Microeconomics I (For University of Delhi)

373 Pages·2012·22.125 MB·English

by  D. N. Dwivedi

Microeconomics – I
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Microeconomics – I
For University of Delhi
As per the syllabus of B.Com. (Hons) course
D. N. Dwivedi
Professor of Economics
Maharaja Agrasen Institute of Management Studies,
New Delhi
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Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Licensees of Pearson Education in South Asia
No part of this eBook may be used or reproduced in any manner whatsoever without the publisher’s prior
written consent.
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right to remove any material present in this eBook at any time.
ISBN 9788131764480
eISBN 9789332509672
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Registered Office: 11 Local Shopping Centre, Panchsheel Park, New Delhi 110 017, India
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Syllabus
B.Com. (Hons)
Paper – CH 1.3: Semester – I
Microeconomics – I
Duration: 3 Hours Max. Marks: 100
Lectures: 75
Objective: Objective of the course is to acquaint the students with the concepts of microeconomics
dealing with consumer behaviour. The course also makes the students understand the supply side of the
market through the production and cost behaviour of firms.
Learning Outcomes: The students would be able to apply tools of consumer behaviour and firm theory
to business situations.
Course Contents
Unit – I
1. The concept of demand and the elasticity of demand and supply, Demand curves: individu-
al’s demand curve, market demand curve, Movements along versus shifts in the demand curve,
Elasticity of demand: price, income and cross. Concept of revenue: Marginal and Average: Revenue
and elasticity of demand. 11 lectures
Unit – II
Consumer Behaviour: Notion of indifference and preference. Indifference curve analysis of consumer
behaviour, Consumer’s equilibrium (necessary and sufficient conditions). Price elasticity and price
consumption curve, income consumption curve and Engel curve, price change and income and sub-
stitution effects. Consumer surplus. Indifference curve as an analytical tool (cash subsidy v/s kind sub-
sidy). Revealed preference. 22 lectures
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vi Syllabus
Unit – III
2. Production: fixed and variable inputs, production function, total, average and marginal products,
law of variable proportions. Linear homogeneous production function. Production isoquants,
marginal rate of technical substitution, economic region of production, optimal combination of
resources, the expansion path, isoclines, returns to scale. 10 lectures
Unit – IV
3. Cost of Production: social and private costs of production, difference between economic and
accounting costs, long run and short run costs of production. Economies and diseconomies of
scale and the shape of the long run average cost. Learning curve. 10 lectures
Unit – V
4. Perfect Competition: assumptions, price and output decisions. Equilibrium of the firm and the
industry in the short and the long runs, including industry’s long run supply, difference between
accounting and economic profits, producer surplus. Stability analysis—Walrasian and Marshallian.
Demand-supply analysis. 22 lectures
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Contents
Preface xvii
About the Author xix
Part I Introduction
1. Introduction to Microeconomics 3
What Is Economics?—3
Economics Is a Social Science 4
Why Economizing Behaviour? 4
Two Major Branches of Economics 5
What Is Microeconomics?—6
Is Microeconomics a Positive or a Normative Science?—7
Microeconomics As a Positive Science 7
Microeconomics As a Normative Science 8
Methodology of Positive Economics: Model B uilding and Theorization—8
The Uses and Limitations of Microeconomic Theories—10
The Uses of Microeconomic Theories 10
Limitations of Microeconomic Theories 11
Limitations Do Not Matter Much 12
Review Questions and Exercises 12
Endnotes 13
Further Readings 14
2. The Economy: Its Basic Problems
and Working System 15
What Is an Economy?—16
Economic Activities Are Interrelated and Interdependent 16
The Economic System Works Automatically 16
How an Economy Works?—17
The Circular Flow Model of a Simple Economy 17
The Basic Problems of an Economy—19
Problems in Maximizing Production and Optimizing Distribution 19
Problems in Achieving Growth, Full Employment and Stability 20
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viii Contents
How Market Mechanism Solves the Basic Economic Problems?—21
Drawbacks of the Free Enterprise System—22
The Government and the Economy—24
The Mixed Economy System Is the Order of the Day 25
The Production Possibility Frontier—26
Some Implications of PPF 28
Shift in PPF 29
Review Questions and Exercises 31
Endnotes 32
Further Readings 32
Part II Market Mechanism: How Markets Work
3. The Market Forces: Demand and Supply 35
The Concept of Market—36
The Demand Side of the Market—36
Meaning of Demand 36
The Law of Demand 37
The Demand Schedule 37
The Demand Curve 38
The Factors Behind the Law of Demand 38
Exceptions to the Law of Demand 40
The Market Demand 40
Determinants of Market Demand 42
Demand Function 47
Shift in Demand Curve 50
The Supply Side of the Market—52
Market Supply 52
The Law of Supply 52
The Supply Schedule and Supply Curve 52
Shift in the Supply Curve 53
Supply Function 55
The Market Equilibrium: The Equilibrium of Demand and Supply—55
Determination of Price in a Free Market 55
The Concept of Market Equilibrium 55
Determination of Market Price 56
Market Mechanism: How Market Brings About Balance 56
Graphical Illustration of Price Determination 57
Price Determination by Demand and Supply Functions 58
Shift in Demand and Supply Curves and Market Equilibrium—59
Shift in Demand Curve 59
Shift in Supply Curve 60
Parallel Shift in Demand and Supply Curves 60
Stability of Market Equilibrium—62
Market Equilibrium Under Dynamic Conditions 62
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Contents ix
Conclusion—66
Review Questions and Exercises 66
Endnotes 69
Further Readings 69
4. Elasticity of Demand and Supply 70
The Elasticity of Demand—71
Price Elasticity of Demand—71
The Arc and Point Elasticity 73
Measuring Arc Elasticity 73
Measuring Point Elasticity 75
Price Elasticity Varies Along the Demand Curve 78
The Slope of Demand Curve and Price Elasticity 80
Determinants of Price Elasticity of Demand—84
Measuring Price Elasticity from a Demand Function—85
Measuring Price Elasticity from a Linear Demand Function 86
Price Elasticity from a Non-linear Demand Function 87
Price Elasticity and Sales Revenue—88
Price Elasticity and Marginal Revenue 89
Relation Between MR and AR 90
Price Elasticity and Total Revenue 92
Price Elasticity and Consumption Expenditure—94
Other Elasticities of Demand—95
Cross-Elasticity of Demand 95
Income Elasticity of Demand 96
Application of Demand Elasticity—98
Price Elasticity of Supply—98
Definition and Measurement 98
Determinants of the Price Elasticity of Supply 100
Review Questions and Exercises 100
Endnotes 104
Further Readings 104
5. Application of Market Laws and Elasticities 105
Excise Tax: Its Effects and Incidence—106
Lump-Sum and Ad Valorem Excise Tax 106
The Effects of Excise Tax on Production and Price 107
Who Bears the Tax Burden? 107
Production Subsidy and Its Effects—109
The Effect of Production Subsidy 110
Who Benefits from Production Subsidy? 111
Import Tariffs and Export Subsidies—111
Import Tariffs 111
Export Subsidy 112
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