Microeconomics Formula

Updated on April 5, 2024
Article byRishab Nigam
Edited byRishab Nigam
Reviewed byDheeraj Vaidya, CFA, FRM

List of Microeconomics Formula

Microeconomics is 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 explores how one individual or firm interacts with another individual or firm. Microeconomics’ broad goal is to determine and research market prices for the goods and services offered and how well the limited resources are utilized to deliver the goods and services.

Key Takeaways

  • Microeconomics is the study of how individuals and firms make decisions about using limited resources to produce goods and services.
  • It examines how firms and individuals interact with each other in the market.
  • The main goal of microeconomics is to analyze the market prices of goods and services and determine how efficiently resources are being utilized to produce them.
  • If a firm’s marginal revenue exceeds its marginal costs, it should increase production to improve profitability.
  • If a firm’s marginal revenue falls below its marginal costs, it should decrease production to reduce costs.

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 a 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

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

#1 – Total Revenue

It is 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 will result in inelastic demand, resulting in more revenue. Conversely, demand is elastic when the prices are high, and there are 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 concerning the modifications in the quantity retailed. Marginal revenue is the additional revenue earned for the extra 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 it sold finished goods to its consumers. The average revenue is the total revenue ratio concerning 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 EconomicsEconomicsEconomics is an area of social science that studies the production, distribution, and consumption of limited resources within a society.read more, the total cost is determined as the sum of 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 variable costs. The variable costs are the costs that tend to vary with the level of goods sold by the organization. Fixed costs are the type of costs that endure being the same throughout the levels of quantity sold by the business.

Mathematically, it can be illustrated as follows:

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

#5 – Marginal Costs

The 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. At the same time, it prepares finished goods ready for sale. Graphically, marginal costs are plotted as a U-shaped curve wherein the costs appreciate initially, and as the production rises, the prices 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 the total costs incurred by the business involved in manufacturing and production to the quantity of items produced by the company. 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 costAverage Fixed CostAverage Fixed Cost refers to the company's fixed production expenses per unit of goods produced. Fixed costs are costs that do not vary with the amount of output produced by the company and are independent of the number of goods or services produced by the business.read more is the total fixed costs incurred by the business involved in manufacturing and production to the quantity of items produced by the company. 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 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 company involved in manufacturing and production to the 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, profitProfitProfit refers to the earnings that an individual or business takes home after all the costs are paid. In economics, the term is associated with monetary gains. read more could be computed using several relationships. Firstly, it can be calculated as the difference between total revenues and costs. It can be calculated 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

When marginal revenue exceeds marginal costs, the organization or firm should produce more items to enhance its profitability. Similarly, when marginal revenue deteriorates below marginal costs, the organization or firm should create fewer items to lower costs.

Examples

Let us 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 $100 per unit. It normally generates 100 units a year. Each unit 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 = $10,000

Calculation of Total Costs:

Example 1.2
  • =$80*100
  • Total Costs = $8,000

Calculation of Profit Earned:

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

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

Example #2

Let us take the example of Knowledge Process Solutions. The business focuses on developing good content for its clients’ maintaining websites. The cost of software annually amounts to $1,000 per year. The company charges its clients $50 per article submitted and accepted. Annually business supplies around 100 articles to its clients. Help the management determine the profit earned on 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 a 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 the company Uber. The company is a popular entity that offers cab aggregator services to 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 occur between the riders and the drivers of a cab. For example, it learned that the consumer’s demand was relatively inelastic when fares of the rides doubled two times. The system further analyzed the instances when the rider accepted an Uber booking and rejected the booking. It broadly studied the factors relating to time, price, demand, and supply.

Frequently Asked Questions (FAQs)

1. What is an intermediate microeconomics formula sheet?

An intermediate microeconomics formula sheet is a document that lists the key formulas and equations used in intermediate microeconomics courses. Students can use it as a reference tool to help them solve problems and understand the concepts covered in the course.

2. What is the marginal utility microeconomics formula?

The marginal utility formula calculates the additional satisfaction or usefulness a consumer derives from consuming an additional unit of a good or service. It is calculated as the total utility change divided by the quantity consumed change. The formula is MU = ΔTU/ΔQ, where MU is the marginal utility, ΔTU is the change in total utility, and ΔQ is the change in quantity consumed.

3. What is the marginal physical product microeconomics formula?

The marginal physical product formula is used to calculate the additional output or production that results from adding one more unit of labor or capital to a production process. The formula is MPP = ΔQ/ΔL, where MPP is the marginal physical product, ΔQ is the change in total output, and ΔL is the change in the quantity of labor or capital input.

Recommended Articles

This article is a guide to the Microeconomics Formula. We discussed the microeconomics calculations, examples, and a downloadable Excel template. You can learn more from the following articles: –