effective
way possible.
● It aims to solve the scarcity problem, which occurs when human wants for
goods and services outnumber available supplies.
● The term ‘economics’ is derived from two Greek words: ‘eco’, which
means ‘home’, and ‘nomos’, which means ‘accounts.’
● The topic has evolved from how to keep the family accounts to the wide-
ranging subject at present.

The Real Meaning of Economics:

● It is the actual study of scarcity and choices.
● It seeks ways to reconcile unlimited wants with limited resources.
● Economics explains community living problems in terms of underlying
resource costs and consumer benefits.
● Economics is concerned with the coordination of activities that result from
specialisation.

Definition of Economics:
● The formal definition of economics can be traced back to the great Scottish
economist Adam Smith (1723-90). Adam Smith and his followers,
following the mercantilist tradition, regarded economics as a science of
wealth that studies the processes of wealth production, consumption, and
accumulation.
● The emphasis in Alfred Marshall's book “Principles of Economics,”
published in 1890, was on human activities or welfare rather than wealth.
“A study of men as they live, move, and think in the ordinary business of
life,” Marshall defines economics. He claimed that economics is a study of
wealth on one hand and a study of man on the other.

Difference between Microeconomics and Macroeconomics:

S.no Basis of Microeconomics Macroeconomics

Difference

1. Origin The word ‘micro’ comes The word macro

from the Greek word originated from the
‘micros,’ which means Greek ‘makros,’ which
means ’large.’ It's also
Class XII Micro Economics www.vedantu.com 2
 ‘small.’ It's also known as known as the Income
Price theory. and Employment
Theory.

2. Study Matters It investigates individual It investigates the

economic relationships or economy as a whole.
issues such as households,
businesses, and
consumers.

3. Objective Its main goal is to It looks into the

examine the principles, principles, issues, and
issues, and policies that policies that go into
can be used to achieve the achieving full
goal of optimal resource employment and
allocation. expanding productive
capacity.

4. Deals with It is concerned with how It examines how

consumers and producers different economic
make decisions based on sectors, such as
their budget and other households, industries,
factors. the government, and the
international community,
make decisions.

5. Method It employs the partial It employs the general

equilibrium method, equilibrium method,
which involves achieving which ensures that all
equilibrium in only one markets in an economy
market. are in equilibrium.

6. Variables Price, individual consumer Aggregate price,

demand, wages, rent, aggregate demand,
profit, revenues, and other aggregate supply,
microeconomic variables inflation, unemployment,
are important. and other
macroeconomic
variables are important.

Class XII Micro Economics www.vedantu.com 3

 7. Theories ● Consumer Behaviour ● National Income
and Demand Theory. Theory.
● Producer Behaviour ● Money Theory.
and Supply Theory.
● General Price Level
● Price Determination and Inflation Theory.
Theory under various
Market Situations. ● Employment Theory

● Factor ● International Trade

pricing/distribution Theory.
theory. ● Macro-distribution
● Economic Welfare Theory.
Theory. ● Economic Growth
Theory.

8. Main Problem Its main issues are price Its main issue is
determination and determining the
resource allocation. economy's level of
income and employment.

9. Popularised by Alfred Marshall John Maynard Keynes

Difference between Positive and Normative Economy:

S.No Positive Economy Normative Economy

1. It is concerned with what is and It deals with what ought to be.

what was.

2. It is based on the cause-and- It is based on moral principles.

effect relationship between facts.

3. Actual data can be used to verify Actual data cannot be used to

it. verify it.

Class XII Micro Economics www.vedantu.com 4

 4. The value of judgement is not This is where the value of
given in this case. judgement is given.

Problems of an Economy:
● The basic economic problem is one of choice, which is exacerbated by
resource scarcity.
● It's also known as the problem of resource economization, or the problem
of making better and more efficient use of limited resources to meet the
needs of the greatest number of people.
● Natural resources, such as land and air, human resources, such as labour,
capital resources, such as machines and buildings, and entrepreneurial
resources, such as a person willing to take risks, are all examples of factors
of production.
● Unlimited human wants, limited economic resources, and alternative uses
of resources are the main causes of central problems.

Central Problems of an Economy:

a) What to produce: An economy has an infinite number of wants and a finite

number of resources that can be put to other uses. The economy is unable to
produce all types of goods, such as consumer and producer goods. As a result, the
economy must decide what types of goods and services will be produced and in
what quantities.

b) How much to produce: It's a problem of deciding on a production technique.

There are two types of production techniques:
i. Labor-Intensive Technique: This is a production technique in which labour is
used more than capital.
ii. Capital-Intensive Technique: Capital is used more than labour in this
technique.

c) From whom to produce: It is a problem involving the distribution of

manufactured goods among various social groups. It has two aspects:
i. Personal distribution: When the national income is distributed according to
who owns the production factors.
ii. Functional distribution: When the national income or production is
distributed among various factors of production such as land, labour, capital, and
entrepreneurship for the purpose of providing their services in terms of rent,
wages, interest, and profit.

Class XII Micro Economics www.vedantu.com 5

 Problem relating to the efficient use and fuller utilisation of resources:
Production efficiency refers to producing the greatest amount of goods and
services possible with the resources available. Resources are already scarce in
comparison to the demand for them, so an economy must ensure that its resources
are not wasted by remaining underutilised.

Problem relating to resource growth:

It has to do with increasing the economy's production capacity in order to increase
the quantity of output.

Production possibility frontier:

● The production possibility frontier is a curve that depicts all possible
combinations of two goods that can be produced in a given economy with
given resources and technology.
● The production possibility frontier is also known as the transformation
curve or the production possibility curve.
● Due to scarce and finite resources, the production of a commodity could
only be increased if there is a reduction in the other commodity. Hence, the
PPC curve is concave.

Assumptions
The PP curve concept is founded on the following assumptions:
● The economy's resource base is fixed.
● The technology is pre-installed and unmodified.
● The resources are effective and fully utilised.
● In the production of all goods, all resources are not equally efficient.

Diagram:

Goo
dY A
B
C
E
D

0 Good
X

Class XII Micro Economics www.vedantu.com 6

 In the diagram, there are different combinations of good X and good Y, that is
combination A,B,C and D which could be produced when the the resources in the
economy are optimally and fully utilised. Any point on or below the production
possibility frontier gives a combination of goods that could be produced given
the resources and technology, however any combination under the PPC (Point E)
signifies the underutilization or wasteful utilisation of resources.

Shifts in Production Possibility Curve.

• Reasons:
o Changes in resources.
o Changes in manufacturing technology for both goods.

• Rightward shift:
Production Possibility Curve shift to the right indicates an increase in
resources or technological advancement. Example skilled labour,
technological advancements, and increased land productivity are all factors
that are contributing to increased productivity.

• Leftward shift:
Production Possibility Curve shift to the left indicates a decrease in
resources or a deterioration in technology in the economy. Example
unskilled labour, technological obsolescence, and decreased land
productivity are all factors that are contributing to decreased productivity.

Methods for resolving fundamental issues in capitalistic and planned

economies include:
The market mechanism solves the fundamental problems in a capitalist or market-
oriented economy.
● The market forces of demand and supply have an impact on price. These
forces assist us in determining what, how, and for whom we should
produce.
● In a planned economy, the government makes all of the economic decisions
about what, how, and for whom to produce.
● The price mechanism is replaced by economic planning. The state sets the
prices for various products, which are referred to as administered prices.

Class XII Micro Economics www.vedantu.com 7

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 CBSE Class–12 Economics
Micro Economics
Chapter 2 – Theory of Consumer Behaviour
Revision Notes

Consumer is an economic agent who consumes final goods or services for a consideration.

Thus Consumer behaviour is the study of how individual customers, groups or organizations select,
buy, use, and dispose ideas, goods, and services to satisfy their needs and wants. It refers to the actions
of the consumers in the marketplace and the underlying motives for those actions.

Utility is want satisfying power of a commodity. There are two types:-

• Total utility is the total satisfaction derived from consumption of given quantity of a
commodity at a given time. In other words, It is the sum total of marginal utility.

• Marginal Utility is the change in total utility resulting from the consumption of an additional
unit of the commodity. In other words, it is the utility derived from each additional unit.

Law of Diminishing Marginal Utility: As consumer consumes more and more units of
commodity the Marginal utility derived from each successive units go on declining. This is the
basis of law of demand.

Consumer’s Bundle is a quantitative combination of two goods which can be purchased by a

consumer from his given income.

Law of Equi-Marginal utility- It states that when a consumer spends his income on different
commodity he will attain equilibrium or maximize his satisfaction at that point where ratio between
marginal utility and price of different commodities are equal and which in turn is equal to marginal
utility of money.

Budget set is quantitative combination of those bundles which a consumer can purchase from his
given income at prevailing market prices. The group of all the bundles which the consumer is able to
buy with his/her income at the prevailing prices in the market is called the budget set of a consumer.
The budget set of a consumer is basically a collection of all bundles of goods and services which a
consumer can purchase by using the available income.
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Consumer Budget:- A budget constraint represents all the combinations of goods and services that
a consumer may purchase given current prices within his or her given income. Consumer Budget
states the real income or purchasing power of the consumer from which he can purchase certain
quantitative bundles of two goods at given price. It means, a consumer can purchase only those
combinations (bundles) of goods, which cost less than or equal to his income.

Budget Line: A graphical representation of all those bundles which cost the amount just equal to
the consumer’s money income gives us the budget line. The budget line represents two different
combinations of goods which a consumer can purchase with the given income and prices of
commodities.
For example;-
Q1 be the amount of Good 1, Q2 be the amount of Good 2, P1 be the price of Good 1, P2 be the
price of Good 2, P1q1 = Total money spent on Good 1, P2q2 = Total money spent on Good 2.
Therefore, the equation of the budget line will be p1q1 + p2q2 = X. The budget set can be shown
in the below diagram:

Budget line always slope downwards so that consumer can increase the consumption of Good 1
only by decreasing the consumption of Good 2. If consumers desire to have one additional unit of
Good 1, then they can only have that additional unit if they manage to give up some quantity of
other good. Consumers have limited income. They have to decide whether to spend on either
Good 1 or Good 2.

Monotonic Preferences: Consumer’s preferences are called monotonic when between any two
bundles, one bundle has more of one good and no less of other good as it offers him a higher level of
satisfaction.

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Change in Budget Line: There can be parallel shift (leftwards or rightwards) due to change in income
of the consumer and change in price of goods. A rise in income of the consumer shifts the budget line
rightwards and vice-versa. In case of change in price of one good, there will be rotation in the budget
line. Fall in price cause outward rotation due to rise in purchasing power and vice-versa.

Marginal Rate of Substitution (MRS) :It is the rate at which a consumer is willing to substitute
(good Y/ good X) one good to obtain one more unit of the other good. Generally, It is the slope of
indifference curve.

Indifference Curve: It is a curve showing different combination of two goods, each

combinations offering the same level of satisfaction to the consumer.

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Characteristics of IC

1. Indifference curves are negatively sloped (i.e. slopes downward from left to right).
2. Indifference curves are convex to the point of origin. It is due to diminishing marginal rate of
substitution.
3. Indifference curves never touch or intersect each other. Two points on different IC cannot give
equal level of satisfaction.
4. Higher indifference curve represents higher level of satisfaction.

Preference of consumer is governed by monotonic preferences. Monotonic Preferences refers to a

situation, where the consumer will prefer more of a commodities than the combination providing lesser
commodities. OR A consumer’s preferences are monotonic if and only if between any two bundles, the
consumer prefers the bundle which has more of at least one of the goods and no less of the other good
as compared to the other bundle.

Consumer’s Equilibrium: A consumer is said to be in equilibrium when he maximizes his

satisfaction, given his money income and prices of two commodity. He attains equilibrium at that point
where the slope of IC is equal to the slope of budget line.

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Marginal Rate Of Substitution:-
Marginal Rate Of Substitution MRS refers to the rate at which the consumer substitute one good to
obtain one more unit of the other good. The slope of the Indifference curve is
y
MRS = •MR
x
MRS is never constant, it varies over the IC. As we move along Indifference Curve, MRS falls also
called Diminishing Marginal rate of substitution.

Quantity Demanded: It is that quantity which a consumer is able and is willing to buy at particular
price and in a given period of time.

Determinants of Demand:

a). Price of Good

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b). Income of Consumers
c). Taste & Preference of Consumer

Change of Demand :

a) Change in quantity demanded or Movement along Demand curve

b) Change in Demand or Shift in Demand

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Market Demand: It is the total quantity of the commodity demanded in the market by all consumers
at different prices at a point of time.
Demand Function: It is the functional relationship between the demand for a commodity and factors
affecting demand.
Law of demand: The law states that when all other thing remains constant then there is inverse
relationship between price of the commodity and quantity demanded of it. That is, higher the price,
lower the demand and lower the price, higher the demand.
Change in Demand: When demand changes due to change in any one of its determinants other than
the price.
Change in Quantity Demanded: When demand changes due to change in its own price keeping all
other factors constant.
Demand curve and demand schedule: The tabular presentation of price and quantity. It is called
demand schedule and a demand curve is the graphical representation of the demand schedule.
Demand curve and its slope:

Price Elasticity of Demand: Price Elasticity of Demand is a measurement of change in quantity

demanded in response to a change in price of the commodity.
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Percentage Method:
Q P
Ep = 
P Q
EP → Elasticity of Demand
Q → Change in quantity
P → Change in price
P → Initial price
Q → Initial Quantity
Or

Total Expenditure Method : It measures price elasticity of demand on the basis of change in total
expenditure incurred on the commodity by a household due to change in its price.
There are three conditions :
1. Ed=1 When due to rise or fall in price of a good, total expenditure remains unchanged.
2. Ed >1 When due to fall in price, total expenditure goes up and due to rise in price, total expenditure
goes down.
3. Ed <1 when due to fall in price, total expenditure goes down and due to rise in price, total
expenditure goes up.

Geometric Method : Elasticity of demand at any point is measured by dividing the length of lower
segment of the demand curve with the length of upper segment of demand curve at that point.
The value of ed is unity at mid point of any linear demand curve.

Diagram to show Geometric or point method:

Elasticity of demand at given point.

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D is midpoint of the demand curve.

Factors influencing Price elasticity of Demand

(a) Nature of the Commodity.
(b) Availability of Substitute goods.
(c) Income level of the consumer.
(d) Price level of the commodity.

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(e) Time Period.
(f) Different use of the commodity.
(g) Behaviour of the consumer.
(h) Postponement of consumption.

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 CBSE Class–12 Economics
Micro Economics
Chapter 3 – Production and Costs
Revision Notes

Production: - It is mainly transformation of resources into commodities.

Production Function: Physical inputs. Production function of a firm describes the
relationship between the output and the factors of production which are being used in the
production process. It shows the required number of inputs needed to produce the maximum
level of final output.
The following formula is used to express the production function: Q = f ( x1, x2 )

Where
Q = final units of output

The above equation shows that the final units of output can be produced by using production
factors 1 and 2.

Types of Production Function:

There are two types of Production Function.
1. Short-run Production Function: In this production function one factor of production
is variable and all others are fixed. So, law of return to a factor is applied. It is also called
variable proportion type of production function.
It is a time period which is not enough to make change in all inputs. In this level of
production can be changed by changing the variable factors.

2. Long-run Production Function: In this production function all the factors of

production are variable. So, law of returns to scale is applied. It is also called constant
proportion type of production function.
It is a time period which is enough to make change in all inputs, all inputs are variable
in the long run. In this level of production can be changed by changing all inputs.

Total product or Total physical product: - Total product is the summation of the final units

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of output produced by a firm by using the given amount of inputs during a particular period
of time. Total product is the relationship between variable factors of production and final
units of output when all other factors of production are held constant. The following formula
can be used to express the total product:
Total Product =  Qx

The above formula shows the relationship between variable factors of production and the
summation of the total output.

Average production is the per unit production of variable factor.

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Marginal product refers to the change in total product resulting from the employment of an
additional unit of variable factor. In other words, it is the contribution of each additional unit
of variable factor to output.
Marginal Product of an Input= Change in Total Product/Change in Variable Product
Relation between Total, Average and Marginal Product

1. When TP increases at an increasing rate, MP also increases

2. When TP increases at a diminishing rate, MP declines.
3. When TP is maximum, MP=0.
4. When TP begins to decline, MP becomes negative.

Labour MP TP AP
1 2 2 2
2 3 5 2.5
3 4 9 3
4 3 12 3
5 1 13 2.6
6 0 13 2.16
7 -2 11 1.6

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1. When MP > AP, AP rises.
2. When MP = AP, AP is maximum and constant.
3. When MP < AP, AP falls.
4. MP may be zero or negative, but AP continues to be positive.
5. AP increases, even when MP falls but MP should lie above AP.
Returns to a factor: It refers to the behaviour of output when only one variable factor of
production in increased in short run and fixed factors remain constant.
Law of variable proportion: The law states that when more and more units of variable
factors are employed to increase the output, initially output increases at an increasing rate and
finally falls.

1.

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Stage I (Stage of Increasing Return to factor): TP Increases at increasing rate: In the initial
phase as more and more units of variable factors are employed with fixed factor total physical
production increases at increasing rate, MP increases.
Cause for increasing return: (a) Underutilisation of fixed factor (b) Indivisibility of factor
(c) Increased efficiency of variable factor

Stage II (Stage of Diminishing Return to factor): TP increases at decreasing rate : As more

and more units of variable factors are employed with fixed factors then total product
increases at diminishing rate, MP decreases but is positive. At the end of this phase TP
maximum and MP becomes zero.
Cause of diminishing return: (a) optimal use of fixed factor (b) imperfect factor
substitutability

Stage III (Stage of negative return to factor) : TP falls :As more and more units of variable
factors are employed with fixed factors, total production starts decreasing and marginal
product becomes negative.
Cause of negative return:
(a) Poor co-ordination between fixed factor and variable factor.
(b) Over utilisation of fixed factor
Economic Cost: It is the sum total of explicit and implicit cost.

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Explicit Cost: Actual money expenditure incurred by a firm on the purchase and hiring the
factor inputs for the production is called explicit cost. These are entered into books of
accounts. For example-payment of wages, rent, interest, purchases of raw materials etc.
Implicit cost is the cost of self-owned resources of the production used in production
process. Or estimated value of inputs supplied by owner itself. These are not entered into
books of accounts.
Normal Profit: It is the minimum amount required to keep the producers into business. In
other words, it is the minimum supply price of the entrepreneur. It is also called the wage off
an entrepreneur.

Total cost refers to total amount of money which is incurred by a firm on production of a
given amount of a commodity.
Total cost is the sum of total fixed cost and total variable cost.
TC = TFC + TVC or TC = AC × Q
Total fixed cost: - It is also called supplementary cost. It is the total expenditure incurred by
the producer for employing fixed inputs. Ex- Rent of land and building, interest on capital,
license fee etc.
TFC = TC – TVC or TFC = AFC × Q

Features of Total Fixed Cost:- (a) It remains constant at all levels of output. It is not zero
even at zero output level. Therefore, TFC curve is parallel to X-axis. (b) Total cost at zero
level of output is equal to total fixed cost.

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Total variable cost is the cost which vary with the quantity of output produced. It is zero at
zero level of output. TVC curve is parallel to TC curve. Ex-cost of raw material, expenses on
power etc.
TVC = TC – TFC or TVC = AVC × Q

Features of Total variable cost: - (a) It is zero when output is zero. (b) It increases with
increase in output. (c) Initially TVC increases at diminishing rate due to increasing returns
and later it increases at an increasing rate due to diminishing return.
Average cost is per unit cost of production of a commodity. It is the sum of average fixed
cost and average variable cost.
Average fixed cost is per unit fixed cost of production of a commodity.

Features of AFC:- (a) AFC diminishes with increase in output. (b) AFC curve is a
rectangular hyperbola.(c) It cannot intersect X-axis or Y-axis.

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Average variable cost is per unit variable cost of production of a commodity. AVC is U-
shaped due to law of variable proportion.

Marginal Cost - It refers to change in TC, due to additional unit of a commodity is produced.
MC = ΔTC/ΔQ or MCn = TCn – TCn–1. But under short run, it is calculated from TVC.

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Relation between Short-Term Costs
Total cost curve and total variable cost curve remains parallel to each other. The vertical
distance between these two curves is equal to total fixed cost.
TFC curve remains parallel to X-axis and TVC curve remains parallel to TC curve.

With increase in level of output, the vertical distance between AFC curve and AC curve goes
on increasing. On contrary the vertical distance between AC curve and AVC curve goes on
decreasing but these two curves never intersect because average fixed cost is never zero.

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Relation between MC and AVC.
When MC < AVC, AVC falls.
When MC = AVC, AVC is minimum and constant
When MC > AVC, AVC rises. MC curve cuts AVC curve at its lowest point. Both curves are
U-shaped and starts from same point.

Relation between MC and AC:- (i) when AC falls, MC < AC. (ii) when AC rises, MC >
AC. (iii) when AC is constant and minimum, MC = AC.

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Money received from the sale of product is called revenue.
Total revenue is the total amount of money received by a firm from the sale of given units of
a commodity.

Per unit revenue received from the sale of given units of a commodity is called average
revenue. Average revenue is equal to price. Per unit price of a commodity it also called AR.

Marginal revenue is net addition to total revenue when one additional unit of output is sold.

Relation between TR, AR, and MR when more quantity sold at the same price: under
perfect competition.

(a) Average revenue and marginal revenue remains constant at all levels of output and AR
and MR curves are parallel to ox-axis.
AR= MR.
(b)Total revenue increases at constant rate MR is constant and TR curve is positively sloped
straight line passing through the origin.

Relation between TR, AR and MR when more quantity by sold at the lower price or there
is monopoly or monopolistic competition in the market.

(a) Average revenue and marginal revenue curves have negative slope. MR curve lies below
AR curve. AR > MR
(b)Marginal revenue falls, twice the rate of average revenue.

(c) So long as marginal revenue decreases and positive, total revenue increases at
diminishing rate. When marginal revenue is zero, total revenue is maximum and when

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marginal revenue becomes negative, TR starts falling.

Relation between AR and MR (General relationship)

When MR = AR, AR is maximum and constant. MR can be negative, but not AR.
When MR < AR, AR falls. When TR increases at an increasing rate, MR and AR also
increases.
Concept of Producer’s Equilibrium: If refers the stage where producer is getting maximum
profit with given cost and he has no incentive to increase or decrease the level of output.

(A) MR and MC Approach: Conditions of producers equilibrium according to this

approach are :
(a) MC = MR and also AR = MR, hence AR = MR = MC. MC should be rising.
(b) MC curve should cut the MR curve from below at the point of equilibrium.

Or

MC should be more than MR after the equilibrium point, with increase in output.

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Normal Profit: - It is a no profit no loss situation, it is achieved when P = AC. It is the
minimum return that a producer expects from his capital invested in the business.

Break-even Point: - It occurs when AR = AC or (TR = TC). At this point, firm is earning
zero economic profit or normal profit. OR we can say it is just covering all its costs.

Shut-down Point: - It occurs when a firm is covering its variable costs only, here, the firm is
incurring loss of fixed cost. (TR < TVC OR AR < AVC)

Supply: Refers to the amount of the commodity that a firm or seller is willing to sell at
different prices during a given period of time.

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 CBSE Class–12 Economics
Micro Economics
Chapter 4 – The Theory of the Firm under Perfect Competition
Revision Notes

1. Market is a mechanism or arrangement through which the buyers and sellers of a commodity or service
come into contact with one another and complete the act of sale and purchase of the commodity or service on
mutually agreed prices.

2. Perfect competition is a market structure where there are large number of buyers and sellers selling
identical products at uniform price with free entry and exit of firms and absence of govt. control. Under
perfect competition, price remains constant therefore, average and marginal revenue curves coincide each
other i.e., they become equal and parallel to x-axis.

In this, price is determined by the industry on the basis of market forces of demand and supply. No
individual firm can influence the price of the product. A firm can takes the decision regarding the output
only. So industry is price maker and firm is price taker.

3. Important features of perfect competition:

1. Very large no. of buyers and sellers.

2. Homogeneous product.
3. Free entry and exit of firms in the market.

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4. Perfect knowledge.
5. Perfect Mobility.
6. Perfectly elastic demand curve.
7. No transportation cost.

4. Price Line The price line is the line which represents the graphical relationship between price and output.
The demand curve and the price line are equal in a perfectly competitive market.

Graphical representation of the price line is as below:-

The line indicates that a firm can sell its goods and services at the existing price. The shape of the price line
in a perfectly competitive market is horizontal.

5. Revenue: It refers to the money receipts of a firm from the sale of its output.

6. Total Revenue (TR) is the sum total of revenue derived from the sale of all units of commodity.
TR = (P) (Q) or AR (Q) or ΣMR, here P is Price whereas Q is Output, AR is Average revenue, MR is
Marginal revenue.

7. Marginal revenue is the revenue which is generated by selling an additional unit of a commodity. It is the
change in total revenue when an additional unit of a commodity is sold in the market.
The relationship between market price and marginal revenue can be explained by using the following
equations:

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TR = Total revenue
MR = Marginal revenue
Q = Quantity

The above equation indicates that the price is equal to marginal revenue in a perfectly competitive market.
Graphical representation of the relationship between marginal revenue and price:

The diagram shows that the price, marginal revenue, average revenue and demand curve are the same in a
perfectly competitive market.

8. Shape of TR, AR, MR, curves in perfect Competition

Profit is the difference between revenue and cost. It is determined as:-

Profit = Revenue – Cost

9. Profit maximisation in a competitive market –

If a profit-maximising firm produces positive output in a competitive market, then the following conditions
must hold:

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• At the quantity level, marginal revenue should be equal to marginal cost. If the marginal revenue is less
than the marginal cost, then a firm would not produce more quantity in a perfectly competitive market.
• There should be an increase in the marginal cost according to an increase in the quantity produced.
• Price should not be less than the average variable cost. It should be equal or greater than that of the
price in short run.
• Price should not be less than the long-run average cost. The price should be equal or more than the
long-run average cost.

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www.vedantu.com 5
23. Equilibrium Price: The price at which the quantity demanded and supplied are equal is known as
equilibrium price.

24. Equilibrium quantity: The quantity demanded and supplied at an equilibrium price is known as
equilibrium quantity.

25. Market equilibrium is a state in which market demand is equal to market supply. There is no excess
demand and excess supply in the market.

26. Application of Demand of Supply:-

(a)Maximum Price Ceiling: It means the maximum price the sellers are allowed to charge less than

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equilibrium market price. Government imposes such a ceiling when it finds that the demand for necessary
goods exceeds its supply. That is, when consumers are facing shortages and equilibrium price is too high.
Government does it in the interest of consumers. Excess demand may be fulfilled by: (a) Rationing (b) Dual
marketing

(b) Minimum Price Ceiling: It means that producer are not allowed to sell, the goods below the price
fixed by Government, When government finds that equilibrium price is too low for the produce, then Govt.
fixes a price ceiling higher than equilibrium price to prevent the possible loss to the producers. The price is
also called floor price or minimum support price. Generally, government buys the excess supply at this price.

27. Technological Progress on Supply Curve:-

Technological progress reduces the marginal cost of production. Producers can produce comparatively more
goods and services with the help of available factors of production. This situation is likely to shift the supply
curve rightward and the marginal cost curve downward. There is a positive relationship between
technological progress and supply. Technological progress often leads to a decline in the cost of production
which enables producers to produce and supply more goods and services at the existing price.
Thus, technological progress is likely to increase supply causing a rightward shift in the supply curve.

28. Supply Curve of the firm in short run-

The upward sloping part of the short-run marginal cost curve is considered the supply curve of a firm in the
short run. The supply curve of a firm in the short run is comparatively less elastic as it cannot be changed
according to changes in the demand for goods and services. The supply curve is also regarded as the addition
of the upward sloping portion of short-run marginal cost.
Graphical representation indicating the supply curve in the short run:

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The diagram indicates the upward sloping part of the marginal cost curve which is considered the short run
supply curve of a firm in the short run.

29. Supply curve of the firm in long run-

In the long run, supply of goods and services can be changed according to the changes in the demand. So, the
shape of the supply curve in the long run is elastic as indicated in the diagram.

The supply curve is upward sloping with an addition of the rising long-run marginal cost curves.

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 CBSE Class–12 Economics
Micro Economics
Chapter 5 – Market Equilibrium
Revision Notes

1. Market is a mechanism or arrangement through which the buyers and sellers of a commodity or service
come into contact with one another and complete the act of sale and purchase of the commodity or service
on mutually agreed prices.
2. Market equilibrium is a state in which market demand is equal to market supply. There is no excess
demand and excess supply in the market.
3. Equilibrium Price & Quantity: The price at which the quantity demanded and supplied are equal is known
as equilibrium price. The quantity demanded and supplied at an equilibrium price is known as equilibrium
quantity.

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www.vedantu.com 2
 8. Price Ceiling Price ceiling is the process of determining the price of some necessary goods at a lower
level so that they can be made available for the poor.
Government of India imposes a price ceiling on the basic necessity goods which should be made available
for the poor.
For example, goods such as rice, wheat, sugar kerosene and pulses.
Imposition of the price ceiling has the following consequences:
a) Imposition of price ceiling leads an excessive increase in the demand. At lower price, people are likely to
increase their demand for such commodities.
b) Poor consumers do not get access to unlimited goods. The quota is fixed for these goods.
Normally, the goods provided under the price ceiling system are of inferior quality.

Price Determination in Perfect Market Competition: - In a perfectly competitive market, price is

determined by market demand and market supply. Market demand is the summation of all individual demands
in the market. Market supply is also the summation of all individual supply schedules in the market. The
intersection of market demand and market supply determines the price in a perfectly competitive market.

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Graphical representation of the determination of price in a perfectly competitive market

The above figure indicates that the price is determined at the point where the market demand curve intersects
the market supply curve. Any point above the equilibrium price creates excess supply, and the price below the
equilibrium level creates excess demand, as indicated in the figure.

Wage Determination in Perfect Competitive Labour Market –

Equilibrium of demand and supply of labour determines the wage rate. Marginal product of labour plays an
important role in determining the demand for labour.

Graphical representation of the wage determination in a perfectly competitive labour market

The graph indicates the wage determination in a perfectly competitive market. Intersection of demand and
supply determines the wage rate.

Marginal Revenue Product of Labour: - The marginal revenue product of labour (MRPL) is the change in

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revenue that results from employing an additional unit of labour, holding all other inputs constant. The
marginal revenue product of a worker is equal to the product of the marginal product of labour (MPL) and the
marginal revenue (MR) of output, given by MR×MPL = MRPL. This can be used to determine the optimal
number of workers to employ at an exogenously determined market wage rate. Theory states that a profit
maximizing firm will hire workers up to the point where the marginal revenue product is equal to the wage
rate, because it is not efficient for a firm to pay its workers more than it will earn in revenues from their
labour.

Let TR=Total Revenue; L=Labour; Q=Quantity.

MRPL= ∆TR/∆L

MR = ∆TR/∆Q

MPL = ∆Q/∆L

MR × MPL = (∆TR/∆Q) × (∆Q/∆L) = ∆TR/∆L

Value of marginal product of labour- There are three potential meanings of the "value of marginal product
of labour." One is the "magnitude" of marginal product—the increase in physical output associated with hiring
another employee. The more traditional definition is the price of output times that magnitude (in the case of
competitive output markets), which represents the monetary value of another worker, to be compared to the
marginal monetary cost of that worker. In the third case, the firm has some degree of market power, so it is
marginal revenue that multiplies the physical marginal product. In all cases, one is looking for marginal

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benefits to compare to marginal costs.

Effect of Income (Rise or Decline) on Equilibrium of Price and Quantity-

(a) An increase in consumer income leads to a rise in the equilibrium price assuming that the number of
firms is constant in the market. Consumers are likely to increase their demand considering a rise in their level
of income. A rise in demand causes an increase in the equilibrium price.

Graphical representation of the effects of an increase in the level of income on the equilibrium price and
quantity

The figure indicates that the equilibrium price is likely to increase due to a rise in the consumer's income level.

(b) A decrease in consumer's income leads to a decline in the equilibrium price assuming that the number of
firms is constant in the market. Consumers are likely to decrease their demand considering a decline in their
level of income. A decline in the demand causes a fall in the equilibrium price due to the availability of excess
supply in the market.

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Graphical representation of the effects of a decrease in the level of income on the equilibrium price and
quantity

The figure indicates that the equilibrium price is likely to decrease due to a decrease in the consumer's income
level.

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 Revision Notes
Class 12 Micro Economics
Chapter 6 – Non-Competitive Markets

Market: It is a mechanism or arrangement that brings buyers and sellers of a

commodity or service together and allows them to complete the act of selling and
buying the commodity or service at mutually agreed prices.

Perfect competition: It is a market structure in which a large number of buyers and

sellers compete for the same products at the same price, with firms free to enter and
exit and no government control.
Since price remains constant in the presence of perfect competition, the average and
marginal revenue curves coincide, i.e., they become equal and parallel to the x-axis.

Price is determined by the industry under perfect competition based on market forces
of demand and supply. No single company can influence the product's price. A
company can only make decisions about output. As a result, the industry sets the
price, and the firm accepts the price.

Features of perfect competition:

Class XII Micro Economics www.vedantu.com 1

a) It comprises an enormous number of purchasers and vendors.
b) The product is homogeneous.
c) Market entry and exit are unrestricted.
d) Extensive knowledge.
e) Unrivaled mobility.
f) A demand curve that is perfectly elastic.
g) There are no transportation costs.

Monopoly Market: A monopoly market is one in which there is a single seller and
a large number of buyers. There are no close substitutes for the products.
Some features of the monopoly market:
a. A single seller with a large number of potential buyers.
b. Barriers to new firms entering the market.
c. There are no close substitutes available.
d. Complete price control.
e. Discrimination based on price.
f. It is a price maker.
g. A demand curve with a downward slant that is less elastic.

Average Revenue (AR) or Marginalised Revenue (MR) Curve in Monopoly

Market:
The income or revenue received by the firm per unit of an item sold is known as the
Average Revenue (AR). The AR (Demand) Curve is less elastic than that of
monopolistic competition, sloping downward from left to right. It means that in order
to increase demand, the price must be reduced. Given the demand for his product,
the monopolist can increase sales by lowering the price; however, the marginal
revenue declines at a faster rate than the average revenue declines. A monopolist
sets either the price or the output. He can't make both decisions at the same time.
Y
Revenu
e

A
R
M
R
O x
Output

Class XII Micro Economics www.vedantu.com 2

Monopolistic Competition: It is a market in which a large number of buyers and
sellers are present. The sellers offer a variety of products, not all of which are
identical. The products are nearly identical to one another.

Some features of monopolistic competition:

a. A large number of potential buyers and sellers
b. Differentiation of products based on colour, flavour, packaging, trademark, and
size.
c. The cost of advertising and sales promotion.
d. Unrestricted entry and exit of businesses.
e. Price control, but only in parts.
f. A lack of complete knowledge.
g. A demand curve that is elastic and slopes downward.
h. Production factors and products are not perfectly mobile.

Average Revenue (AR) or Marginalised Revenue (MR) Curve in Monopolist

Market:
The AR (Demand) Curve is a downward sloping curve that is more elastic and flatter
than the monopoly curve. It means that a monopolistic competitive firm's demand
will change more in response to a price change than a monopoly firm's demand. The
AR and MR curves are both downward sloping because the only way to sell more
units is to lower the price. MR is located beneath AR.
Y
Revenue

AR

MR

O x
Output

Oligopoly: It is a market structure in which only a few firms can prevent the others
from exerting significant influence.

Important characteristics of oligopoly market:

a. There are only a few sellers who control all or most of the industry's sales.

Class XII Micro Economics www.vedantu.com 3

b. Each firm creates a product that is either homogeneous or differentiated.
c. The demand curve in an oligopoly cannot be determined.
d. In terms of price determination, all firms are interdependent.

Oligopoly can be categorised into two categories on the basis of production:

a. Collusive oligopoly is a type of oligopoly in which all firms agree to avoid
competition and set prices and output quantities through cooperative behaviour.
b. Non-collusive oligopoly is a type of oligopoly in which all firms set their prices
and output quantities in response to rival firms' actions and reactions.

Oligopoly can be categorised into two categories on the basis of differentiation:

a. When firms deal with homogeneous products, they form a type of oligopoly
known as a perfect oligopoly.
b. When there is product differentiation, an imperfect oligopoly occurs. It deals with
heterogeneous products.

Price maker: It is an establishment, for example, a firm, that has an imposing

business model or monopoly that permits it to impact the value it charges in light of
the fact that the goods it produces do not have a perfect substitute. Within the
monopolistic competition, a price maker produces goods that differ in some way
from the products of its competitors.

The state of Demand Curve under various Market Structures:

● Monopoly is a market category in which there is only one seller and thus no
distinction between a firm and an industry. Because the firm is an industry in and
of itself, the demand curve of the individual firm and the demand curve of the
industry will be the same. Furthermore, because there are no close substitutes
when there is a monopoly, the demand curve is relatively steeper, indicating
relatively inelastic demand.
● Monopolistic competition occurs when a group of monopolists competes to
produce a differentiated product. Each company's product is slightly different
from the others. Because substitutes exist, each firm's product demand curve is
downward sloping and relatively elastic. The industry demand curve has little
meaning in monopolistic competition because there are many sellers with
differentiated products.
In an oligopoly market, there are only a few sellers who produce differentiated or
homogeneous goods. The actions of competitors have an impact on the demand for
a company's product. In an oligopolistic market, a firm's demand curve has a kink.

Marginal Revenue Value in an Elastic Demand Curve:

Class XII Micro Economics www.vedantu.com 4

When the demand curve is elastic, the value of marginal revenue will be positive.
The relationship between the value of MR and the demand curve is depicted
graphically in the diagram below. The marginal and average revenue curves are
sloping downward from left to right, as shown in the diagram.

Y
Price

AR = D

MR
O Quantity X

Price Elasticity and Marginal Revenue:

Price elasticity and marginal revenue have a direct relationship. The more elastic a
good's demand is, the more it is affected by supply changes. Marginal revenue and
price are equal in a competitive market. As a result, price elasticity and marginal
revenue have a direct relationship in a competitive market. Marginal revenue is less
than price in a natural monopoly. Because low prices are a primary driver of
monopoly, this is the case. As a result, price elasticity has a direct relationship with
marginal revenue in a monopoly.
Price and cost, both of which are a function of demand, drive marginal revenue.
Higher revenues are generated by higher prices and lower costs. Higher volume
generates more revenue and lowers costs due to economies of scale. The effect is
cyclical, with the cost-cutting benefit offset by the revenue loss from lower prices.
Changes in price will have no effect on demand if the good is price inelastic. Because
price has no effect on demand, raising the price will increase revenue. Furthermore,
the cost savings from increased volume do not need to be passed on to the customer.
Marginal Revenue is expressed as:
MR = P[1-(1/Ep)]
Where MR = Marginal Revenue,
P = Product’s market price
Ep = The price elasticity of demand for the product.

Class XII Micro Economics www.vedantu.com 5

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