Microeconomics Formula

List of Microeconomics Formula

MicroeconomicsMicroeconomicsMicroeconomics is a study in economics that involves everyday life, including what we see and experience. It studies individual behavioural patterns, households and corporates and their policies. It deals with supply and demand behaviours in different markets, consumer behaviour, spending patterns, wage-price behaviour, corporate policies.read more is termed as the study of economics where the performance of firms and individuals towards delivering sustainable results by employing limited resources are assessed, analyzed and studied. It also studies how one individual or firm interacts with another individual or firm. The broad goal of microeconomics is the assessment and study of market prices for the goods and services offered and how well the limited resources are utilized to deliver the goods and services.

The following microeconomics formulas that help in understanding the position of the economy are listed below  –

Sr NoFormula NameFormula
1Total RevenuePrice x Quantity in Demand
2Marginal RevenueChanges in Total Revenues Earned / Changes in the Quantity Traded
3Average RevenueTotal Income or Revenue earned by the Business / Total Quantity
4Total CostsTotal costs incurred on fixed basis + Total costs that vary with the quantity produced
5Marginal CostsChanges in the Level of Total Costs / Changes in the level of Quantity Produced
6Average CostTotal Costs / Total Quantity
7Average FixedTotal Fixed Costs / Total Quantity
8Average VariablesTotal Variable Costs / Total Quantity
9Profit EarnedTotal Revenue – Total Costs
10Profit EarnedMarginal Revenue – Marginal Costs

#1 – Total Revenue

It is defined as the situation wherein demand is assessed in terms of price elasticity. It is expressed as the product of the overall price and the quantity in demandQuantity In DemandQuantity demanded is the quantity of a particular commodity at a particular price. It changes with change in price and does not rely on market equilibrium.read more. If the prices are high, it would result in inelastic demand on prices wherein higher prices result in more revenues. Demand is elastic when the prices are high and results in low volumes.

Mathematically, it can be illustrated as follows: –

Total Revenue = Price x Quantity in Demand

#2 – Marginal Revenue

The marginal revenueMarginal RevenueThe marginal revenue formula computes the change in total revenue with more goods and units sold." The value denotes the marginal revenue gained. Marginal revenue = Change in total revenue/Change in quantity sold. read more is expressed as the ratio of total revenue changes with respect to the modifications in the quantity retailed. Marginal revenue is the additional revenue earned for the additional quantity sold. Mathematically, it can be illustrated as follows: –

Marginal Revenue = Changes in Total Revenues Earned / Changes in the Quantity Traded

#3 – Average Revenue

Revenues can be described as the receipts a firm received once they sold finished goods to its consumers. The average revenue is expressed as the ratio of total revenue with respect to the overall quantity sold.  Mathematically, it can be illustrated as follows: –

Average Revenue = Total Income or Revenue earned by the Business / Total Quantity

#4 – Total Costs

Under the concept of economics, the total cost is determined as the sum of the fixed costsFixed CostsFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more and the variable costs. The variable costs are termed as the costs that have a tendency to vary with the level of goods sold by the organization. The fixed costs are defined as the type of costs that endure being same throughout the levels of quantity sold by the business.

Mathematically, it can be illustrated as follows: –

Total Costs = Total costs incurred on fixed basis + Total costs that vary with the quantity produced

#5 – Marginal Costs

Marginal Cost formulaMarginal Cost FormulaMarginal cost formula helps in calculating the value of increase or decrease of the total production cost of the company during the period under consideration if there is a change in output by one extra unit. It is calculated by dividing the change in the costs by the change in quantity.read more is defined as the appreciation or deterioration in the overall costs that the business incurs while it prepares finished goods ready for the sale.  Graphically, marginal costs are plotted as a U-shaped curve wherein the costs appreciate initially and as the production rises, the costs deteriorate. Mathematically, it can be illustrated as follows: –

Marginal Costs = Changes in the Level of Total Costs / Changes in the level of Quantity Produced

#6 -Average Total Cost

The average total costAverage Total CostThe cost per unit of the quantity produced is calculated using the average total cost formula. It is calculated by dividing the total manufacturing cost by the total number of units produced.read more is defined as the total costs incurred by the business involved in manufacturing and production to the level of quantity of items produced by the business. In such a relationship, determine the total costs and total quantity to arrive at the average total costs. Mathematically, it can be illustrated as follows: –

Average Costs = Total Costs / Total Quantity

#7 – Average Fixed Costs 

The average fixed cost is defined as the total fixed costs incurred by the business involved in manufacturing and production to the level of quantity of items produced by the business. In such a relationship, determine the total fixed costs and total quantity to arrive at the average total fixed costs. Mathematically, it can be illustrated as follows: –

Average Fixed Costs = Total Fixed Costs / Total Quantity

#8 – Average Variable Costs

The average variable costAverage Variable CostAverage Variable Cost refers to the cost that directly varies with the output incurred on each unit of goods or services. It is evaluated by dividing the total variable cost incurred during the period by the number of units produced.read more is defined as the total variable costsTotal Variable CostsTotal variable cost is the total of all variable costs that would change in proportion to the output or the production of units and helps analyze the company's overall costing and profitability. Total variable cost formula = number of units produced x variable cost per unit.read more incurred by the business involved in manufacturing and production to the level of quantity of items produced by the business. In such a relationship, determine the total variable costs and total quantity to arrive at the average total variable costs. Mathematically, it can be illustrated as follows: –

Average Variable Costs = Total Variable Costs / Total Quantity

#9 -Profit Made by the Firm

In microeconomics, profit could be computed using several relationships. Firstly, it can be computed as the difference between total revenues and total costs. It can be computed as the difference in marginal revenue and marginal costsMarginal CostsMarginal cost formula helps in calculating the value of increase or decrease of the total production cost of the company during the period under consideration if there is a change in output by one extra unit. It is calculated by dividing the change in the costs by the change in quantity.read more. Whenever the profits are lesser than average variable costs, the business can no longer sustain itself and it has to be shut down. Mathematically, it can be illustrated as follows: –

Profit Earned = Total Revenue – Total Costs

It can additionally be illustrated as follows: –

Profits Earned = Marginal Revenue – Marginal Costs

Whenever marginal revenue exceeds the marginal costs then the organization or firm should produce more items to enhance its profitability. Similarly, whenever marginal revenue deteriorates below the marginal costs then the organization or firm should produce fewer items to lower down costs.

Examples

Let’s see some simple to advanced examples of the microeconomics formula to understand it better.

You can download this Microeconomics Formula Excel Template here – Microeconomics Formula Excel Template

Example #1

Let us take the example of a small business. It sells its finished products at a price of $100 per unit. It normally generates 100 units a year. For each unit, it incurs the cost of $80 for developing the finished products. Help the management determine the profits earned by the small business.

Solution

Use the below-given data

Example 1

Calculation of Total Revenue 

Microeconomics Formula Example 1.1
  • =$100*100
  • Total Revenue = $10000

Calculation of Total Costs

Example 1.2
  • =$80*100
  • Total Costs = $8000

Calculation of Profit Earned

Microeconomics Formula Example 1.3
  • =$10,000 – $8,000
  • Profit Earned = $2,000

Hence the business earned the profit of $2,000 on producing and selling 100 units of goods.

Example #2

Let us take the example of Knowledge process solutions. The business focuses on developing good contents for its clients maintaining websites. The cost of software annually amounts to $1,000 per year. The business charges its clients $50 per article submitted and accepted. Annually business supplies around 100 articles to its clients. Help the management to determine the profit earned on its developing and supplying services.

Solution

Use the below-given data

Example 2

Calculation of Total Revenue 

Microeconomics Formula Example 2.1
  • =$50*100
  • Total Revenue = $5000

Calculation of Profit Earned

Example 2.2
  • =$5,000 – $1,000
  • Profit Earned = $4,000

Hence the business earned the profit of $4,000 on producing and selling 100 articles by bearing an annual cost of $1,000.

Example #3

Let us take the example of company Uber. The company is one of the popular entities that offer cab aggregator services to the daily riders and commuters. The business has developed a dynamic mechanism that studies the demand for cabs with the supply of the cabs with riders.

They also study price levels on which interactions take place between the riders and the drivers of a cab. It was studied that the consumer’s demand was relatively inelastic when fares of the rides doubled itself two times. The system further analysed the instances when the rider accepted an uber booking and when it rejected the bookings wherein it broadly studied the factors relating to time, price, demand and supply.

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