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Unit-1: Introduction to Microeconomics

Notes

Microeconomics is the smallest study of the economy.

Vastly, co-relation among different markets is taken into consideration so that all the prices could be
determined at a time. Although, it is usually said that microeconomics is related to partial equilibrium
analysis which studies equilibrium condition of a person, a firm and an industry, it is also the study
of their natural relation and mutual dependence in the economy which comes under the preview of
general equilibrium analysis. So microeconomics is the study of mutual interdependence of prices
of individual consumers, firms and industries related goods, factor price, their demand and supply
and costs.
First, a consumer market in which quantity demand of the product does not depend only on its availability
but also on the price of every other product available in the market. In this market, consumers meet with
producers to buy the product in which consumers purchase and producers sell the prouduct. Consumer
demand of the different goods depends on its own prices and prices of the service, which they provide.
In other words; a consumer earns income by selling his produced services and creates demand for the
products. The price at which goods are sold depends upon its production costs further, production
costs depend upon different services, which are used to produce the goods, their quantities and their
remuneration. In this way, supply of goods in the market depends on the cost of production of the firm
and price of quantities of their different services.
Second in producer markets or factor market, factors of production are demanded by producers and
supplied by consumers. Quantity of factor used for the production of a product depends upon the
relation between its price, prices of other factors and prices of goods. Here production meets labourers,
capitalists, land owners and owners of other resources. In this market, monetary income is earned by
resources’ owners who sell them. They are lamely consumers. In this way, microeconomics studies the
mutual relation of consumers, producers and owners of resources. In this system, all prices are related
to each other. Change in any one price creates disturbance which affects both product and resource
market. Inter relation between resources and product market through prices is shown in the Fig 1.1. In
this way, macroeconomics is the study of natural interdependence among product price, resource price,
their demand supply and cost, which are related to individual consumers, firms and industry.
Besides this, microeconomics also studies how efficiently various resources are distributed between
individual consumers and producers. Efficiency of distribution of resources is related to study of
welfare economics. It includes the study of efficiency in the consumption, affiance in production and
overall efficiency in consumption and production. Efficiency of production and consumption is related
to individual welfare and over all efficiency is related to social welfare, welfare of individual consumer
is maximized when it could be improved with any redistribution of resources without deteriorating
situation of any other individual. An individual producer attains efficiency in production when he
is able to increase the production of a particular product by redistribution of resources, without
hampering the production of other goods. Overall efficiency which is also known as social welfare
or pareto-optimality is related to overall improvement in economic efficiency of society which leads
to increase in social welfare of society which leads to increase in social welfare when redistribution
of resource results in better condition of society without distributing situation of any individual any
redistribution of resources at this level not only lead to overall economic inefficiency but also creates
inefficiency of individual consumers and producers. This way microeconomics studies the welfare
theory in individual and collective viewpoint.

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