Micro Economic

Introduction and basic concept
Is may be defined as that branch of economic analysis which studies the economic behaviour of the individual unit, may be a person, a particular household, or a particular firm. It is a study of one particular unit rather than all unit combined together. And In micro-economic also studied the various units of the economic such as thousand of consumer, thousand of producer or firm, thousand of worker and resources supplier and how they function and how they reach the equilibrium.

Scarcity and Choice
Basically human want for good and service are unlimited, well the productivity resources with which to produce goods and services are scarce. With our wants being virtually unlimited, and resource scarce, we cannot satisfy all our wants and desire by producing everything we want. A society has to decide how to use its scarce resource to obtain the maximum possible satisfaction of its member, it is this basic problem of scarcity which give rise to many of the economic problem which have long been the concern of economic.
The scarcity of resource relative to human want gives rise to struggle of man for sustenance and effort by him to promote the well being. That the scarcity of resource in relation to human wants is the fundamental economic problem can be easily understood in the context of poor and developing country like India where quite large number of population live at the bare subsistence level. The struggle for existence due to scarcity of resource is too obvious in them to need any elaborate explanation. Even in developed country like USA where effluence and prosperity have been brought about also confront the scarcity problem raises some doubt.
Since all wants cannot be satisfied due to scarcity of resource we face the problem of choice – choice among multiple want which are to be satisfied. If its decide to use more resource in one line of production, some resource must be withdraw from another commodity, thus the problem of choice from the view point of the society as a whole refers to which goods and in what quantities are to be produce and productive resource allocated for their production accordingly so as to achieve economics in term of this basic economic problem.
The problem of scarcity give rises to some problem generally known as the basic economic problem which s society has to solve so as to promote material of well-being of its people. These basic economic problems related to what commodities are to be produced.
It is with regard to this problem of resource allocation the choice of production methods, distribution and economic growth which have their roots in scarcity of resources, the economist has been asking question from time to time to providing the answer for them. Beside, economist have also been arising the question about efficiency of the resource allocation for the production of goods and their distribution among the people. This question of economic efficiency is aimed at knowing whether or not a particular pattern of production and distribution ensure maximum social welfare.





Deductive and Inductive Methods
The deductive methods is also called abstract, analytical and priori methods and represent an abstract approach to the derivation of economic generalization and theories. The principal steps in the process of deriving economic generalization through deductive logic are –
a. Perception of the problem to be inquire into
b. Defining precisely the technical term and making appropriate assumption often called postulates or premises.
c. Deducing hypotheses that is deriving conclusion from the premises through the process of logical reasoning
d. Testing of hypothesis deduced.
Merit and Demerits of Deductive Methods
1. Useful mathematical technique can be employed to derive generalization of economic.
2. The deductive logic is useful economic theorem can be derived without the tenuous and detailed collection and analysis of data which are required under the alternative methods.
3. In view of limited scope for controlled experimentation in economic, the methods of deduction is extremely useful method of deriving generalization.
4. The use of sophisticated mathematical methods in the deductive methods approach enables the economic to introduce accuracy and exactness in economic principle and theories.
Advantage of the deduction methods –
a. Its lead to correct conclusion provided the premises from which the reasoning proceed are correct.
b. Its only drawn back the conclusion derived through the deductive methods can have only a limited application because economic condition are continually changing.

Inductive Methods
The indicative methods which is also called empirical method derives economic generalizations on the basic of experience and observation. In this method detailed data are collected with regard to certain economic phenomenon and effort is then made to arrive at certain generalizations which follow from the observation collected.
There are three ways which can used for deriving economic principle and theories –
a. Experimentation
b. Observation
c. Statistical or econometric methods
Advantage of the Inductive methods –
a. The method of statistical induction is indispensable for the formation of economic policy
b. The economic laws which are arrived at by process of induction lead to precise exact measurable conclusion.
c. Some of the important theory has been discorrect as a result of use of induction.
d. Its used to check and verify the conclusion of deduction to bring to light deficiencies in their treatment and for amplify their conclusion.
e. The chief merit of inductive methods is to show the complexity of economic phenomena and the impossibility of deriving conclusion and principle which would have numerical application.

Positive economic and Negative/ Normative
Positive economic is concern whit what is
Normative economic is concerned with what ought to be
Positive economic is concerned with the utilization of means or resource for the advancement of economic goods.
Normative science is concerned about what economic consider thing as they ought to be and its discussed the desirability to be achieved.

Elasticity (Price, Cross, Income)
· Price Elasticity
The price elasticity is a measure of the responsive of demand to change in the commodity’s own price. If the changes in price are very small we use as a measure of the responsiveness of demand the point elasticity demand. If the change prices are not small we use the arc elasticity of demand as the relevant measure.
· Income Elasticity
Income elasticity is defined as the proportionate change in the quantity demanded resulting from a proportionate change in income.
The income elasticity is positive for normal goods. Some writers have used income elasticity in order to classify good into ‘luxuries’ and ‘necessities’. A commodity is a considered to be luxuries if its income elasticity is greater than unity. A commodity is a necessity if its income elasticity is small (less than unity).
The main determinants of income elasticity are:
The nature of the need that the commodity covers: the percentage of income spent on food decline as income increase ( this known as Engel’s law and has some time been used as a measure of welfare and of the development stage of a economy).
The initial level of income of a country.
The time period, because consumption pattern adjust with a time-lag to changes in income.
· Cross Elasticity
The cross elasticity is defined as the proportionate change in the quantity demanded of x resulting from proportionate change in the price of y.
The sign of the cross elasticity is negative if x and y are complimentary goods, and positive if x and y are substitutes. The higher the value of the cross elasticity the stronger will be the degree of substitutability or complimentary of x and y.
The main determinant of the cross elasticity is the nature of the commodities relative to their uses. If two commodities can satisfy equally well the same need, the cross elasticity is high, and viva versa.

Distribution
A. Rent
The term of rent is used in the following senses in modern economic theory –
the term of rent refers to the rental made for the use of fixed factors of production whose existence is not dependant on any human effort or sacrifice.
the term of economic rent is employed for the surplus earned by unit of a factor of production over and above the minimum earning necessary to induce it to stay in their present use industry or occupation.
the term of rent cover the earning (net of depreciation and interest charges) of fixed capital equipment like machinery in the short run.

Ricardian theory of rent
Ricardo defined rent as follow: Rent is that portion of the produce of earth which is paid to the landlord for the use of the ‘original and indestructible power of the soil’. Or is a payment for the use of only land and is different from contractual rent which includes the return on capital investment made by the landlord in the form of hedge, drains, well and the like.

B. Interest
The theory of interest is a reward for capital but there are two concept of interest and there are one concept of interest in the real rate of interest which is the rate of return on physical capital such a machine vehicle, tractor created for the purpose of the producing more goods. A capital asset is used for production for several years and yields a stream of return over the years. A rate of return on it is obtained by calculating the present discounted value of the yields earned over the number of years for which capital asset is used for production .
The second concept of interest is the price paid for the use of borrowed funds from other and its often called money rate of interest.

C. Profit
Pure profit of the entrepreneur are found by subtracting from the gross residual income the imputed values of rent and interest on the self owned land and capital employed by the entrepreneur and also the imputed wages firm his work of routine management.
A popular conception of profit is that they arise in dynamic economy, that is, in economy where changes are taking place. In static economy where nothing changes there can be no profit. (J.B. Clark)
The main function of the entrepreneur is to introduce innovations in the economy and profits are reward for his performing this function. What is the innovation stand for?
Any new measure or policy adopted by an entrepreneur to reduce his cost of production or to increase the demand for his product is an innovation.
Two type of innovation is:
Those which reduce cost of production or which change the product function .
Those which increase the demand for product or which change the demand or utility function. ( Joseph Schumpeter )