MICROECONOMICS

CORE COURSE
3 CREDIT

INTRODUCTION TO MICROECONOMICS
Lecture 1
DR. PAROMA MITRA
 ECONOMICS:
• Any activities which generate income are termed as Economic
Activities, which are responsible for the origin and development of
a subject called Economics.

• The science of making decisions in the presence of scarce resources.

• Managerial economics: is applied Microeconomics drawn from

Macroeconomics theory as well. It has normative bias starting what
firm should do in order to reach certain objectives. It also deals with
partial equilibrium of a firm and industry not the economy.
 Types of ECONOMIC Analysis

MICROECONOMICS MACROECONOMICS

1.Actor make the decision 1.Aggregate economy

2.Allocation of resources 2.Many actors
To simplify the philosophical decision 3.Policy-top down questions
making mathematics is used . Like
simple graphs, equation etc.
Economics for effective management
a. Identified goals and constraints
b. Recognize the Nature and importance
of profits
c. Understand Incentives
d. Understand Markets
e. Use Marginal Analysis
 a. Identified goals and constraints

•Goals can be Maximize or Minimize

( for example maximum profit, revenue, Sales
or Minimize cost, wastage, time)
•Constraints can be one to many
(resources are limited, time is limited )
b. Recognize the Nature and importance of profits

ACCOUNTING AND ECONOMIC PROFIT

• Accounting Profit: the difference between Total Revenue and

Explicit cost
• Explicit cost/Accounting Cost: cost which are tangible in nature.
• Economic Profit: the difference between Total Revenue and
Total Opportunity cost
• Total Opportunity cost: the Explicit cost of a resource plus the
Implicit cost of giving up its best alternative use.
• Implicit cost: cost which are intangible in nature. Normally
overlooked
 Lets understand with a small example
A Carpenter makes 100 chairs per month and sells them at Rs 450 per piece. His expenses on rent of the shop,
cost of wood and other material are worth Rs 15000 per month. He employees two workers whose monthly
wage bills stands at Rs 7200 and pays electricity bill of about Rs 1500 per month. He has invested Rs 150000 in
the form of machines, tool and inventories in the business, of which Rs 75000 is from his own fund and the
remaining Rs 75000 is a loan from a bank at the interest rate of 18% per annum.
Further, assuming imputed costs of his own time, his wife’s time and his own savings of Rs 75000 for the month
are Rs 9000, Rs 3000 and Rs 750 respectively.
What is the total receipt or earning ( we called it as Total Revenue)?
What is the total cost? ( both Fixed and Variable cost)(Explicit)
What is Business profit?(TR-EC)
What is the total Implicit cost? Therefore, Explicit cost are the monetary payments to owners
What is economic Profit? (TR-EC-IC) of market supplied resources.
Implicit cost are non-monetary opportunity costs of using
Total receipt or earning =Rs 450 *100= Rs 45000 owner supplied resources
Total Explicit cost =15000+7200+1500+{75000(1/12)(.18)}=Rs 24825
Business (Accounting )Profit = Rs 45000-24825=Rs 20,175
Total Implicit cost = Rs 9000+3000+750 =Rs 12750
Economic Profit = Rs 45000-24825-12750=Rs 7425
[note: Rs 75000 he spend for investment for machine. In month wise calculation it will not include. We mainly include revenue
expenditure. It comes under capital purchase as per accounting]
 Class assignment 1
• Mrs Sharma managing a Boutique shop and earn Rs 250000 per year. She
decides to open her own Boutique shop. Her revenue during first year of
operation is Rs 12,00,000 and here are following expenses yearly:
• Salaries in hired - Rs 4,50,000
• Supplies -Rs 1,50,000
• Rent - Rs 100,000
• Utilities -Rs 10,000
• Interest to bank loans –Rs 100,000
• Calculate, explicit cost, implicit cost, business profit and Economic profit.
Answer to Class assignment 1
• TR Rs 12,00000
• Explicit cost Rs 810000
• Implicit cost Rs 250000
• Business profit 390000
• Economic profit 140000
c. Understand incentives
• Changes in profits provides an incentives affect
how resources are used and how hard workers
work.

• Mainly we will discuss Cost- Benefit analysis over

here.
d. Understand the market
• A market is any arrangement through which buyers & sellers
exchange goods & services
• Markets reduce transaction costs
• Costs of making a transaction other than the price of the good or
service
Product and Factor Markets
Market Buyers Sellers

Product Markets Individuals Firms

Factor Markets Firms Individuals
Market Structures
• Market characteristics WHEN PRODUCT WHEN PRODUCT
DIFFERENTIATION
that determine the IS TOO LOW…..WE
DIFFERENTIATION
IS HIGH…..WE
economic environment CALLED IT CALLED IT
in which a firm operates IDENTICAL DIFFERENTIATE
PRODUCTS PRODUCTS

• Number & size of

firms in market
• Degree of product
differentiation
• Likelihood of new
firms entering
market
Price-Takers vs. Price-Setters
• Price-taking firm
• Cannot set price of its product
• Price is determined strictly by market forces of demand
& supply
• Price-setting firm
• Can set price of its product
• Has a degree of market power, which is ability to raise
price without losing all sales
TYPES OF MARKETS BASED ON
INFLUENCE ON PRICE
Market Type Products Sellers Buyers
Perfect Competitive Homogeneous Many Many

Monopolistic Heterogeneous Many Many

Oligopoly Identical or differentiate A few Many
Monopoly Unique one Many
Monopsony Unique Many One

Oligopsony Identical or differentiate Many A few

 e. Use Marginal Analysis
Concept of Marginal means one additional unit

Having Cold Drinks in a party

Marginal Benefit (MB) Marginal Cost(MC)
• Taste good • To reduce the increase calorie one needs to
spend money
• Every glass will quench your thirst • Other health issue may rise like BP, Sugar , so
• Mingle up with friends cost will incur to cure that.
MB and MC
MC

MB

Quantity of having glass of Cold Drinks

1 2 3 4
Prescribed Book
1. Hirschey, Managerial Economics, Cengage, 12e
 
Reference Books
2. Geetika, Ghosh, Roy Choudhury: Managerial Economics,
MGH, 3rd Edition.
3. Koutsoyiannis, Modern Micro Economics Macmillan press.
4. Thomas, C.R and S. C. Maurice, Managerial Economics, the
Mc Graw-Hill, 8th ed.
5. Salvatore, Dominick & Rastogi Siddhartha: Managerial
Economics Principles and Worldwide Applications, Oxford 8e.
6. Baye Prince: Managerial Economics and Business Strategy,
MGH 8e
Grading System: Total 100 marks

Assignment 1: Project (35 Marks)

Assignment 2: 4 Quizzes (10 marks)
Class participation: (5 marks)
Midterm exam: (20 Marks)
End term exam: (30 Marks)

[Note: There will be “n” number of class polls similar as quizzes for
self reflection. Attendance of the polls are important. No marks will be
attached to it.]