Engel Curve
Posted inMicroeconomics

Engel Curve – Cardinal Utility Approach | Microeconomics

Engel Curve 

An Engel curve is a curve that shows the optimum quantity of a commodity purchased at different levels of income. In other words, Engel’s curve indicates how much quantity of a commodity a consumer will consume at different levels of his income in order to be in equilibrium. When prices and preferences are constant, the Engel Curve is the locus of all quantity demand points for the goods at various income levels. The Engel curve was named for German statistician Ernst Engel (1821-96) and represents a relationship between the demand for a good and the income of its buyers, the former depending on the latter. An individual’s Engel curve, however, can be obtained from his ICC.

Importance of Microeconomics in Business Decision Making
Posted inMicroeconomics

Importance of Microeconomics in Business Decision Making – Microeconomics | Management Notes

Importance of Microeconomics in Business Decision Making

Importance of Microeconomics in Business Decision Making: Microeconomics plays an important role in business decision making. It helps the business managers in making production plans and trade decisions. It provides an analytical tool to examine the market mechanisms and helps business firms to take decision about their production and pricing policies.

The following are the points that represent the importance of microeconomics in business decision making.

a) Optimal resource utilization

Microeconomics tells how productive resources are allocated in the production of various goods and services as productive resources are scarce in the economy. It also helps to find out, what to produce, how much to produce, and for whom to produce.

Limitations of Microeconomics
Posted inMicroeconomics

Limitations of Microeconomics – Microeconomics | Management Notes

Limitations of Microeconomics

Microeconomics is the branch of economics that deals with the study of how individual households and firms make decisions and how they interact in markets. Microeconomics studies principles, problems, and policies concerning the optimum allocation of resources with maximum satisfaction. Microeconomics plays a very important role in the study of economic theory.

Besides its importance it has certain limitations which are as follows:

  1. Wrong conclusions
  2. Static
  3. Unrealistic assumptions
  4. Limited scope
  5. Ignores the role of the government

a) Wrong conclusions

According to the viewpoint of macroeconomics, the conclusions drawn from the study of microeconomics in many cases are not valid.Microeconomics has often been proven to be misleading in many ways. Due to its focus on the individual, what is applicable to an individual may not be applicable to economies. The economic approach involves many generalizations and inferences based on certain circumstances and conditions. Often, these generalizations lead to a misunderstanding of the economic situation. As a result, wrong conclusions are drawn.

Elasticity - Very Short Questions
Posted inMicroeconomics

Elasticity – Very Short Questions | Introductory Microeconomics

Elasticity of demand:
The elasticity of demand is the measure of responsiveness of demand for a commodity to the change in any of its determinants like price of the same commodity,price of the related commodity,income of the consumer,etc.

Types of elasticity of demand:
There are three types of elasticity of demand.They are:

  • Price elasticity of demand(Ep)
  • Income elasticity of demand(Ey)
  • Cross elasticity of demand(Ec)

Price elasticity of demand:
Price elasticity of demand is the measure of the degree of responsiveness of quantity demanded for a commodity to the change in its price.

Types of price elasticity of demand:
The types of price elasticity of demand are as follows:

  • Perfectly elastic demanded(Ep=infinity)
  • Relatively elastic demand(Ep>1)
  • Unitary elastic demand(Ep=1)
  • Relatively inelastic demand(Ep<1)
  • Perfectly inelastic demand(Ep=0)

Four determinants of price elasticity of demand:
The main determinants of price elasticity of demand are as follows:

  • Nature of commodity
  • Substitute
  • Goods having several uses
  • Income of the consumer