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Let us first understand the concept of derivative. Both TR and TC functions involve a common variable, which is output level (Q). When Z is constant, the derivative of Y with respect to X is equal to: When X is constant, the derivative of Y with respect to Z is equal to: However, if the X and Z are in the form of a product as follows: Then, the derivative of Y with respect to X is as follows: Similarly, the derivative of Y with respect to Z would be as follows: Optimization techniques are used to determine the value of independent variable that maximizes or minimizes the value of defendent variable. In a nonlinear demand curve, the slope is different not only in between the points but also at every point. Merely said, the working tools of microeconomics is universally compatible gone any devices to read. 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. On the basis of preceding rules, we can calculate partial derivative. Diagrams may be in the form of figures such as explaining the circular flow of national income. Therefore, the relationship between input-output can be represented as follows: However, this assumption has restricted the application of linear programming to linear input-output relationship only. Questions that drive interest, applications that illustrate concepts, and the tools to test and solidify comprehension. It is called positive quadrant. Assumes a linear relationship between input and output of production. This can be done in two ways, which are as follows: i. "Microeconomics is the study of specific individual units; particular firms, particular households, individual prices, wages, individual industries particular commodities. Similarly, we can find out the constraint equation for Q that can be expressed as follows: In case of Q the total supply is equal to 1000. Differential calculus provides a technique termed as derivative, which helps in determining the marginal change produced in the dependent variable (X) due to the change in the independent variable (Y), while X reaches to zero. Assumes that the prices of input and output remain constant, regardless of the quantity sold and purchased. ECO 101 Principles of Economics 1(Microeconomics) This course introduces students to the fundamental concepts in microeconomics and its relation with other social sciences. The microeconomics is expanded via some fundamental assumptions. Therefore, it is not a proper method for the determination of slope. Similarly, total revenue function has quantity sold and advertisement expenditure as independent variables. MICROECONOMICS Principles and Analysis Frank A. Cowell STICERD and Department of Economics London School of Economics December 2004 Another assumption is related to the additive nature of variables to be added together. Each equation is a concise statement of a particular relation. For example, total profit is defined as the excess of total revenue over total cost, and we can denote as: Where π is total profit, TR is total revenue and TC is total cost. 1225 fetches the optimum utilization of resources; therefore, would yield maximum profit. 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 . If the price of a product decreases (- AP), then the demand for that product would increase (AD). It also explains how the value of one variable can be found by specifying the value of other variable. The mathematical representation of first-order condition is as follows: Therefore, for maximizing profit, it is necessary that the derivative of TR and TC should be equal or their difference should be equal to zero. Economic theory is a verbal expression of the functional relationships between economic variables. Managerial Economics also uses tools of Mathematical Economics and econometrics such as regression analysis, correlation analysis etc. It indicates how the value of dependent variable depends on the value of independent or other variables. At times the terms “Graph” and “Diagram” are used interchangeably. Ceteris paribus is a Latin phrase meanings, “all other things remaining the same” or all relevant factors being equal. The linear relationship between input-output is represented by a linear equation. Second-order condition can be mathematically represented as follows: According to the second-order condition, profit would be maximum when the difference of second derivative of TR and TC function should be less than zero or their sum should be negative. Statistics Statistical tools include regression and correlation analysis and calculation of probabilities. It is represented by a symbol. GOT IT. Helpful to formulate economic policies. Let us understand linear function with the help of linear demand function. Second derivative refers to the derivative of first derivative of a function. Therefore, 10 units is the optimum solution for the preceding problem. For example, an organization has two products, A and B that can be produced with the help of two inputs, P and Q. Requires that the difference of second derivative of TR and TC functions should be less than zero or their sum should be negative. In other words a variable is something whose magnitude can change. Therefore, firstly, we need to determine the derivative of TR function as follows: By keeping the preceding equation of TR function to zero, we can determine the value of Q as follows: The maximum TR can be determined by putting the value of Qin the equation of TR function, which is as follows: The maximum value of TR can be checked by increasing or decreasing the value of Q by 1. You can use the tools of microeconomics to decide how best to spend your income; how best to divide your time among leisure activities; or how many people to hire in the business you run. Similarly, we can draw a tangent from point C and calculate the slope of tangent or slope at point C of demand curve. For instance, economist generally links demand for good depends upon its price. Microeconomic analysis gas stations Pages: 2 (330 words) Marketing Case Analysis: Curtis Automotive Hoist Sample Pages: 4 (949 words) Keynes’s Analysis of the Stock Market and Identifying the Related Policy Sample Pages: 9 (2074 words) Case Question Sample Pages: 2 (385 words) Reference book: Principles of Microeconomics Principles of Microeconomics, Libby Rittenberg (Colorado College), Timothy Tregarthen (University of Colorado), published by Flat World Knowledge, April 2009, ISBN 0-9820430-3-1, 978-0-9820430-3-5.. The two expressions of an equation are called the sides of the equation. This implies that the slope of nonlinear demand function would be different between two different sets of points. Graph is most commonly used tool in modern economics. Determining the optimum size of an organization is helpful the future planning of the organization under certain conditions, which are as follows: i. This line is termed as the slope of line. The formula used for the calculation of MC is as follows: The value of ∆Q is assumed to be one. An identity is a relation that is true for all values of the variables; no values can be found that will contradict it. Out of which 4 units of input P is used for the production of output A and 2 units of input P is used for the production of output B. 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. Let us understand the techniques of optimization of various economic variables. These are the basic tools of economic analysis. One of these packages is called “ micE- con ” (Henningsen and Toomet, 2005) and provides tools for microeconomic analysis. However, as a matter of fact, this condition may be vulnerable to external manipulations exerted by some individuals or groups. Privacy Policy3. It is expressed as D = f (P). 2000 is not appropriate, as it does not feasible in the linear programming conditions. Basic Tools in Economic Analysis - WikiEducator Start studying C718 Microeconomics. Therefore, the determination of slope in non-linear demand function can be performed by comparing the slope within and at a point on the demand curve. Let us continue the example of demand function. For instance, Pie diagram is a best example of a diagram that indicates through slicing the percentage- wise composition of a phenomenon, such as how much percentage of national income is generated from which sector of the economy. Microeconomics can help you decide how to make them. The most basic categories of objects in models of … The term equation is a statement of equality of two expressions or variables. Microeconomic Analysis Essay Sample. Disclaimer Copyright, Share Your Knowledge This problem can be overcome by using the differential calculus technique. 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. 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. These lines are also termed as iso-cost. With the help of the preceding equation, we can determine the slope of any point in the demand curve. The books are classics or Creative Commons licensed and include everything … An endogenous variable is a va… Graph can be drawn only two dimensional figures on a plain paper. Share Your Word File This method of slope determination has certain limitations, which are as follows: a. The value we get after the multiplication of 2 with the derivative of Y is as follows: The value obtained from the difference of the preceding equation and the derivative of X would be: By putting the value of Y in the partial derivative of X we get: Therefore, to maximize the profit, the organization should produce 16 units of X and 19 units of Y. In non-linear demand function, the slope of demand curve changes at every point. According to maximization rule of TR, the revenue produced from the sale of marginal unit of output should be zero. For example, for the present example, the constraint equation for P can be expressed as follows: The preceding equation implies that the total supply of input P is 800. Variables that are used in economics are income, expenditure, saving, interest, profit, investment, consumption, imports, exports, cost and so on. Linear programming refers to the mathematical technique used for solving optimization problems, such as maximization and minimization problems, of businesses. Here negative sign indicates the inverse relationship between demand and price of a product. This field of study deals with factors that influence individual economic choices. The graph made for this function shows a non-linear demand curve as depicted in Figure-4: In Figure-4, at point A the value of X= XI and Y =Y1. The slope differs for linear and non-linear variables. For example, if a product requires 5 units of input to produce one unit of output, then the production of 10 units of output would require 50 units of input. The example of such production function is agricultural industry in India. Only the iso-profit line of Rs. Graph presents a visual picture of an abstract idea. Moreover, the values of these variables are affected by change in the value of other interrelated variables. For example, generally, organizations strive to determine the level of output that would minimize the cost of production or maximize their profits. The value of output at which the profit is maximum (50 units) can be checked by increasing or decreasing the value of Q by 1. Let us plot the calculated equations of C and D on the graph as shown in Figure-7: In Figure-7, MN line represents the line of labor constraint, JK and TR represents the line of constraints for other inputs. https://wikieducator.org/index.php?title=Basic_Tools_in_Economic_Analysis&oldid=774462, Creative Commons Attribution Share Alike License. For example, the functional relationship between consumption (C) and income (Y) can take different forms.The most simple equation; C = a (Y) states that consumption (C) is related to income (Y). For Principles of Microeconomics courses. 3. search-pdf-books.com-macroeconomics-by-hl-ahuja-pdf - Docslide.us docslide.us › Documents Apr 27, 2015 - F D P eo Bk o s Free PDF eBo o ks! Differential calculus provides an optimum solution for economic problems and supports decision-making. The shaded area, JLKO represents the points that satisfy all the conditions and assumptions of linear programming. A variable is a magnitude of interest can be defined and measured. First, it will help you understand markets. The first quadrant depicts the positive values of both X and Y. An identity explains an equilibrium condition or a definitional condition. Helpful in business decision making. The slope at point C of demand curve can be determined as follows: Therefore, the slope at point C of demand curve is equal to -4.5/10. It is necessary for the sake of convenience. The calculation of A and B values with the help of terminal points are shown as follows: Suppose, for constraint equation 4A + 2B = 800, A = 0. To solve the preceding problem with the help of linear programming technique, we need to form linear programming equations as described in the following steps: Refers to the first step of formulating the objective function for solving the problem. Four importance of Microeconomics: The four importance of microeconomics are as follows: Helpful to understand working of the economy. In the graphical method, the problem of linear programming can be solved by transforming the unequal constraint equation into an equal constraint equation, which is expressed as follows: Now, we can plot the constraints on a graph by calculating the values of A and B with the help of terminal points. Derivative can be calculated with the help of differentiation method. The profit function can be determined with the help of TR and TC functions, which can be expressed as follows: The derivative of the profit function would be a follows: According to the rule of maximization, the derivative of profit function should be equal to zero. If the slope of a line is positive, the line moves upward when going from left to right. The main aim of economic analysis is to identify the nature of economic variables and determine the level of relationship between two or more related economic variables. The relationship between a dependent and independent variable can be represented as a straight line on a graph. Economic analysis is performed with the help of various tools, which are shown in Figure-1: The different tools of economic analysis (as shown in Figure-1) are discussed in detailed below. Similarly, for constraint equation 2a + 5B = 1000, a = 0. … ii. 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. Thus the equation shows that C is a constant proportion of income. In such a case, the slope of the demand curve would be as follows: Where, -∆P = change in price (independent variable), ∆D = change in demand variable (dependent variable). For example, a manufacturing company requires 25 men (W), 10 machines (M), and 0.6 tons of raw materials (R) for the production of one unit of output (O). This chapter reviews some important definitions and methods that are commonly used in economics. For understanding the concept of differential calculus, we first need to get acquainted with the basic rules of differential calculus. Therefore, we can determine the value of Q for minimizing Q with the help of the derivative of the AC function that can be calculated as follows: By equating the preceding equation with zero, we get. The product of two different functions can be expressed as follows: The derivative of such functions can be represented as follows: δY / δX = f (X) δg (x)/δx + g (X) δf (x)/δx. While formulating theories a number of tools are used by experts in this field. so on. The aforementioned equation cannot be used when the value of ∆Q is very small as it tends to be zero. All the points that lie in the feasibility area are called feasible points. 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. The slope of tangent and demand curve is equal in measurement. Suppose a unit change in the independent variable x brings changes in the dependent variable y. For instance, if we try to establish the relationship between demand and price, there may be other variables which may also influence demand besides price. The different functions of managerial decisions in which differentiation method is used are as follows: In the preceding functions, we would only explain the rules of differentiation that are the rules for determining derivatives of functions. Refer to variables that are independent and are not affected by a change in any other variable. Here ‘a’ is constant and it has a value greater than zero but less than one (0

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