II)

Definition of Micro Economics

Microeconomics is the branch of economics that concentrates on the behavior and performance
of the individual units, i.e. consumers, family, industry, firms. Here, the demand plays a key role
in determining the quantity and the price of a product along with the price and quantity of
related goods (complementary goods) and substitute products, so as to make a judicious
decision regarding the allocation of scarce resources, concerning their alternative uses.
Definition of Macro Economics
Macroeconomics is the branch of economics that concentrates on the behavior and performance
of aggregate variables and those issues which affect the whole economy. It includes regional,
national and international economies and covers the major areas of the economy like
unemployment, poverty, general price level, GDP (Gross Domestic Product), imports and exports,
economic growth, globalization, monetary/ fiscal policy, etc. It helps in resolving the various
problems of the economy, thereby enabling it to function efficiently.
Key Differences between Micro and Macro Economics
1. Microeconomics studies the particular market segment of the economy, whereas
Macroeconomics studies the whole economy, that covers several market segments.
2. Microeconomics deals with an individual product, firm, household, industry, wages, prices,
etc., while Macroeconomics deals with aggregates like national income, national output,
price level, etc.
3. Microeconomics covers issues like how the price of a particular commodity will affect its
quantity demanded and quantity supplied and vice versa while Macroeconomics covers
major issues of an economy like unemployment, monetary/ fiscal policies, poverty,
international trade, etc.
4. Microeconomics determine the price of a particular commodity along with the prices of
complementary and the substitute goods, whereas the Macroeconomics is helpful in
maintaining the general price level.
5. While analyzing any economy, microeconomics takes a bottom-up approach, whereas the
macroeconomics takes a top-down approach into consideration.
Micro Economics
Pros:

It helps in the determination of prices of a particular product and also the prices of various
factors of production, i.e. land, labor, capital, organization and entrepreneur.

It is based on a free enterprise economy, which means the enterprise is independent to

take decisions.

Cons:

The assumption of full employment is completely unrealistic.

It only analyses a small part of an economy while a bigger part is left untouched.

Macro Economics
Pros:

It is helpful in determining the balance of payments along with the causes of deficit and
surplus of it.

It makes the decision regarding economic and fiscal policies and solves the issues of a
public finance.

Cons:

Its analysis says that the aggregates are homogeneous, but it is not so because
sometimes they are heterogeneous.

It covers only the aggregate variables which avoids the welfare of the individual.

IV)

(i) Land:
It refers to all natural resources which are free gifts of nature. Land, therefore, includes all gifts of
nature available to mankindboth on the surface and under the surface, e.g., soil, rivers, waters,
forests, mountains, mines, deserts, seas, climate, rains, air, sun, etc.
(ii) Labour:
Human efforts done mentally or physically with the aim of earning income is known as labour.
Thus, labour is a physical or mental effort of human being in the process of production. The
compensation given to labourers in return for their productive work is called wages (or
compensation of employees).
Land is a passive factor whereas labour is an active factor of production. Actually, it is labour
which in cooperation with land makes production possible. Land and labour are also known as
primary factors of production as their supplies are determined more or less outside the economic
system itself.
(iii) Capital:
All man-made goods which are used for further production of wealth are included in capital. Thus,
it is man-made material source of production. Alternatively, all man-made aids to production,
which are not consumed/or their own sake, are termed as capital.
It is the produced means of production. Examples aremachines, tools, buildings, roads, bridges,
raw material, trucks, factories, etc. An increase in the capital of an economy means an increase
in the productive capacity of the economy. Logically and chronologically, capital is derived from
land and labour and has therefore, been named as Stored-Up labour.
(iv) Entrepreneur:
An entrepreneur is a person who organises the other factors and undertakes the risks and
uncertainties involved in the production. He hires the other three factors, brings them together,

organises and coordinates them so as to earn maximum profit. For example, Mr. X who takes the
risk of manufacturing television sets will be called an entrepreneur.
An entrepreneur acts as a boss and decides how the business shall run. He decides in what
proportion factors should be combined. What and where he will produce and by what method. He
is loosely identified with the owner, speculator, innovator or inventor and organiser of the
business. Thus, entrepreneur ship is a trait or quality owned by the entrepreneur.
Some economists are of the opinion that basically there are only two factors of productionland
and labour. Land they say is appropriated from gifts of nature by human labour and entrepreneur
is only a special variety of labour. Land and labour are, therefore, primary factors whereas capital
and entrepreneur are secondary factors.

production function refers to the functional relationship between the quantity of a good
produced (output) and factors of production (inputs).
The production function is purely a technical relation which connects factor inputs and output.
Prof. Koutsoyiannis
Defined production function as the relation between a firms physical production (output) and
the material factors of production (inputs). Prof. Watson
In this way, production function reflects how much output we can expect if we have so much of
labour and so much of capital as well as of labour etc. In other words, we can say that production
function is an indicator of the physical relationship between the inputs and output of a firm.
The reason behind physical relationship is that money prices do not appear in it. However, here
one thing that becomes most important to quote is that like demand function a production
function is for a definite period.
It shows the flow of inputs resulting into a flow of output during some time. The production
function of a firm depends on the state of technology. With every development in technology the
production function of the firm undergoes a change.
The new production function brought about by developing technology displays same inputs and
more output or the same output with lesser inputs. Sometimes a new production function of the
firm may be adverse as it takes more inputs to produce the same output.
Mathematically, such a basic relationship between inputs and outputs may be expressed as:
Q = f( L, C, N )
Where Q = Quantity of output
L = Labour
C = Capital
N = Land.
Hence, the level of output (Q), depends on the quantities of different inputs (L, C, N) available to
the firm. In the simplest case, where there are only two inputs, labour (L) and capital (C) and one
output (Q), the production function becomes.
Q =f (L, C)

V) a)

PRICE DETERMINATION UNDER PERFECT COMPETITION

Though perfect competition is rare,almost a non-existant situation, yet we study price determination
under the situation. A perfectly competitive market is one in which the number of buyers and sellers is
very large, All engaged in buying and selling a homogeneous product without any artificial restriction
and possessing perfect knowledge of a market at a time.
There are two parties which bargain in such a market, the buyers and the sellers. It is only when they
agree, a commodity can be bought and sold at a certain price. Thus product pricing is influenced both
by buyers and sellers, that is by demand and supply.
The demand and supply are the two forces, which move in the opposite directions. Price is determined
at a point where these two forces are equal, that is known as equilibrium price.
The firm may earn normal profits, super normal profits in the short run whereas it earns normal profits
in the long run. In a perfectly competitive market, market demand and market supply determine the
equilibrium price.

Price of a commodity is determined by the demand and supply. Both the demand and the supply
vary with price.
MARKET PRICE VS NORMAL PRICE :
The price prevailing in the long run is called normal price.The price determined in the very short
period is called Market Price.As supply remains constant, in this period, demand plays an
important role in the determination of price.In the long run supply can be adjusted fully to
changes in demand. In this period supply plays an important role.
PRICE DETERMINATION IN SHORT PERIOD:
First of all we divide product into perishable and durable according to the nature of product. After
this, we create demand and supply curves on the graph paper. In short period, price will be
affected from demand because we can not increase our supply according to demand.

PRICE DETERMINATION IN LONG PERIOD :

In long period, only normal price will be fixed at the point where total quantity of demand will be
equal to the total quantity of supply. Company or firm will receive only normal profit at this
equilibrium.

b)
Price Determination Under Monopoly Market
A monopolist is the sole seller of a commodity. The aim of a monopolist is to get maximum profits. Of course,
everyone who enters business aims at getting maximum profit. But there is no scope for getting abnormal profit
under competition for there are several number of sellers. But the monopolist is the sole seller of a commodity.
So he will take advantage of the situation and try to get maximum profits. For, all those who want the good
should buy it only from him. They have no other way. So in determining the price of a commodity, he will be
guided by only one motive, that is, to maximize his profits.
We know in a market, price is determined by the interaction of supply and demand. Under monopoly too, the
price of a good is determined by the interaction of supply and demand, but in a different way. Under perfect
competition, there will be several number of sellers. But under monopoly, the monopolist is the sole seller of a
commodity. So he can control the supply of his good. But he cannot control demand for there are several
number of buyers as in the case of competition.
The aim of a monopolist is to maximize his profits. For that, he can do one of the following two things. He can
fix the price for his good and leave the market to decide what output will be required. Or he can fix the output
and leave the price to be determined by the interaction of supply and demand. In other words, he can fix the
price or the output; he cannot do both. The amounts he can sell at any given price depend upon the conditions of
demand for his good.

I)

Market forces are the factors that influence the price and availability of goods and services in a market
economy, i.e. an economy with the minimum of government involvement.
Market forces push prices up when supply declines and demand rises, and drive them down when supply grows
or demand contracts. When demand equals supply for a product or service, the market is said to have reached
equilibrium.
The economic factors affecting the price of, demand for, and availability of a commodity.
The effect of aggregate supply and demand in a market environment on the prices of goods and
services. Market forces will cause prices to increase when supply decreases or demand
increases, whereas prices will fall when demand decreases or supply increases.

Market Equilibrium
Market equilibrium is a market state where the supply in the market is equal to the demand in the market. The
equilibrium price is the price of a good or service when the supply of it is equal to the demand for it in the
market. If a market is at equilibrium, the price will not change unless an external factor changes the supply or
demand, which results in a disruption of the equilibrium.

If a market is not at equilibrium, market forces tend to move it to equilibrium. Let's break this concept down.
If the market price is above the equilibrium value, there is an excess supply in the market (a surplus), which
means there is more supply than demand. In this situation, sellers will tend to reduce the price of their good or
service to clear their inventories. They probably will also slow down their production or stop ordering new
inventory. The lower price entices more people to buy, which will reduce the supply further. This process will
result in demand increasing and supply decreasing until the market price equals the equilibrium price.
If the market price is below the equilibrium value, then there is excess in demand (supply shortage). In this case,
buyers will bid up the price of the good or service in order to obtain the good or service in short supply. As the
price goes up, some buyers will quit trying because they don't want to, or can't, pay the higher price.
Additionally, sellers, more than happy to see the demand, will start to supply more of it. Eventually, the upward
pressure on price and supply will stabilize at market equilibrium.

VI

Law of variable proportions occupies an important place in economic theory. This law examines the
production function with one factor variable, keeping the quantities of other factors fixed. In other words, it
refers to the input-output relation when output is increased by varying the quantity of one input.
When the quantity of one factor is varied, keeping the quantity of other factors constant, the proportion between
the variable factor and the fixed factor is altered; the ratio of employment of the variable factor to that of the
fixed factor goes on increasing as the quantity of the variable factor is increased.
Since under this law we study the effects on output of variation in factor proportions, this is also known as the
law of variable proportions. Thus law of variable proportions is the new name for the famous Law of
Diminishing Returns of classical economics. This law has played a vital role in the history of economic
thought and occupies an equally important place in modern economic theory. This law has been supported by
the empirical evidence about the real world.
Assumptions of the Law:
The law of variable proportions or diminishing returns, as stated above, holds good
under the following conditions:
1. First, the state of technology is assumed to be given and unchanged. If there is
improvement in the technology, then marginal and average products may rise instead
of diminishing.
2. Secondly, there must be some inputs whose quantity is kept fixed. This is one of
the ways by which we can alter the factor proportions and know its effect on output.
This law does not apply in case all factors are proportionately varied. Behaviour of
output as a result of the variation in all inputs is discussed under returns to scale.
3. Thirdly the law is based upon the possibility of varying the proportions in which the
various factors can be combined to produce a product. The law does not apply to
those cases where the factors must be used in fixed proportions to yield a product.
An analysis of the production decision made by a firm in the short run, with the
ultimate goal of explaining the law of supply and the upward-sloping supply curve.
The central feature of this short-run production analysis is the law of diminishing
marginal returns, which results in the short run when larger amounts of a variable
input, like labor, are added to a fixed input, like capital. A contrasting analysis is longrun production analysis.
Two Runs: Short and Long
The first step in the analysis of short-run production is a distinction between the
short run and the long run. This distinction is intertwined with the distinction
between fixed and variable inputs.
Short Run: The short run is a period of time in which at least one input used for
production and under the control of the producer is variable and at least one input is
fixed.
Long Run: The long run is a period of time in which at all inputs used for production
and under the control of the producer are variable.
The difference between short run and long run depends on the particular production
activity. For some producers, the short run lasts a few days. For others, the short run
can last for decades.