Basic Principles of Microeconomics

Microeconomics studies the behaviour of individual economic agents such as consumers, firms, and investors. It focuses on how these agents make choices under scarcity and how their interactions determine prices and quantities in specific markets.

In the Indian context, microeconomic analysis helps a research analyst evaluate the demand for a mutual fund scheme, the pricing power of a listed company, or the cost structure of a manufacturing unit. SEBI expects analysts to back their recommendations with clear micro‑economic reasoning.

For the exam, you will often be asked to identify the correct diagram, compute elasticity, or choose the appropriate market‑structure classification. Remember that micro‑economic concepts are the building blocks for more advanced topics like portfolio risk assessment.

The law of demand states that, ceteris paribus, quantity demanded falls when price rises. Conversely, the law of supply says that quantity supplied rises with price. Both laws are illustrated by downward‑sloping demand and upward‑sloping supply curves.

Market equilibrium occurs where the two curves intersect, giving the equilibrium price (P*) and quantity (Q*). At this point, the amount consumers are willing to buy equals the amount producers are willing to sell, and there is no inherent pressure for price change.

Exam questions frequently present a shift in either demand or supply and ask you to predict the new equilibrium. A common trap is to confuse a shift (which changes both price and quantity) with a movement along a curve (which changes only one variable).

Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. It is calculated as the percentage change in quantity divided by the percentage change in price.

When |E_d| > 1, demand is elastic – a small price change leads to a larger proportionate change in quantity. When |E_d| < 1, demand is inelastic – quantity changes little relative to price. At |E_d| = 1, demand is unit‑elastic, and total revenue remains unchanged with price variations.

For the NISM exam, you must be able to compute PED using the midpoint method and interpret the result to decide whether a price increase will raise or lower total revenue. This concept is directly applied in pricing recommendations for equity research reports.

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. Graphically, it is the area above the market price and below the demand curve.

Producer surplus is the difference between the market price received and the minimum price at which producers are willing to supply. It appears as the area below the market price and above the supply curve.

In Indian equity research, analysts often cite consumer surplus to argue for pricing power, while producer surplus helps assess profitability under different cost scenarios. The exam may ask you to identify which surplus increases when a price ceiling is imposed.

Costs are classified as fixed (do not vary with output) and variable (change with output). Adding them gives total cost (TC). Dividing TC by quantity yields average cost (AC), while the change in TC for one additional unit gives marginal cost (MC).

Understanding MC is crucial because profit maximisation occurs where MC equals marginal revenue (MR). In the Indian market, firms often face rising MC due to labour regulations and input price volatility, influencing their pricing strategies.

Exam questions may provide a short cost table and ask you to compute MC or decide whether the firm should expand output. Remember the formula for MC and keep units consistent (Rs per unit).

Four principal market structures are examined in microeconomics: perfect competition, monopolistic competition, oligopoly, and monopoly. Each differs in the number of sellers, product differentiation, and the degree of price‑setting power.

In a perfectly competitive market, many sellers offer identical products, leading to price‑taking behaviour. In monopolistic competition, many firms sell differentiated products, giving limited pricing power. Oligopolies consist of few large firms that may collude or compete strategically. A monopoly has a single seller with complete control over price.

Indian financial analysts must identify the appropriate structure when evaluating a company's competitive position. The NISM exam often presents a brief industry description and asks you to select the correct market‑structure category.