Microeconomics – Study Notes
(CS Executive – Economics & Finance)
1. Simple Explanation
Microeconomics is the branch of economics that studies individual economic agents (households, firms, and markets) and how they interact to make decisions about what, how, and for whom to produce. It focuses on:
- Demand – how much consumers want to buy at each price.
- Supply – how much producers are willing to sell at each price.
- Market Equilibrium – the price and quantity where demand meets supply.
- Costs & Profits – how firms decide production levels.
- Market Structures – how the number of firms and product differentiation affect prices and output.
2. Key Points
| Concept | Definition | What It Matters For |
|---|---|---|
| Demand Curve | Downward‑sloping relationship between price (P) and quantity demanded (Q). | Shows consumer willingness to pay. |
| Supply Curve | Upward‑sloping relationship between price (P) and quantity supplied (Q). | Reflects production costs and incentives. |
| Market Equilibrium | The point where quantity demanded equals quantity supplied (Qd = Qs). | Determines the market price and quantity. |
| Elasticity | Sensitivity of quantity demanded/supplied to changes in price or income. | Helps firms set pricing and anticipate tax/ subsidy effects. |
| Consumer Surplus | Difference between what consumers are willing to pay and what they actually pay. | Measures consumer welfare. |
| Producer Surplus | Difference between the price received and the minimum price producers are willing to accept. | Measures producer welfare. |
| Costs | • Fixed Costs (FC) – do not vary with output (e.g., rent). • Variable Costs (VC) – vary with output (e.g., raw materials). • Total Cost (TC) = FC + VC |
Determines production decisions and profit maximisation. |
| Marginal Cost (MC) | Extra cost of producing one more unit. | Key to decide optimal output (where MC = MR). |
| Marginal Revenue (MR) | Extra revenue from selling one more unit. | In perfect competition MR = P; in imperfect competition MR < P. |
| Profit Maximisation | Choose output where MC = MR. | Ensures maximum profit. |
| Market Structures | • Perfect Competition – many firms, identical products, free entry/exit. • Monopolistic Competition – many firms, differentiated products. • Oligopoly – few large firms, interdependent decisions. • Monopoly – single firm, high barriers to entry. |
Determines pricing power and efficiency. |
| Efficiency | • Allocative Efficiency – resources used for goods consumers value most. • Productive Efficiency – goods produced at lowest possible cost. |
Goals of market outcomes. |
3. Worked Example – Supply & Demand, Elasticity, and Profit Maximisation
3.1 Scenario
A small bakery sells croissants.
- Demand: ( Q_d = 200 - 5P ) (units per day)
- Supply: ( Q_s = 20 + 4P ) (units per day)
- Cost Structure:
- Fixed cost (FC) = $100/day
- Variable cost per croissant (VC) = $1.20
- Total Cost ( TC = FC + VC \times Q )
3.2 Find Market Equilibrium
Set ( Q_d = Q_s ):
[ 200 - 5P = 20 + 4P \ 200 - 20 = 5P + 4P \ 180 = 9P \ P^* = 20 ]
Plug back to find equilibrium quantity:
[ Q^* = Q_d = 200 - 5(20) = 200 - 100 = 100 \text{ croissants} ]
Result: Market equilibrium price ( $20 ) per croissant, quantity ( 100 ) croissants/day.
3.3 Price Elasticity of Demand
Elasticity formula (point elasticity):
[ E_d = \frac{dQ}{dP} \times \frac{P}{Q} ]
Here ( dQ/dP = -5 ). At equilibrium ( P = 20, Q = 100 ):
[ E_d = (-5) \times \frac{20}{100} = -1 ]
Interpretation: Unit‑elastic demand; a 1% price increase → 1% drop in quantity demanded.
3.4 Profit Maximisation
- Revenue: ( R = P \times Q = 20 \times 100 = $2,000 )
- Total Cost:
[ TC = 100 + 1.20 \times 100 = 100 + 120 = $220 ] - Profit:
[ \pi = R - TC = 2000 - 220 = $1,780 ]
Check MC = MR
- MC: derivative of TC w.r.t Q → ( MC = VC = $1.20 ) (constant).
- MR: derivative of R w.r.t Q → ( MR = P = $20 ) (since price fixed in perfect competition).
Since ( MR > MC ) at every output level, the firm would increase output until the market price changes. In this simplified example, the equilibrium price already reflects that condition.
4. Quick Revision Summary
| Topic | Take‑away |
|---|---|
| Demand | Downward slope; higher price → lower quantity demanded. |
| Supply | Upward slope; higher price → higher quantity supplied. |
| Equilibrium | Intersection of demand & supply; determines price & quantity. |
| Elasticity | Measures responsiveness; |
| Consumer & Producer Surplus | Welfare measures; larger surplus = better welfare. |
| Costs | FC + VC = TC; MC = change in TC per unit. |
| Profit Maximisation | Produce where |