Introduction to Microeconomics

What is Economics?

ECONOMICS is the social science of human behavior in

relation to how scarce resources are allocated and how
choices are made between alternative uses.

Economics study mankind’s activities, which are

production, distribution and consumption of goods and
services that are capable of satisfying human wants and
desires.
 What is Economy?

 An economy is the system of trade and industry by

which the wealth of a country is made and used.

 It is a system that attempts to solve the basic

economic problems. The function of the economy is
to allocate scarce resources among unlimited
wants.

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 Economics, Scarcity, and Choice
 Economics
Study of choice under conditions of
scarcity.

 Scarcity
Situation in which the amount of
something available is insufficient to satisfy
the desire for it.

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 Scarcity and Social Choice
The problem for society is a scarcity of resources

Scarcity of Labor
Scarcity of Capital
Human capital
Stock capital
Scarcity of land
Physical space
Scarcity of entrepreneurship
Ability and willingness to combine the
other resources into a productive
enterprise
In other words, society faces the scarcity of
resources
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 Scarcity and Economics

 The scarcity of resources deals

 Households allocate limited income among goods and services
 Business firms choices of what to produce and how much are
limited by costs of production
 Government agencies work with limited budgets and must carefully
choose which goals to pursue

 Economists study these decisions to

 Explain how our economic system works
 Forecast the future of our economy
 Suggest ways to make that future even better

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 Microeconomics
 Micro
 Micro comes from Greek word mikros meaning
“small”
 Microeconomics
 Study the behavior of individual households,
firms, and government
 Choices they make
Interaction in specific markets
Focuses on individual parts of an economy, rather
than the whole

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 Microeconomics is the study of how individuals and firms
make themselves as better off as possible in a
world of scarcity.

 Microeconomics is often called price theory why,

because, prices play important role to determine market
outcomes.

 It explains how the actions of all buyers and sellers

determine prices and how prices influence the
decisions and actions of individual buyers and sellers.
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 Features of Microeconomics
 Microeconomics is concerned with the small parts of the
economy.
 Studies about individual firms and consumers.
 Studies economy in disaggregated manner.
 Assumes the existence of full employment in the total
economy.
 objectives: Scarce resources are allocated among
alternative uses.
 Analyses economic phenomenon under the ceteris paribus
assumption.
 Therefore, microeconomics is a method of partial
equilibrium analysis.
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 Macroeconomics
 Macro
 Macro comes from Greek word, makros, meaning “large”

 Macroeconomics
 Study of the economy as a whole. It is policy oriented..
it studies the relationship and the interaction between the
“Factors or Forces”. Focuses on big picture and
ignores specific details.

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 Features of Macroeconomics
 Macroeconomics is the study of entire economy in an
aggregated approach
 Principal variables: national income, level of employment,
inflation, money supply, growth rates etc.
 Objectives :To determine the aggregate production, level
of employment, general price level and their rate of
change over time.
 Macroeconomics is a policy science.
 The analytical tools are fiscal policy and monetary policy.
 It is related to the balance between aggregate demand and
aggregate supply.

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 Positive Economics

 Positive Economics: Positive economics deals with or

studies ‘what is’ or how the economic problems facing a
society are actually solved. It deals with the analysis of
facts. It deals with the question ‘what is’, ‘what was’, and
‘what will be’
 Positive economics aims to explain cause and affect
relationship between or among the economic issues and
problems
 E.g,
The per capita income of Nepal is less than the per capita income of India.
The rise in tax rate on commodity may raise the price of the commodity

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 Normative Economics
 Normative economics: deals with ‘what ought to be’. It
always asks ‘what is best’ or ‘whether it is good or bad’
instead of what reality is.
 It is based on positive economics and value judgments of
the society.
 It provides guideline for policy makers so as to increase
the maximize the social welfare. It concerns with how the
basic economic functions should be performed.

 E.g.
Since nearly 25% people in Nepal live below the poverty line. The government
should reduce poverty through different programs and policies.
The government should not impose higher tax rate on the goods of basic needs.
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 Factors of production
LAND :- is the natural resources on the planet. It includes space on
the ground, hills, seas and oceans, air etc.

LABOUR:- is the human input (workers, managers etc) into the

production process. Each individual has a different level of skills,
qualities and qualifications. This is known as the human capital.

CAPITAL: – man made physical goods used to produce other goods

and services

ENTERPRISE:- The entrepreneur provides the initial ideas. They risk

their own resources in business ventures. They also organize the other
3 factors of production.

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 Allocation of Resources

WHAT TO PRODUCE – food or industrial machinery,

books or newspapers, and so on
 
HOW TO PRODUCE – how many workers will be used,
with what machinery…

FOR WHOM TO PRODUCE – will some people get a

bigger share of resources than other? Will some people
get so few resources that they cannot survive, while other
live in luxury?

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Uses / Importance / Advantages of Microeconomics

1. Individual Behavior Analysis

Micro economics studies behavior of individual consumer or producer in a
particular situation.
2. Resource Allocation
Resources are already scare i.e less in quantity. Micro economics helps in
proper allocation and utilization of resources to produce various types of goods
and services.
3. Price Mechanization
Micro economics decides prices of various goods and services on the basis of
'Demand-Supply Analysis'.
4. Economic Policy
Micro economics helps in formulating various economic policies and economic
plans to promote all round economic development.
5. Free Enterprise Economy
Micro economics explain operating of a free enterprise economy where
individual has freedom to take his own economic decisions. 15
Types of Microeconomics:

1) Micro static analysis

2) Micro comparative static analysis
3) Micro dynamic analysis

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 Comparative micro static analysis

  Comparative micro static analysis compares one

equilibrium position with another when data have changed
and system has finally reached another equilibrium position.

 It does not show how the system has reached the final
equilibrium position with a change in data.

 It explains and compares the initial equilibrium position with

the final one reached after the system has adjusted to a
change in data.

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 Cont…
 Thus, in comparative static analysis, equilibrium positions
corresponding to different sets of data are compared

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 Micro dynamic analysis

 Dynamic analysis of the two equilibrium positions with

different sets of data

 It is used to explain the dynamics of demand, supply and

price over long period of time. The cob-web model analyses
the movements of prices and outputs when supply is
wholly determined by prices in the previous period.

 (e.g. prices of perishable commodities like vegetables).

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 Convergent Cob-web

 Under this model the supply is a function of previous year

production i.e.
St= f (Productiont-1) ………………..(i)
‘t’ = is the current period
t-1 = is a previous period

and on the other hand the demand is the function of current

price i.e. Dt = f (Pt) ……………….(ii)

 The equality between quantity supplied and quantity demand

is called as
Market equilibrium .i.e. QSt = QDt
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Graphically

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Ten Principles of Economics

1. People face tradeoffs

2. The cost of something is what you give up
to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off

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 Cont..

6. Markets are usually a good way to organize

economic activity
7. Governments can sometimes improve market
outcomes
8. A country's standard of living depends on its ability
to produce goods and services
9. Prices rise when the government prints too much
money
10. Society faces a short-run tradeoff between
Inflation and Unemployment
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The End

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