Core Commerce – Micro‑Economics
BBA – Semester 1 (Core Commerce)
Micro‑economics studies how individual agents (households, firms) make decisions and interact in markets. It explains price formation, resource allocation, and trade‑offs that shape the economy at the micro‑level.
1. Simple Explanation
- Agents: Consumers (individuals, households) and producers (firms, businesses).
- Decision‑making: Consumers choose what to buy; producers decide what to produce and at what price.
- Scarcity & Choice: With limited resources, agents trade off between alternatives.
- Markets: Places (physical or virtual) where buyers and sellers meet; prices emerge from supply and demand.
- Equilibrium: The point where quantity demanded equals quantity supplied; no incentive to change.
2. Key Concepts & Points
| Concept | Definition | Key Take‑away |
|---|---|---|
| Demand | Relationship between price and quantity demanded, ceteris paribus. | Downward sloping; higher price → lower demand. |
| Supply | Relationship between price and quantity supplied. | Upward sloping; higher price → higher supply. |
| Equilibrium Price/Quantity | Intersection of supply & demand curves. | Determines market outcome. |
| Price Elasticity of Demand (PED) | % change in quantity demanded / % change in price. | |
| Income Elasticity of Demand (YED) | % change in quantity demanded / % change in income. | |
| Cross‑Price Elasticity (XED) | % change in quantity demanded of good A / % change in price of good B. | Positive → substitutes; Negative → complements. |
| Consumer Surplus (CS) | Difference between what consumers are willing to pay and what they actually pay. | Indicator of welfare. |
| Producer Surplus (PS) | Difference between price received and minimum price willing to accept. | Indicator of welfare. |
| Cost Functions | Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC). | Marginal Cost (MC) = ∂TC/∂Q. |
| Profit Maximisation | Choose Q where MC = MR (Marginal Revenue). | MR = price in perfect competition. |
| Market Structures | 1) Perfect Competition 2) Monopoly 3) Oligopoly 4) Monopolistic Competition. | Characterised by number of firms, product differentiation, barriers to entry. |
| Externalities | Costs/benefits of an activity borne by third parties. | Positive externality → under‑provision; negative → over‑provision. |
| Public Goods | Non‑rival, non‑excludable. | Free‑rider problem; typically government provision. |
| Taxation & Subsidies | Government tools to correct market failures or redistribute income. | Distortions → dead‑weight loss. |
3. Worked Example – Demand, Supply, Equilibrium & Elasticity
Scenario
A local coffee shop sells mugs.
- Demand function: ( Q_d = 120 - 4P )
- Supply function: ( Q_s = 3P + 30 )
Where ( P ) is price per mug (in ₹), ( Q ) is quantity (in mugs).
3.1 Find the market equilibrium
Set ( Q_d = Q_s ):
[ 120 - 4P = 3P + 30 \ 120 - 30 = 7P \ 90 = 7P \ P^* = 12.86\ \text{₹} ]
Plug ( P^* ) back to find equilibrium quantity:
[ Q^* = 120 - 4(12.86) = 120 - 51.44 = 68.56 \text{ mugs} ]
So, equilibrium price ≈ ₹12.86, quantity ≈ 69 mugs.
3.2 Price Elasticity of Demand at equilibrium
Demand slope ( dQ/dP = -4 ).
PED formula:
[ PED = \frac{dQ/dP \times P}{Q} ]
Using equilibrium values:
[ PED = \frac{-4 \times 12.86}{68.56} = \frac{-51.44}{68.56} = -0.75 ]
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PED = –0.75 → demand is inelastic (|PED| < 1). A 10 % price increase will reduce quantity demanded by about 7.5 %.
3.3 Consumer & Producer Surplus
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CS: Area above price line and below demand curve up to equilibrium quantity.
[ CS = \frac{1}{2}(Q^)(P_{\text{max}}-P^) ] where ( P_{\text{max}} ) is choke price (where demand = 0).
Choke price: ( 120 - 4P = 0 \Rightarrow P_{\text{max}} = 30 ).[ CS = \frac{1}{2}(68.56)(30-12.86) = 34.28 \times 17.14 = 588.5 \text{ ₹} ]
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PS: Area below price line and above supply curve up to equilibrium quantity.
Supply intercept at ( Q = 0 \Rightarrow 0 = 3P + 30 \Rightarrow P_{\text{min}} = -10 ) (negative, so treat as price zero).[ PS = \frac{1}{2} Q^* (P^* - 0) = \frac{1}{2} (68.56)(12.86) = 34.28 \times 12.86 = 441.2 \text{ ₹} ]
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Total Surplus: ( CS +