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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
DEMAND
Demand

Created Expressed

Desire Willingness
Quantity Price Time
Ability to
Pay
Factors Effecting Demand
1. Price Of the Commodity:-
There is a inverse relationship between price and quantity demanded, other
thing remaining constant.
2. Price of Related Goods:-
(a) Substitute Goods or Competing Goods
As the price of related commodity increases demand for original commodity
also increases or vice versa.
There is a direct relationship between price and demand in substitute.
(b) Complementary Goods
This indicates that there is indirect relationship between price and demand
in complementary goods.
3. Income of the consumer
As income rises demand also rises and vice versa.
This indicates that there is a direct relationship between income and
demand.
(a) Inferior Goods
(b) Necessities
4. Habits, Tastes and Preferences: Demand may be affected at any direction.
5. Climatic Condition

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
6. Population

1. Law of Demand
This indicates that there is a inverse relation between price and quantity
demanded.

2. Demand Schedule

(i) Individual Demand

(ii) Market Demand

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Expansion And Contraction of demand
When there is change in demand
due to price of a commodity
(ceteris paribas) there is a
expansion and contraction of
demand.
Expansion - Rightward Movement
Contraction – Leftward Movement

Increase and Decrease in Demand

When there is change in demand
due to other factors other than
price, then we say either it is
increase or decrease in demand.
Rightward Shift - Increase in Demand
Leftward Shift - Decrease in demand

Elasticity Of Demand
Price Elasticity
Price is the basis affecting demand. 1. P Q
Calculate
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 Price
Formulae:- (i) 10 20
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 Elasticity
20 15
𝑛𝑒𝑤 𝑑𝑒𝑚𝑎𝑛𝑑−𝑜𝑙𝑑 𝑑𝑒𝑚𝑎𝑛𝑑
(ii) x100 2. P Q
𝑜𝑙𝑑 𝑑𝑒𝑚𝑎𝑛𝑑
Calculate
𝑛𝑒𝑤 𝑝𝑟𝑖𝑐𝑒−𝑜𝑙𝑑 𝑝𝑟𝑖𝑐𝑒 Price
x100 10 20
𝑜𝑙𝑑 𝑝𝑟𝑖𝑐𝑒 Elasticity
20 15

Important points

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
(a) Co-efficient of price elasticity is always negative.
(b) for this purpose of expressing elasticity, we ignore negative sign.

Types Of Price Elasticity

1. Perfectly Inelastic Demand

%ΔD=0

e=0
% Δ P = ✔️

2. Relatively Inelastic Demand

%ΔD -
E<1
%ΔP

3. Elastic Demand >1

% change in
% change in price
demand

4. Unitary Elastic Demand

% change in % change in price

demand

5. Perfectly Elastic Demand

%ΔD=∞

% Δ P = Slight

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
P Q Situation 1:- Price of a commodity rises from 10 to 15.
10 20 Situation 2:- The price of the commodity falls from 15 to 10.
15 10
Calculate Price Elasticity.

Mid-point Elasticity
Arc Elasticity
𝑛𝑒𝑤 𝑝𝑟𝑖𝑐𝑒−𝑜𝑙𝑑 𝑝𝑟𝑖𝑐𝑒 P Q
𝑛𝑒𝑤 𝑝𝑟𝑖𝑐𝑒+𝑜𝑙𝑑 𝑝𝑟𝑖𝑐𝑒
2 10 20
𝑛𝑒𝑤 𝑝𝑟𝑖𝑐𝑒−𝑜𝑙𝑑 𝑝𝑟𝑖𝑐𝑒
𝑛𝑒𝑤 𝑝𝑟𝑖𝑐𝑒+𝑜𝑙𝑑 𝑝𝑟𝑖𝑐𝑒 15 10
2
Calculate Price Elasticity.

Situation 1: When price rises from 10 to 15.

Situation 2: When price fall from 15 to 10.
As we can see in both the situations elasticity is different for the same product
there is need to determine only one elasticity in any of the situation.
Note: As observed in the above situation the numerators are same but
denominators are different. Therefore we get different elasticity in different
situations.

Income Elasticity
Income is the basis of affecting demand.
𝛥𝐷 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑
Formula: (i) =
𝛥𝐼 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒.

% 𝛥𝐷
(ii) -I
%𝛥𝐼
𝑛𝑒𝑤 𝑑𝑒𝑚𝑎𝑛𝑑−𝑜𝑙𝑑 𝑑𝑒𝑚𝑎𝑛𝑑
𝑜𝑙𝑑 𝑑𝑒𝑚𝑎𝑛𝑑
𝑥100
(iii) 𝑛𝑒𝑤 𝑖𝑛𝑐𝑜𝑚𝑒−𝑜𝑙𝑑 𝑖𝑛𝑐𝑜𝑚𝑒
𝑜𝑙𝑑 𝑖𝑛𝑐𝑜𝑚𝑒
𝑥100

Cross Elasticity (Price Of Related Commodity)

1. Substitute:- Price of related commodity is the basis affecting demand of
original commodity.

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
𝐷𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦
Formula: (i)
𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑟𝑒𝑙𝑎𝑡𝑒𝑑 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦

𝛥𝐷𝑜 %𝛥𝐷𝑜
(ii)
𝛥𝑃𝑟 %𝛥𝑃𝑟
𝑛𝑒𝑤 𝑑𝑒𝑚𝑎𝑛𝑑𝑜−𝑜𝑙𝑑 𝑑𝑒𝑚𝑎𝑛𝑑𝑜
𝑥100
𝑜𝑙𝑑 𝑑𝑒𝑚𝑎𝑛𝑑𝑜
(iii) 𝑛𝑒𝑤 𝑝𝑟𝑖𝑐𝑒𝑟 −𝑜𝑙𝑑 𝑝𝑟𝑖𝑐𝑒𝑟
𝑥100
𝑜𝑙𝑑 𝑝𝑟𝑖𝑐𝑒𝑟

2. Complementary:
Determinants of price elasticity
(a) Availability of Substitute
(b) Position in Commodity in Budget
(c) Nature of Needs
(d) Number of Uses

Exception to the Law of Demand

According to the law of demand, other things being equal, more of a
commodity will be demanded at lower prices than at higher prices. The law of
demand is valid in most cases; however there are certain cases where this law
does not hold good. The following are the important exceptions to the law of
demand.
(i) Conspicuous goods: Articles of prestige value or snob appeal or articles of
conspicuous consumption are demanded only by the rich people and these
articles become more attractive if their prices go up. Such articles will not
conform to the usual law of demand. This was found out by Veblen in his
doctrine of *Conspicuous Consumption and hence this effect is called Veblen
effect or prestige goods effect. Veblen effect takes place as some consumers
measure the utility of a commodity by its price le, if the commodity is
expensive they think that it has got more utility. As such, they buy less of this
commodity at low price and more of it at high price. Diamonds are often given
as an example of this case. Higher the price of diamonds, higher is the prestige
value attached to them and hence higher is the demand for them.
(ii) Giffen goods: Sir Robert Giffen, a Scottish economist and statistician, was
surprised to find out that as the price of bread increased, the British workers
purchased more bread and not less of it. This was something against the law of

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
demand. Why did this happen? The reason given for this is that when the price
of bread went up, it caused such a large decline in the purchasing power of the
poor people that they were forced to cut down the consumption of meat and
other more expensive foods. Since bread, even when its price was higher than
before, was still the cheapest food article, people consumed more of it and not
less when its price went up.
Such goods which exhibit direct price-demand relationship are called 'Giffen
goods. Generally those goods which are inferior, with no close substitutes
easily available and which occupy a substantial place in consumer's budget are
called 'Giffen goods. All Giffen goods are inferior goods; but all inferior goods
are not Giffen goods. Inferior goods ought to have a close substitute. Moreover,
the concept of inferior goods is related to the income of the consumer i.e. the
quantity demanded of an inferior good falls as income rises, price remaining
constant as against the concept of giffen goods which is related to the price of
the product itself. Examples of Giffen goods are coarse grains like bajra, low
quality rice and wheat etc.
iii) Conspicuous necessities: The demand for certain goods is affected by the
demonstration effect of the consumption pattern of a social group to which an
individual belongs. These goods, due to their constant usage, become
necessities of life. For example, in spite of the fact that the prices of television
sets, refrigerators, coolers, cooking gas etc. have been continuously rising, their
demand does not show any tendency to fall.
(iv) Future expectations about prices: It has been observed that when the
prices are rising, households expecting that the prices in the future will be still
higher, tend to buy larger quantities of such commodities. For example, when
there is wide-spread drought, people expect that prices of food grains would
rise in future. They demand greater quantities of food grains as their price rise.
However, it is to be noted that here it is not the law of demand which is
invalidated but there is a change in one of the factors which was held constant
while deriving the law of demand, namely change in the price expectations of
the people.
(v) The law has been derived assuming consumers to be rational and
knowledgeable about market- conditions. However, at times, consumers tend
to be irrational and make impulsive purchases without any rational calculations

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
about the price and usefulness of the product and in such contexts the law of
demand fails.
(vi) Demand for necessaries: The law of demand does not apply much in the
case of necessaries of life. Irrespective of price changes, people have to
consume the minimum quantities of necessary commodities.
Similarly, in practice, a household may demand larger quantity of a commodity
even at a higher price because it may be ignorant of the ruling price of the
commodity. Under such circumstances, the law will not remain valid. For
example Food, power, water, gas.
(vii) Speculative goods: In the speculative market, particularly in the market for
stocks and shares, more will be demanded when the prices are rising and less
will be demanded when prices decline.
The law of demand will also fail if there is any significant change in other
factors on which demand of a commodity depends. If there is a change in
income of the household, or in prices of the related commodities or in tastes
and fashion etc., the inverse demand and price relation may not hold good.

Supply
Supply refers to the amount of a goods or services that the producers are
willing and able to offer to the market at various prices during the given period
of time.
Determinants Of Supply
1. Price of the Goods
P(increase) S(increase) Direct
P(decrease) S(increase) Relationship

2. Price Of Related Goods

P(increase) S(increase) Direct
P(decrease) S(decrease) Relationship

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
3. Price of Factors of Production
Land, Labour, Capital
Rent Wages Interest P(increase) S(decrease)
Indirect
(Increase) P(decrease) S(increase) Relationship

4. State of Technology
T(increase) S(increase)
T(decrease) S(decrease)

5. Government Policy
Tax(increase)Supply(decrease)
Tax(decrease)Supply(increase)

6. Nature and Size of Industry

Competition(increase)Supply(increase) (Direct Relationship)

Competition(decrease)Supply(decrease)

Law of Supply
Other things remaining constant the quantity of a goods produced and offered
for sale will increase as the price of the goods rises and decreases as the price
falls. {P(increase)S(increases)--P(decreases)S(decreases)}

Theory Of Consumer Behaviour

Introduction

Human Wants are Unlimited.

Resources are Limited.
Not all human wants can be satisfied.
Q. Which product/goods a consumer will demand?
Ans. He will demand those goods which has wants satisfying power.

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Utility

≠Satisfaction ≠Usefulness ≠Pleasure

Utility = Anticipated Satisfaction

Alfred Marshall Hicks and Allen

Law of Diminishing Marginal Utility Indifference Curve Analysis
Cardinal Utility Ordinal Approach
Law of Diminishing Marginal Utility
Assumptions
(a) Utility can be measured in Utils. Ordinal Approach

(b) Basis – Measuring Rod – Money.

(c) Marginal Utility of Money – Constant.
(d) Total Utility: – Addition of Marginal Utlity.
(e) Marginal Utility: – Additional Utility derived from the consumption of one
extra unit.
Formula:- 1. 𝑇𝑈𝑛 − 𝑇𝑈𝑛−1
𝛥𝑇𝑈
2.
𝛥𝑄

Relationship between TU and MU

1. TU(increase), MU (decrease)
2. TU=Max, MU=Zero
3. TU(decrease), MU=-ve(negative)
Chocolate Marginal Utility Summation MU TU Money Utility
(Unit)
1 60 60 50
2 40 100 50

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
3 20 120 50
4 0 120 50
5 -10 110 50

Assumptions of Diminishing Marginal Utility

1. Homogeneous in nature.
2. Size should be Reasonable.
3. Continuous Consumption
4. Taste/Preference – Constant
Exception
1. Drunkard
2. Money
3. Miser
4. Hobbies
5. Education
6. Music

Consumers Equilibrium
Consumer’s Equilibrium refers to a situation when a consumer gets maximum
satisfaction by spending his given income across different goods and services.
i.e., Marginal Utility = Market Price
Ice-Cream
MP 𝑀𝑃1 𝑀𝑃2 Qty MU
10 30 5 1 30
10 30 5 2 10
10 30 5 3 5
10 30 5 4 0

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester

Consumer Surplus
Consumer is Ready to Pay - What Actually the Consumers Pay
= Consumer Surplus
The difference between what consumer is ready to pay and what consumer
actually pays is called consumer surplus.
Consumer Equilibrium in case of one commodity
𝑀𝑈𝑥 = 𝑃𝑥
Units Price MU Remark
1 10 20 MU>P
2 10 16 MU>P
3 10 10 MU=P
4 10 4 MU<P
In the case of single commodity, the consumer attains an equilibrium position
when the marginal utility of a goods in terms of money gets equivalent to the
price of that goods.
Consumers Equilibrium in Case of Two Commodity Case
(Law of Equi-Marginal Utility)
Consumers spending his entire income across two goods attains equilibrium at
a point where MU derived from the last unit of both the goods is equal.

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
e.g.,
Pizza Hot Chocolate Cake
MU 500 100 300
Price 250 50 100
(Situation- 1) (Situation- 2)
𝑀𝑈𝑃 𝑀𝑈𝐻𝐶 𝑀𝑈𝐻𝐶 𝑀𝑈𝐶
Formula:- = =
𝑃𝑃 𝑃𝐻𝐶 𝑃𝐻𝐶 𝑃𝐶
500 100 100 300
= =
250 50 50 100

2=2 2≠3

Indifference Curve Analysis: (Hicks and Allen) Ordinal Approach

An indifference curve is a curve which represents all those combination of two
goods which give same satisfaction to the customers.
Assumptions
1. The Consumer is rational and possesses full information about all relevant
aspect.
2. The Consumer is capable of ranking all conceivable combination of goods
according to the satisfaction they yield.
3. If the Consumers prefers combination A to B and B to C then he must prefer
combination A to C.
4. The Combination which has more goods which give more satisfaction.
Illustration
Combination Food Clothing MRS
A 1 12 -
B 2 6 6
C 3 4 2
D 4 3 1
MRS stands for Marginal Rate Of Substitution

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Properties
(a) Indifference Curve slopes downward to the right.
(b) Indifference Curve are always convex to the origin because of diminishing
Marginal Rate of Substitution.

(c) Indifference Curve never touches either of the axis because it cannot be in 0
as it shows the combination of two goods.
(d) Indifference Curve never intersect each other.

(e) A higher indifference curve represents a higher level of satisfaction than the
lower indifference curve.
Indifference Map
An indifference map represents a collection of many indifference curves where
each curve represent a certain level of satisfaction.

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Budget Line/ Price Line
Budget line is a graphical representation of all possible combinations of two
goods which can be purchased with given income and prices such that the cost
of each of these combination is equal to money Income of the consumer.

Consumer Equilibrium under Indifference Curve

When the budget line is tangent to the indifference curve a consumer will be in
equilibrium.

Assumptions:
(a) Consumer is rational.
(b) Income of the Consumer is Constant.
(c) Goods are substitute to each other.
(d) Consumer preference for two goods is well defined.

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Theory Of Production Function
Production Function
Input (Raw Material) ----------- Activity ------------- Output
(Independent) (Dependent)
Production Function states the functional relationship between input and
output i.e., the maximum amount of output can be produced with given
quantities of input under a given state of technical knowledge.
Production is always associated with the technology. Rational Producers always
uses best possible techniques to produce maximum quantity with a given
combination of input.
Production Function

Short Run Long Run

Too Short Planning Period
Capital-fixed Law Of Returns to Scale
Other factor - Variable
Law Of Variable Proportion
In Short Run, firm can changed its output by changing only variable factors. For
variables factors we need Labours, Raw materials, Used in production. Fixed
factors includes Land and Building, Plant and Machinery, etc.
In Short Run period of time which is too short for a firm to install a new capital
equipment to increase production.
Long Run firm can change its output by changing all factors of production both
Fixed and Variable. The Long Run is a period of time or Planning Horizon in
which all the factors of production are Variable.
Short Run Production Function explains the affect on output when one factor
is changing keeping all others constant.
Long Run Production Function explains the affect on output when all factors of
production are changing in equal proportion.

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Assumptions of Production Function
1. It is Related to a particular unit of time.
2. The technical knowledge during that period of time remains constant.
3. The producer is using the best techniques available.
3 Concepts
1. Total Product (TP)
Total Product(TP) refers to the amount of quantity of a commodity that
a firm produces with a combination of inputs in a given time.
2. Average Product (AP)
Average Product(AP) refers to total product per unit of variable factor.
𝑇𝑃 𝑇𝑃
AP = =
2 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑓𝑎𝑐𝑡𝑜𝑟

3. Marginal Product (MP)

Marginal Product(MP) refers to additional Total Product(TP) obtained from
one extra unit of a variable factor.
𝛥𝑇𝑃 𝛥𝑄
MP = =
𝛥𝑙 𝛥𝑙

e.g., If we assume 7 Labours produces 70 Chairs per month than Tp = 70 units

assuming Labours to be Variable factors.
70
Ap = = 10 Units.
7

Now, if 8 Labours are used Tp increases to 74 units.

74−7
Mp = =4
8−7

Law Of Variable Proportion

Statement: In Short Run, When one factor is variable and other is Fixed, Tp at
First increases at an Increasing Rate, then Tp increases at a decreasing rate,
reaches maximum, remains constant and ultimately declines. In other words,
both AP and MP eventually diminishes.

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Assumptions
i. One factor variable and other are fixed.
ii. Technology remains constant.
iii. Variable factor is homogeneous.
iv. Factor proportion is variable.
Let us explained Law of Variable Proportions by an example.
𝑇𝑝
Labour Capital TP AP ( ) MP
𝑙
0 1 0 - -
1 1 10 10 10
2 1 24 12 14
3 1 41 13.7 17
4 1 56 14 15
5 1 70 14 14
6 1 78 13 8
7 1 84 12 886
8 1 88 11 4
9 1 90 10 2
10 1 90 9 0
11 1 88 8 -2
Relationship between Total Product(TP) and Marginal Product(MP)
i. So long as Total Product(TP) increases at increasing rate, Marginal
Product(MP) increases and positive.
ii. When Total Product(TP) increases at decreasing the Marginal
Product(MP) decreases and positive.
iii. When Total Product(TP) is maximum and constant Marginal Product(MP)
equal to zero. (MP = 0)
iv. When Total product(TP) diminishes Marginal product(MP) is negative.
Relationship between Average product and Marginal product
i. So long as Average product is rising, Marginal product is greater than
Average product.
ii. When Marginal product is equal to Average product, Average product is
maximum and constant.
iii. When Average product decreases, then Marginal product is less than
Average product.

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
The Above point indicate Marginal product curve reaches maximum earlier
then Average product curve.

Stage 1:- Increasing returns to a factor

In this Stage, Average product continues to rise, Total product initially increases
at increasing rate, then increases at diminishing rate. From A to point B along
the Total product curve. In this stage, Marginal product curve always remains
above the Average product curve. Stage-1 ends at Average product reaches
maximum. No producer could like to finds it equilibrium in this stage. Firm
would like to continue production in this stage.
Stage 2:- Diminishing returns to a factor
In this stage, Total Product continues to rise at a decreasing rate, Average
product and Marginal product both diminishes, Marginal product diminishes at
a faster rate then the rate of fall in Average product. Producers would like to
find its equilibrium in this stage. Total product reaches maximum at point C and
Marginal product become negative. The stage is most desired Stage of
operation.
Stage 3:- Negative returns to a factor
In this stage Total product diminishes, Marginal product becomes negative and
Average product continues to fall. No rational producer would like to continue
production in this stage.
Hence; In short run, a producer will always try to operate in stage 2.

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Returns to Scale
Q.1. What is meant by Returns to Scale? What are its different types? (5)
Ans. In Long run, all factors are increased in equal proportion. It is called
change in the scale of production. The resultant change in output due to
change in scale of production called returns to scale.
There are 3 types of Returns to Scale:-
i. Increasing Returns to Scale (IRS)
Definition: When rate of increase in output is more than the rate of increase
in input, it is called Increasing Returns to Scale(IRS). For example,

Input Output
1L+1K = 10 Units
2L+2K = 25 Units

In the above example, input have been increased at equal rate of 100% but
Output increased by 150%. It is clear in case of IRS.
ii. Decreasing Returns to Scale(DRS)
When rate of Increase in Output is Less than the rate of Increase in input.
It is called Decreasing Returns to Scale(DRS). For example,
Input Output
1L+1K = 10 Units
2L+2K = 15 Units

In the above example, Input have been increased at the rate of 100% but
output increased By only 50%.
iii. Constant Returns to Scale(CRS)
When rate of increase in output is equal to increase in input. It is called
Constant Returns to Scale(CRS). For example, Input Output
1L+1K = 10 Units
2L+2K = 20 Units

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 MICROECONOMICS-I
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In the above example, Output have been increase at the equal rate of input by
100%. It is clear case of Constant Returns to Scale(CRS).

Q. What do you mean by Isoquants?

Ans. Isoquants are similar to indifference curve of the theory of consumer
behaviour. An isoquant represents all those combination of input which
are capable of same level of output. Isoquant are also called equal
product or Iso-product curve. Since, An equal product curve represents all
those combinations of input which yield an equal quantity of output.
Combination Factor (x) Factor (y)
A 1 12
B 2 8
C 3 5
D 4 3
E 5 2

Theory Of Cost
Definition Of Cost
The expense incurred for producing commodity by a firm is called cost.

Different Cost Concept

(i) Explicit / Accounting Cost
The actual expenditure on different factors of production that are hired
or purchase called Explicit Cost or Accounting Cost.
For example, Wages of Workers
(ii) Implicit Cost
The estimated cost of factor supplied by the owner of the firm for which
no payments are done called Implicit Cost.
For e.g., Salary of the owner working as a manager in his own firm.

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
(iii) Economic cost
Explicit Cost + Implicit Cost
(Including Net Profit)
(iv) Opportunity Cost
Opportunity cost refers to the cost of foregone opportunity. It involves a
comparison between the Policy that was chosen and the policy that was
rejected. They are not recorded in the books of Account.
(v) Real Cost
Real cost refers to the cost of pain, sacrifice, discomfort, etc. Involved in
providing factor services towards production of a commodity.
(vi) Direct Cost
Cost that are readily identified and are tracable to a particular product,
operation or plant is termed as Direct Cost.
(vii) Indirect Cost
Cost which are not readily identified nor visibly tracable to specified
goods, services, operation, etc.

Total Cost Analysis

Total Cost = Total Fixed Cost + Total Variable Cost
(i) Total Fixed Cost
The cost of fixed factors of production called Fixed Cost. Such cost exists
when there is no production. Total Fixed Cost is also known as Overhead Cost
Or Unavoidable Cost. For e.g., Rent, License Fee, EMI, etc.
(ii) Total Variable Cost
The cost of variable factors of production called variable cost. Such cost
changes directly with quantity.
Variable cost is nil when there is no production. For e.g., Cost of raw
materials, Electricity Charges, Fuel, Transportation Charges, etc.

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 MICROECONOMICS-I
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Features of Total Fixed Cost
(i) Total Fixed Cost = 120 for 20.
(ii) Total fixed cost always remains constant.

Features of Total Variable Cost

(i) Total Variable Cost = 0 for Q = 0
(ii) Total Variable Cost first increases at decreases rate.
(iii) Total Variable Cost then decreases at Increasing rate.

Features of Total Cost

(i) When there is number of product Total cost of the firm is 250? What is the
Fixed cost of the firm.
(ii) Total Cost - Total Variable Cost = Total Fixed Cost. (Constant)
(iii) Total Cost - Total Fixed Cost = Total Variable Cost. (Rising)
(iv) Total Cost Curve is identical to Total Variable Cost Curve.

Cost function
The general form of cost function is dependent -- C(x) = F + V(x) -- Independent
(Output) (Cost)
• It expresses the relationship between cost and output.
• The Cost function refers to the mathematical relation between cost of a
product and the various determinants of cost.
• Cost function are of two kinds. They are:

(i) Short run cost function

(ii) Long run cost function
Short Run Cost Function
(i) Average Fixed Cost(AFC)
Average fixed cost is the Fixed cost per unit of quantity produced.
𝑇𝐹𝐶
Formula:
𝑞

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Nature:
(i) Average fixed cost continuously diminishes.
(ii) Average fixed cost can never be 0. Total fixed cost is unavoidable to short
run. Hence, Average fixed cost curve will never touch X axis.
(iii) Average fixed cost curve never touches ‘y’ axis because at 0 quantity
Average fixed cost is undefined.
Average Variable Cost(AVC)
Average variable cost is the variable cost per unit of quantity produced.
𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡(𝑇𝑉𝐶)
Formula: Average variable cost(AVC) = = AVC x q = TVC
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦(𝑞)

Nature:-
(a) Average variable cost is U shaped due to Law of variable proportion.
Average Cost(AC) / Average Total Cost(ATC)
Average cost is the sum of average variable cost and Average Fixed cost i.e.,
Average Cost = Average Fixed Cost + Average Variable Cost. Average Cost is the
Total cost per unit of quantity produced.
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑇𝐶) 𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡(𝑇𝐹𝐶)+𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡(𝑇𝑉𝐶)
Formula = =
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦(𝑞) 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦(𝑞)

Nature:
(i) Average cost is U Shaped Like Average Variable Cost(AVC).
(ii) Average cost always greater than Average Variable cost and Average Fixed
cost.
(iii) The difference between Average cost and Average Variable cost
continuously diminishes because Average Fixed cost continuously diminishes.
Marginal Cost(MC)
Marginal cost is the additional cost incurred to produce one extra unit of a
commodity.
𝜟𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕(𝑻𝑪)
Formula: MC =
𝜟𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚(𝑸)

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Nature:
(i) Marginal cost is U shaped due to Law of Variable proportion.
(ii) When Average cost is constant, then Marginal cost = Average cost
(iii) When Average cost is increases, Marginal product is greater than Average
cost

𝑇𝐹𝐶 𝑇𝑉𝐶 𝑇𝐶
Q TFC TVC TC AFC ( ) AVC ( ) AC ( )
𝑄 𝑄 𝑄
0 120 0 120 - - -
1 120 20 140 120 20 140
2 120 30 150 60 15 75
3 120 30 150 40 10 50
4 120 48 168 30 12 42
5 120 65 185 24 13 37
6 120 84 204 20 14 34
7 120 118 238 17 16 34
8 120 200 320 15 25 40

Relationship between Average cost And Marginal cost.

(i) When Average cost Falls, Marginal cost is Less than Average cost.
(ii) When Average cost rises, Marginal cost is more than Average cost.
(iii) When Average cost is minimum, Marginal cost is equal to the Average cost.
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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Iso Cost
Iso cost represents the prices of the factor. It shows various combination of two
factor, which the firm can buy with given budget. For e.g,
Budget – Rs.1000
Factor(x) – Rs.100
Factory – Rs.200
Combination Factor (x) Factory
A 4 3
B 2 4
C 6 2

Long Run Average Cost

Long Run Cost of production is the Least possible cost of producing any given
Level of Output. It is often called a planning curve because a firm plans to
produce any output in the Long run by choosing a plant on the Long run
average cost curve corresponding to given output. The long run average cost
curve helps the firm in the choice of the output at the Least possible cost.

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Revenue And Market
Meaning of Market
Market can be defined as all those buyers and sellers of a goods or services
that influences the price.
Classification of Market
In economics, generally the classification is made on the basis of:
➢ Area
➢ Time
➢ Nature of Transaction
➢ Regulation
➢ Volume of Business
➢ Types of Competition

Area
→ Local Market: Markets for perishable goods Like Butters, Eggs, Milks,
Vegetables are Local Markets.
→ Regional Market: Semi-durable goods generally command a regional
market. E.g., Clothes, Umbrella.
→ National Market: In this market, Durable Goods and Industrial Items are
exchanged. E.g., TV, AC, Car, etc.
→ International Market: Precious Commodities Like Gold, Silver, Diamond
are traded in International Market.
Time Period Market
→ Very Short: It refers to that type of market in which the commodities are
Perishable and supply of commodities cannot be changed.
→ Short: Short period is a period which is slightly Longer than the very
short period, the supply of the output will be increased by increasing the
employment of variable factor.
→ Long: It implies that the time available is adequate for altering the
supplies by altering even the fixed factor of production.
→ Very Long: Period which is Secular movement are recorded in certain
factors over a period of time. The Period is Very Long.

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Nature Of Transaction
→ Spot Market: Sport market refers to those market where goods are
transacted on the spot.
→ Future Market: It is related to those transaction which involves contracts
of a Future date.
Regulation
→ Regulated Market: In this market, transaction are regulated so as to put
an end to unfair practices. E.g., Stock Exchange
→ Unregulated Market: It is also called Free market as there are no
restriction on the transaction.
Volume Of Business
→ Wholesale Market: The Wholesale Market is the market where the
commodities are bought and sold in bulk and Large Quantity.
→ Retail Market: When the commodities are sold in small Quantities are
called retail market.

Competition

Perfect Imperfect

Perfect Monopoly Monopolistic

Competition
Oligopoly

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 MICROECONOMICS-I
Bcom(Hons&Gen) 1st Semester
Revenue
Revenue is the income generated from sale of commodity.
There are 3 Concepts of Revenue:
1. Total Revenue(TR): Total Revenue(TR) refers to the total amount of income
earned from sale of a Level of Quantity at a particular price.
Total Revenue(TR) = Price x Quantity
2. Average Revenue(AR): Average Revenue(AR) is the revenue earned by per
unit of Quantity sold.
Total Revenue(TR) 𝑃𝑟𝑖𝑐𝑒(𝑃)𝑥𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦(𝑞)
Average Revenue = =
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦(𝑞) 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦(𝑞)

Total Revenue(TR)
Average Revenue(AR) = Or Price(P)
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦(𝑞)

Hence, Average Revenue(AR) is same as Price(P).

3. Marginal Revenue(MR): Marginal Revenue(MR) Is the change in Total
Revenue(TR) due to sale of one extra unit.
𝛥𝑇𝑅
Marginal Revenue(MR) =
𝛥𝑄

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