QUAID E AZAM COLLEGE OF COMMERCE UNIVERSITY OF PESHAWAR MICRO ECONOMICS 1

MICRO ECONOMCS I 2ND SEMESTER I BS COMMERCE

ECONOMICS
 Economics is the sciences which studies human behavior as a relationship between ends and
scarce which have alternative uses
 Is the study of how people allocate scarce resources for production, distribution and
consumption both individually and collectively.

MICRO ECONOMMICS:
Is the study of individuals, households and firms' behavior in decision
making and allocation of resources, it generally applies to markets of goods and services and
deal with individual economics issue.

MACRO ECONOMICS:
The word Macro is derived from Greek ‘Makros’ and it is the study of
economy as a whole.

POSITIVE ECONOMICS:
Positive economics talks about things that “are”. They are facts. They can be verifiable. You
can prove it or disprove it. You can test it. And you can find out whether these statements
mentioned under positive economics are true or untrue.
NORMATIVE ECONOMICS:
Normative economics is fiction. They aren’t facts; rather they are opinions of economists
who tell us what they think. It can be true for some and false for some. And these
statements mentioned under normative economics aren’t verifiable. They can’t be tested
either.
UTILITY APROCACHES
The concept of Analysis of Consumer Behavior is divided into two parts
CARDINAL APPROACH:
According to this approach, the utility is measurable and can be explained in quantitative
terms. Cardinal utility approach is called Marshallian or Classical Approach because it was
presented by classical economists.
MEASURE OF UTILITY:
According to cardinal measure of utility a person can measure satisfaction with the unit called utile.
For example a consumer may get 50 utils of satisfaction from an apple, 25 utils from a banana, and
10 utils form a candy. These imaginary units of satisfaction are convenient for measuring consumer
behavior

ORDINAL APPROACH:
Second approach would be to observe how the individual chooses among various
combinations of two commodities supposes apples and mangoes over a specific period of
time.
 QUAID E AZAM COLLEGE OF COMMERCE UNIVERSITY OF PESHAWAR MICRO ECONOMICS 2

UTILITY
 Utility is the Satisfaction that a person get from the consumption of a goods or
services
 Utility is the power or ability of goods or services to satisfy a human want.
INITAIL UTLITY:
Is the satisfaction that obtain from the consumption of first unit
MARGINAL UTLITY:
Is the utility which we get from last additional unit of consumption.
TOTAL UTILITY:
Mean total satisfaction received by the consumption of all units taken
Together at a time.

LAW OF DIMINISHING MARGINAL UTILITY

“The additional benefit which a person derives from an increase of his stock of a things
diminishes with increase in the stock that he already has”
When we use many units of a product consecutively the marginal utility of each additional
unit of consumption is tend to fall. When marginal utility become zero we arrive at the end of
satisfaction. With any more use of that product marginal utility become negative.
EXAMPLE:
Let’s suppose that a person is hungry and started taking apple. The first unit of apple gives
him 20 Mu .since his want is now extent. The second apple give him 15 MU which is on less
than the marginal utility of first apple .similarly the marginal utility of the third to sixth apple
keep on diminishing.

LAW OF DIMINSHING RETURN

Under the law of diminishing returns a firm will get less and less extra output
when it adds additional units of an input while holding other inputs fixed. In
other words, the marginal product of each unit of input will decline as the
amount of that input increases, holding all other inputs constant.
 QUAID E AZAM COLLEGE OF COMMERCE UNIVERSITY OF PESHAWAR MICRO ECONOMICS 3

The law of diminishing returns. Given fixed land and other inputs, we see that there is zero
total output of corn with zero inputs of labor. When we add our first unit of labor to the same
fixed. Amount of land, we observe that 2000 bushels of corn are produced. In our next stage,
with 2 units of labor and fixed land, output goes to 3000 bushels. Hence, the second unit of
labor adds only 1000 bushels of additional output. The third unit of labor has an even lower
marginal product than does the second, and the fourth unit adds even less

COST
SHORT RUN COST:
In the short run some resources, those associated with the firm’s
plant, are fixed. Other resources, however, are variable. So short run costs are either fixed
or variable.

LONG RUN COST:

In the long run an industry and the individual firms it comprises can
undertake all desired resource adjustments. That is, they can change the amount of all
inputs used. The firm can alter its plant capacity; it can build a larger plant

OPPORTUNITY COST:
Opportunity cost measure the cost of using resources in term of
forgone opportunity.

FIXED COST: Fixed costs are those costs that in total do not vary with changes in output.
Fixed costs are associated with the very existence of a firm’s plant and therefore must be paid even
if its output is zero.

VERIABLE COST: Variable costs are those costs that change with the level of output. They
include payments for materials, fuel, power, transportation services, most labor

AVERAGE COST: average cost is the total per unit of output

 QUAID E AZAM COLLEGE OF COMMERCE UNIVERSITY OF PESHAWAR MICRO ECONOMICS 4

𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
AV=𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡

MARGINAL COST: Marginal cost (MC) is the extra, or additional, cost of producing 1 more
unit of output.
∆𝑻𝑪
MC= ∆𝑸

AVERAGE VARIABLE COST: average variable cost is the variable cost per unit output

𝑡𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡

AVC= 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡

AVERAGE FIXED COST: average fixed cost is the fixed cost per unit output

𝑡𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡

AFC=𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡

MARKET COMPETITION
Market:
Market is a place where buyer and seller meet each other for the purpose exchange
of goods and services for money.

There are several types of market competition which are

A. PERFECT COMPETITION
B. IMPERFECT COMPETITION

A. PERFECT COMPETITION
Perfect competition is a pure competition is a term that describes a market
that has a broad range of competitors who are selling the same products. It is
often referred to as perfect competition. The price of products is determined
solely by what consumers are willing to pay. There is no firm is to much large
to the entire market and able to influence market price.
CHARACTERISTIC OF PERFECT COMPETITION
I. Same price:
in perfect competition the price will be same or rarely
different
II. Large number of buyers and sellers:
Under perfect competition,
there are large number of buyers and sellers, so no single buyer or seller
is able to influence the market price of the product.
III. Homogenous product:
The products produced by all firms are
standard or identical under perfect competition which means no
 QUAID E AZAM COLLEGE OF COMMERCE UNIVERSITY OF PESHAWAR MICRO ECONOMICS 5

individual producer can charge more for a good as none of the goods are
superior in any way.
IV. Free entry:
Under perfect competition, there is a free entry thus the
existing producers are not in a position to increase prices freely.
V. Perfect knowledge of price:
The buyers and sellers are fully aware
of the price prevailing in the market and hence the same price prevails
throughout the market under perfect competition.

IMPERFECT COMPETITION
The situation prevailing in the market in which element of monopoly allow
individual producer to exercise some control over market prices and they are
much large to influence market price.
It is further divided into 3 types that are
a) Monopoly b) Monopolistic c) oligopoly
b)
A. MONOPOLY:
Monopoly exists when a single firm is the sole producer of a product for which there
are no close substitutes.
Example:
 State bank of Pakistan
 Pakistan Railway
CHARACTERSTIC
 In monopoly market there is only a single producer/seller of a product.
 Monopolist is the price maker
 Monopolist earn super normal profit
 Monopolist offers a very high barrier/resistance to entry
B. MONOPOLISTIC:
A market structure where many sellers produce similar but not identical,
goods. Each producer can set price and quantity without affecting the marketplace as a whole.
EXAMPLE:
OPGQ, OCFQ
CHARACTERSTIC
❑Many producers and many consumers
❑Knowledge is widespread, but not perfect
❑Non-homogenous products
❑Barriers to entry and exit do exist, but are low
❑Brand loyalty exists, making demand less sensitive to price
❑Firms also engage in some form of marketing
❑Ability to make some supernormal profit
OILGOPOLY
Oligopoly An industry dominated by a few large suppliers. Often an oligopoly is defined as an
industry with 2 or more but not more than 20 suppliers. However, an oligopoly would also
exist if there were a large number of small suppliers in a market dominated by several large
suppliers.
 QUAID E AZAM COLLEGE OF COMMERCE UNIVERSITY OF PESHAWAR MICRO ECONOMICS 6

EXAMPLE:
Big 4 dominating on Auditing professions
KPMG , Ernst & Young , Deloitte, PWC

DEMAND

The quantity of commodity that a consumer is willing and able to purchase at a certain price
during a specific time period.
LAW OF DEMAND
All other factors being equal, as the price of a good or service increases, consumer demand
for the good or service will decrease, and vice versa

DETERMINATION/ASSUMPTIONS OF THE LAW OF DEMAND

1. Consumer income: During the analysis of law of demand, the consumer income should
not change. If the consumer income increases, he will be able to demand more units
of the commodity at the higher price.
Hence, the law will not hold good.
2. Season: There should be no change in season. The demand for cold drinks
increases during summer at the higher price.
3. Number of Consumer: Number of Consumers also affects the validity of the law. If the
population of a country increases, demand for commodity will increase at the rising
price.
4. Taste: The taste and fashion of consumer also affect the validity of the law. If a
consumer develops the taste of the commodity
5. Fashion: If a product becomes a fashion to use the commodity, its demand will
increase at the higher price
6. Price of other goods: Goods are generally related in two ways
7. Substitute in consumption are those goods which are used in place of one another
e.g. Cock and juice; etc. In the case of substitute goods the quantity demand of one
good (e.g Coke) increases with rise in price of other good (e.g. juice).
 QUAID E AZAM COLLEGE OF COMMERCE UNIVERSITY OF PESHAWAR MICRO ECONOMICS 7

8. Complements in consumption are those goods which are used together e.g. car
and petrol; CD player and CD etc. In case of complementary goods the quantity
demanded of one goods (e.g Petrol) increases with fall in price of other good (e.g
car)

PRICE ELASTICITY OF DEMAND

Elasticity of demand may be defined as
“Elasticity of demand as the ratio of percentage change in demand to the
percentage change in price”
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒔 𝒒𝒖𝒂𝒏𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
Ed =
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆

EXPLANATION:
The law is straight forward. It tells us when the price of a good
rises its quantity demanded will fall. All other things remain constant. The Law
does not indicate as how to much the quantity demanded will fall with rise in
price or how much responsive demanded is to rise price. The economist here
use and measure the quantity demanded to a change in price by the concept of
elasticity of demand.
DIFFERENT ASPECT OF PRICE ELASTICITY OF DEMAND
The price elasticity of demand is given below
1. ELASTIC DEMAND:
If a little change in price brings high change in demand in this
case we say that demand is more or highly elastic.
Price per kilogram Quantity Demanded
5 50
15 40
30 30

2. INELASTIC DEMAND (LESS ELASTIC DEMAND:

If a huge change in price brings little
change in demand then the demand is called less elastic demand.

Price per kilogram Quantity Demanded

1 10
2 9.50
3 9.00

3. UNITERY ELASTIC DEMAND:

 QUAID E AZAM COLLEGE OF COMMERCE UNIVERSITY OF PESHAWAR MICRO ECONOMICS 8

When the quantity demand changed by exactly

the same percentage as a price the it is called unitary elastic demand.
Price per kilogram Quantity Demanded Total expenditure
6 15 90
3 30 90
1 90 90

4. PERFECT ELASTIC DEMAND:

When there is no change occurs price but quantity of
demand change to reasonable extent then it is called perfect elastic demand.

Price per kilogram Quantity Demanded

50 5
50 10
50 15

MARKET EQUILIBRIUM
With our understanding of demand and supply, we can now show how the decisions of buyers of
product interact with the decisions of sellers to determine the equilibrium price and quantity of a
product.
“A situation in which the supply of an item is exactly equal to its demand. Since there is neither
surplus nor shortage in the market, price tends to remain stable in this situation”
QUAID E AZAM COLLEGE OF COMMERCE UNIVERSITY OF PESHAWAR MICRO ECONOMICS 9