Microeconomics mainly deals with an individual’s behavior and decisions that affect the demand and supply of goods and services. www.unitedworld.edu.in

1. ROLE OF MICRO ECONOMICS IN
PRICING A PRODUCT

2. INTRODUCTION
 Microeconomics mainly deals with an individual’s
behavior and decisions that affect the demand and
supply of goods and services.
 In microeconomics actions of individuals, households
and business are important.
 A demand curve shows the relationship between the
quantity of a good that consumers are willing to buy
and the price of the goods.
 A supply curve gives the relationship between the
quantity of a good that producers are willing to sell and
the price of the good.

3. EQUILIBRIUM PRICE
 Economic equilibrium is a state
of the world where economic forces
are balanced and in the absence of
external influences the (equilibrium)
values of economic variables will
not change. For example, in the
standard text-book model of perfect
competition, equilibrium occurs at
the point at which quantity
demanded and quantity supplied
are equal. Market equilibrium in
this case refers to a condition where
a market price is established
through competition such that the
amount of goods or services sought
by buyers is equal to the amount of
goods or services produced by
sellers. This price is often called the
competitive price or market
clearing price and will tend not to
change unless demand or supply
changes.

4. DECREASE IN SUPPLY
 When supply of the commodity falls in the
market due to any particular reason, demand
remaining constant, its price rises as the
commodity would not be easily available in the
market. This is an inward shift in supply.
The supply curve may shift outwards if there is
 A fall in the costs of production (e.g. a fall in
labour or raw material costs)
 A government subsidy to producers that reduces
their costs for each unit supplied
 Favourable climatic conditions causing higher
than expected yields for agricultural
commodities
 A fall in the price of a substitute in production
 An improvement in production technology
leading to higher productivity and efficiency in
the production process and lower costs for
businesses
 The entry of new suppliers (firms) into the
market which leads to an increase in total
market supply available to consumers
 .

5. INCREASING DEMAND
 Now if a situation
arises that there is an
increase in income.
This may lead to
higher purchasing
power of a consumer,
demand for a
commodity goes up
and hence demand
curve shifts to the right
but the supply does
not change.

6. INSTANT IN INCREASE IN DEMAND
 Palm oil is a derived demand as it is used as an
ingredient (input) in the manufacturing of foodstuff
like instant noodles, breakfast bars, doughnuts,
margarine, crackers, crisps or French fries.
 Hence, an increase in demand for these end-
products will result in an increase in the demand for
palm oil.

7. SUBSTITUTE GOODS
 A substitute good, in contrast to a
complementary good, is a good with
a positive cross elasticity of
demand. This means a good's
demand is increased when the price
of another good is increased.
Conversely, the demand for a good
is decreased when the price of
another good is decreased. If goods
A and B are substitutes, an increase
in the price of A will result in a
leftward movement along the
demand curve of A and cause the
demand curve for B to shift out. A
decrease in the price of A will result
in a rightward movement along the
demand curve of A and cause the
demand curve for B to shift in.

8. COMPLIMENTARY GOODS
 Method in which one of the complementary
products (shaving razor, for example) is priced to
achieve maximum sales volume, (without cost or
profit considerations) to stimulate the demand for
the other product (razor blades). The objective is
to generate a level of profit that adequately
covers losses sustained by the first product.

9. EFFECT OF COMPETITION
 Perfect Competition - A large number of firms produce a good,
and a large number of buyers are in the market. There is little
room for differentiation between products, and individual firms
cannot affect price . Market price is the price of the product.
 Monopolistic Competition - A large number of firms produce a
good, but the firms are able to differentiate their products. There
are also few barriers to entry. Each firm has relative freedom to
set its own price.
 Oligopoly - A relatively small number of firms produce a good, and
each firm is able to differentiate its product from its competitors.
Barriers to entry are relatively high.
 Monopoly - One firm controls the market. Because the firm
controls the entire share of the market , it can charge any price.

10. CONCLUSION
This is how a economy can be analyzed
through supply and demand curves.

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