NCERT Extracts - Introductory Microeconomics
Category : UPSC
Introductory Microeconomics
- By goods we means physical, tangible objects used to satisfy people's wants and needs. The term 'goods' should be contrasted with the term 'services', which captures the intangible satisfaction of wants and needs.
- As compared to food items and clothes, which are examples of goods, we can think of the tasks that doctors and teachers perform for us as examples of services.
- By individual, we mean an individual decision making unit. A decision making unit can be a single person or a group like a household, a firm or any other organisation.
- By resource, we mean those goods and services which are used to produce other goods and services, e.g. land, labour, tools and machinery, etc.
- In a centrally planned economy, the government or the central authority plans all the important activities in the economy. All important decisions regarding production, exchange and consumption of goods and services are made by the government.
- The central authority may try to achieve a particular allocation of resources and a consequent distribution of the final combination of goods and services which is thought to be desirable for society as a whole.
- In contrast to a centrally planned economy, in a market economy, all economic activities are organised through the market.
- A market, as studied in economics, is an institution which organises the free interaction \pf individuals pursuing their respective economic activities.
- In other words, a market is a set of arrangements where economic agents can freely exchange their endowments or products with each other.
- It is important to note that the term 'market' as used in economics is quite different from the common sense understanding of a market. The arrangements which allow people to buy and sell commodities freely are the defining features of a market.
- In a market system, the central problems regarding how much and what to produce are solved through the coordination of economic activities brought about by the price signals.
- In microeconomics, we study the behaviour of individual economic agents in the markets for different goods and services and try to figure out how prices and quantities of goods and services are determined through the interaction of individuals in these markets.
- In macroeconomics, on the other hand, we try to get an understanding of the economy as a whole by focusing our attention on aggregate measures such as total output, employment and aggregate price level.
- Technological progress is expected to shift the supply curve of a firm to the right.
- An increase (decrease) in input prices is expected to shift the supply curve of a firm to the left (right).
- The price elasticity of supply of a good is the percentage change in quantity supplied due to one per cent change in the market price of the good.
- It is not very uncommon to come across instances where government fixes a maximum allowable price for certain goods.
- The government-imposed upper limit on the price of a good or service is called price ceiling.
- Price ceiling is generally imposed on necessary items like wheat, rice, kerosene, sugar and it is fixed below the market-determined price since at the market-determined price some section of the population will not be able to afford these goods.
- For certain goods and services, fall in price below a particular level is not desirable and hence the government sets floors or minimum prices for these goods and services.
- The government imposed lower limit on the price that may be charged for a particular good or service is called price floor.
- Most well-known examples of imposition of price floor are agricultural price support programmes and the minimum wage legislation.
- Through an agricultural price support programme, the government imposes a lower limit on the purchase price for some of the agricultural goods and the floor is normally set at a level higher than the market-determined price for these goods.
- Similarly, through the minimum wage legislation, the government ensures that the wage rate of the labourers does not fall below a particular level and here again the minimum wage rate is set above the equilibrium wage rate.
- In the case of agricultural support, to prevent price from falling because of excess supply, government needs to buy the surplus at the predetermined price.
- In a perfectly competitive market, equilibrium occurs where market demand equals market supply.
- Imposition of price ceiling below the equilibrium price leads to an excess demand.
- Imposition of price floor above the equilibrium price leads to an excess supply.
- A market structure in which there is a single seller is called monopoly.
- The market structure called monopoly exists where there is exactly one seller in any market.
- A commodity market has a monopoly structure, if there is one seller of the commodity, the commodity has no substitute, and entry into the industry by another firm is prevented.
- The market price of the commodity depends on the amount supplied by the monopoly firm. The market demand curve is the average revenue curve for the monopoly firm.
- Oligopoly in a commodity market occurs when there are a small number of firms producinga homogenous commodity.
