Therefore, a change in one economic variable brings changes in the value of other economic variables. For example, demand, supply, prices, production cost, wages labor and capital are the economic variables whose value changes with change in their determinants or in different trade cycles. Let us understand the concept of slope with the help of an example. According to the rule of minimization, the derivative of the function should be zero for minimizing the function. Total profit (Π) refers to the difference between total revenue and total cost as expressed as follows: The profit would be maximum when the difference between the total revenue and total cost is maximum. In fact, there are large number of variables interacting simultaneously at a given time. Let us understand the application of linear programming in solving out these business problems. A simple technical term is used to analyze and symbolizes a relationship between variables. It is economic theory in a microscope. If variables cannot be added together, they have no meaning in linear programming. This line is termed as the slope of line. This method of slope determination has certain limitations, which are as follows: a. MICROECONOMICS Principles and Analysis Frank A. Cowell STICERD and Department of Economics London School of Economics December 2004 In partial differentiation, Y is assumed as the dependent variable and X and Z as independent variables. 4. Helpful in business decision making. The technique to calculate the value of slope at which the fluctuation in independent and dependent variable is infinitely small is termed as derivative. "Microeconomics is the study of specific individual units; particular firms, particular households, individual prices, wages, individual industries particular commodities. Therefore, 10 units is the optimum solution for the preceding problem. Therefore, keeping the derivative of profit function equal to zero, we can calculate the output level for profit maximization, as described in the following equation: Therefore, the profit would be maximum when the level of output is 50 units for the given TR and TC functions. GOT IT. ii. For example, the slope between two points A and D is -0.44 but the slope between the points that lie in between these two points is large, B and C is -0.66. According to this assumption, only numerical values bring continuity in the measurement of variables. Economic analysis is a process in which the strengths and weaknesses of an economy are determined. In the preceding example of demand of a product and its price, the demand of the product is a dependent variable, while price of the product is an independent variable. The influence of other factors may invalidate the hypothesis that quantity demanded of a commodity is inversely related to its price. For Principles of Microeconomics courses. Similarly, we can find out the slope between the points J and K. At point K. the price (Px) = 5 and demand (Dx) = 10. However, we try to eliminate the interrupting influences of other variables by assuming them to remain unchanged. MICRO ECONOMIC ANALYSIS BLOCK 1 PARTIAL AND GENERAL EQULIBRIUM, LAW OF DEMAND AND DEMAND ANALYSIS CONTENTS Page number Unit 1 Introduction to Demand Theory 4 Unit 2 Concepts of Demand and Supply 22 Unit 3 Theories of Demand 42 . Refers to the condition required for getting the more realistic solution of maximization problem. The formula used for the calculation of Average Cost (AC) is as follows: Let us assume that TC function of an organization is as follows: By substituting the value of TC in the formula of AC, we get. If the slope is steeper, then the relationship between the two variables is weak and vice-versa. However, economic application of linear programming is very rare as it provides less information regarding the working of an economy. Similarly, saving is defined as the difference between income and consumption expenditure and we can say; You are required to note that an identity is denoted by a three - bar sign (≡). Types of Microeconomics Analysis. The shape of line determines the type of relationship between the two variables. An endogenous variable is a variable that is explained within a theory. In profit function maximization, we require to find out profit function and then maximize that function with reference to output. This production function is represented as a horizontal line on a graph. It helps in determining the most efficient size of an organization. Therefore, to avoid such situation, non-negative approach is adopted. However, for the function, Y = f(X), where ∆X approaches to zero. Linear programming technique is most commonly used for solving out profit maximization problems. According to maximization rule of TR, the revenue produced from the sale of marginal unit of output should be zero. If the production function is Y =4X3, then, ii. Basic Tools in Economic Analysis - WikiEducator Start studying C718 Microeconomics. Other Resources 1. The assumption of Ceteris Paribus thus eliminates the influence of other factors which may get in the way of establishing a scientific statement regarding the behavior of economic variables. Permits change in one independent variable at a time, b. Adopts the same rule for differentiation as in case of one independent and one dependent variable. The forerunning premise is the existence of perfect competition which indicates that there are numerous trading objects and prices are independent from the intervention of any individual within the market system. Statistics Statistical tools include regression and correlation analysis and calculation of probabilities. With the help of slope of iso-profit, we can determine the various iso-profit lines and overlaid on the feasibility area for determining the point of maximum profit. Thus, R is the point at which maximum profit can be generated, as shown in Table-3: The combination of A and B for yielding maximum profit can be calculated as follows: Putting the value of A in the constraint equation of Q, we get, Putting the value of B in equation (1), we get. Basis of Welfare Economics Microeconomics is not only concerned with analyzing economic condition but also with the maximization of social welfare. Therefore, it is satisfying both first and second-order conditions. A Chinese proverb says “A picture is worth a thousand words”. Diagrams and Graphs provide visual impact and help to grasp and learn economics with interest and ease. These techniques are useful for making various managerial decisions. ... Every time you find something useful, you can save that using the bookmark tool. In such a case, the total profit of the organization would be as follow: Π = 50(16) – (16)2 – 16*19+90(19) – 2 (19)2. Let us first determine the level of profit at output level of 50 units as follows: In both the cases, the value of total profit is less than the value of total profit when the level of output is equal to 50. Refer to variables whose value can be obtained within the model under consideration. The economic policy directly affects the economy and which leads to change in allocation of resources. According to the assumption of linearity, the factor of production provides equal returns in the short run. Economic theory is a verbal expression of the functional relationships between economic variables. In brief, get acquainted with the terms such as Variables, Ceteris Paribus, Functions, Equations, Identities, Graphs and Diagrams, Lines and Curves, Slopes, Limits and Derivatives, Time Series and so on. If our analysis has to be accurate we may have to examine two variables at a time which makes it inevitable to assume other variables to remain unchanged. This field of study deals with factors that influence individual economic choices. Microeconomics can help you decide how to make them. Microeconomics: Theory & Applications, 13 th Edition teaches students how fundamental tools of analysis are used explain and predict market phenomena. In above, we have used the differential calculus method for measuring the slope of a demand curve. For example, generally, organizations strive to determine the level of output that would minimize the cost of production or maximize their profits. The size of the organization also enables the organization to plan and select appropriate marketing strategies. They try to explain the relationship between two or more variables. In case, we want to determine the derivative of Y with respect to X, then it would be equal to the product of derivative of Y with respect to U and derivative of U with respect to X, which is described as follows: Let us understand the application of derivative of a function of function with the help of an example. Iso-profit lines would be parallel because profit of A and B are constant, as shown in Figure-6: In Figure-6, maximum profit of Rs. On the basis of preceding rules, we can calculate partial derivative. This is because the price of the product is set in response to consumer demand. 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