Concepts of MICROECONOMICS

Law of Demand

Other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises. The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase. If the price of chocolate cake rose to Rs. 105 per piece, you would buy less cake. If the price of chocolate cake fell to Rs. 60 per piece, you would buy more.

Utility

The satisfaction people derive from their consumption activities. When we compare Xiaomi phones and Samsung smartphones we found that people are buying Xiaomi phones more because they are getting more utility of it. Xiaomi phones have more features than Samsung smartphones. So, there is more demand for Xiaomi phones rather than Samsung Smartphones. Utility depends upon the intensity of want. When a want is unsatisfied, there is a greater urge to demand a particular product which satisfies a given want. Now, utility has been called as ‘expected satisfaction.’

Kinds of Utility

1.Marginal Utility

2.Total Utility

3.Average Utility 

Marginal Utility

Other things remain constant, the amount by which total utility rises with consumption of an additional unit of a good, service, or activity, is marginal utility. A group of six purchases tickets for a Hollywood movie, and is told there is a “buy six, get the seventh one free” sale. However, there is no additional happiness from that seventh ticket because they only need six tickets. If, however, they had a friend they wanted to take with them, the seventh ticket would have positive marginal utility. The more of a good that one obtains in a specific period of time, the less the additional utility derived from an additional unit of good.

Opportunity Cost

The opportunity cost is what you must forgo in order to get something. Imagine, you buy a pizza and with that same amount of money you could have bought a drink and a pastry. The opportunity cost is the drink and pastry.

Opportunity cost = Return on the best option not chosen - Return on the option chosen.

Opportunity costs are a factor not only in decisions made by consumers but by many businesses as well, for areas such as production, time management, and capital allocation.

Production Function

Maximum Output that a firm can produce for every specified combination of inputs. Firms use the production function to determine how much output they should produce given the price of a good, and what combination of inputs they should use to produce given the price of capital and labor. Cars, clothing, sandwiches, and toys are all examples of output. Capital refers to the material objects necessary for production. Machinery, factory space, and tools are all types of capital. The short run refers to a period of time in which one or more factors of production cannot be changed. When looking at the production function in the short run, therefore, capital will be a constant rather than a variable. In long run refers to the period wherein all inputs are variable.

Q = F (K, L)

Here, K= Capital

          L = Labor