Microeconomics:-

The purpose of this lesson is to reach an understanding of

how markets operate, how prices are set and transactions occur.
The two market forces of demand and supply are defined and
explained. The equilibrium point is studied. Conclusions and
applications are offered.

DEMAND
Demand is the expression of willingness and ability of a
potential buyer to acquire certain quantities of an item for
various possible prices the buyer can reasonably offer. Demand
can be thought of as a schedule of prices and quantities in the
mind of the buyer.

LAW OF DEMAND
The law of demand postulates that the relationship between price
and quantity in the mind of buyers is inverse. The law of demand
is represented graphically by a downsloping demand curve. The
law of demand is explained by the diminishing marginal utility,
the income effect, the substitution effect and with the help of
indifference curves analysis.

LAW OF DEMAND REASONS

The law of demand can be explained by
- price being an obstacle to consumption,
- diminishing marginal utility,
- price change income effect and substitution effect.
It can also be derived from the diminishing marginal rate of
substitution of indifference curves.
SUPPLY
Supply is the willingness and ability of sellers or suppliers to
make available different possible quantities of a good at all
relevant prices.

LAW OF SUPPLY
The law of supply postulates that the relationship between
price and quantity in the mind of sellers or producers is
a direct one. When price increases so does quantity.

LAW OF SUPPLY REASONS

The law of supply is explained by
- price being an inducement for sellers or producers to sell
more, and
- cost of production increasing (because of the law of
diminishing returns).

Utility approach:-

The basic idea behind ordinal utility approach is that a consumer keeps number
of pairs of two commodities in his mind which give him equal level of satisfaction.
This means that the utility can be ranked qualitatively.

The ordinal utility approach differs from the cardinal utility approach (also called
classical theory) in the sense that the satisfaction derived from various
commodities cannot be measured objectively.

Ordinal theory is also known as neo-classical theory of consumer equilibrium,

Hicksian theory of consumer behavior, indifference curve theory, optimal choice
theory. This approach also explains the consumer's equilibrium who is confronted
with the multiplicity of objectives and scarcity of money income.

The important tools of ordinal utility are:

1. The concept of indifference curves.

2. The slop of I.C. i.e. marginal rate of substitution.

 3. The budget line.

Indifference curves:-

In economics, an indifference curve connects points on a graph representing

different quantities of two goods, points between which a consumer is indifferent.
That is, the consumer has no preference for one combination or bundle of goods
over a different combination on the same curve. One can also refer to each point on
the indifference curve as rendering the same level of utility (satisfaction) for the
consumer. In other words, an indifference curve is the locus of various points
showing different combinations of two goods providing equal utility to the
consumer. Utility is then a device to represent preferences rather than something
from which preferences come.The main use of indifference curves is in the
representation of potentially observable demand patterns for individual consumers
over commodity bundles.

There are infinitely many indifference curves: one passes through each
combination. A collection of (selected) indifference curves, illustrated graphically,
is referred to as an indifference map.

An example of an indifference map with three indifference curves represented

Elasticity of demand and supply:-

The concept of elasticity is intended to measure the degree of

responsiveness of a buyer or seller to a change in a key
determinant, in particular price. The degree of responsiveness
of the quantity demanded to a price change is called the price
elasticity of demand. If the price change is that of another
good then the study deals with cross elasticities of demand.

ELASTIC DEMAND
If the demand is elastic, it means that a small price change
results in a large quantity change. This would generally take
place on the upper portion of the demand curve. If the demand is
perfectly elastic (which means that the smallest possible price
change results in a virtually infinite quantity change), the
demand curve is then horizontal.

DEMAND ELASTICITY DETERMINANTS

The determinants of demand elasticity are
- the time framework (market period, short run or long run),
- the availability of substitutes,
- the proportion the item represents in total income,
- the perception of the item as necessity or luxury.

SUPPLY ELASTICITY
Supply elasticity is the degree of responsiveness of the quantity
supplied to a change in price. It is calculated as

Es = % change in quantity / % change in price .

SUPPLY ELASTICITY DETERMINANTS

The major determinants of supply elasticity are
- the time framework (market period, short run or long run),
- the ability to shift resources.

Consumer surplus:-

Many times, the equilibrium price is lower than the highest price some folks are
willing to pay. For all consumers, this is called consumer surplus. Similarly, the
price might be higher than the minimum price at which some are willing to
produce. For all the producers, this is called producer surplus. This tutorial covers
them both with an emphasis on the visual.