Microeconomics

Mrs. WAJEEHA BATOOL, MSc

ECONOMICS AND ADMINISTRATIVE SCIENCES
ALA-TOO INTERNATIONAL UNIVERSITY
 Key Economic Concepts

 Good: Anything from which individuals receive utility or satisfaction.

 Utility: The satisfaction one receives from a good.
 Bad: Anything from which individuals receive disutility or
dissatisfaction.
 Disutility: The dissatisfaction one receives from a bad.
 Resources: are required to produce the goods. Sometimes resources
are referred to as inputs or factors of production.
 Generally, economists divide resources into four broad categories.
 Factors of Production

 Land: includes natural resources, such as minerals, forests, water,

and unimproved land.
 For example, oil, wood, and animals fall into this category.
(Sometimes economists refer to this category simply as natural
resources.)
 Labor: consists of the physical and mental talents that people
contribute to the production process.
 For example, a person building a house is using his or her own labor.
 Factors of Production

 Capital: consists of produced goods that can be used as inputs for

further production. Factories, machinery, tools, computers, and
buildings are examples of capital. One country might have more
capital than another; that is, it has more factories, machinery, tools,
and the like.
 Entrepreneurship: refers to the talent that some people have for
organizing the resources of land, labor, and capital to produce goods,
seek new business opportunities, and develop new ways of doing
things.
 A Definition of Economics

 Scarcity: is the condition in which our wants (for goods) are greater
than the limited resources (land, labor, capital, and
entrepreneurship) available to satisfy those wants. In other words, we
want goods, but not enough resources are available to provide us with
all the goods we want.
 Economics: is the science of how individuals and societies deal with
the fact that wants are greater than the limited resources available
to satisfy those wants.
 Need for a Rationing Device

 A rationing device is a means of deciding who gets what of available

resources and goods. If people have infinite wants for goods and if
only limited resources are available to produce the goods, then a
rationing device is needed to decide who gets the available quantity
of goods. Dollar price is a rationing device.
 For example, 100 cars are on the lot, and everyone wants a new car.
How do we decide who gets what quantity of the new cars? The
answer is to use the rationing device called dollar price. The people
who pay the dollar price for a new car end up with one.
 Scarcity and Competition

 The economist suggests, competition exists because of scarcity. If

there were enough resources to satisfy all our seemingly unlimited
wants, people would not have to compete for the available but
limited resources.
 The economist sees that competition takes the form of people trying
to get more of the rationing device. If dollar price is the rationing
device, people compete to earn dollars.
 Basic Problems of an Economy

 The central problems of an economic society are similar to the

individual problems except that the problems here in an economic
society relate to the economy as a whole. The main problem is the
scarcity of resources in the face of unlimited wants. The scarce
resources have, however, alternative uses.
 The problems of an economic society are, symbolically expressed by
three question words, such as what? how? and for whom?
The problem of Allocation of Resources:
What?
 The term 'what?' refers to the problem of allocating resources to the
production of commodities and services.
 It is the problem of determining the commodities and services which
will be produced.
 Related to this problem is the necessity of determining the quantities
of selected commodities and services.
 Opportunity Cost

 Opportunity cost of undertaking an activity is the forgone benefit

from the next-best activity. Though a resource has alternative uses, it
cannot be put into more than one use at the same time.
 If the owner of a price of land decides to build a house on it, the
opportunity cost of the house will be the forgone benefit from its
next-best use which is, say, growing crops in it.
There Is No Such Thing as a Free Lunch!

 Economists are fond of saying that there is no such thing as a free

lunch. This catchy phrase expresses the idea that opportunity costs
are incurred whenever choices are made. Perhaps this is an obvious
point, but consider how often people mistakenly assume that there is
a free lunch.
 For example, some parents think education is free because they do
not pay tuition for their children to attend public elementary school.
That’s a misconception. “Free” implies no sacrifice and no
opportunities forfeited, but an elementary school education requires
resources that could be used for other things.
Scarcity & Related Concepts
 Production Possibility Curve

 The idea of opportunity cost can be explained with the help of an

opportunity cost curve, alternatively known as production possibility
curve.
 Suppose, a hypothetical economy can produce only two commodities:
guns and paddy, by using all its resources.
 We measure the quantity of food in million metric tons along the
vertical axis and the number of guns in millions along the horizontal
axis.
Production Possibility Curve
 Production Possibility Curve

 Each point on the curve AB shows a specific combination of two

commodities. The country chooses one and only one combination
from the set of many combinations on the curve AB. It cannot choose
more than one combination on the curve.
 Similarly, it cannot choose the point M, which it cannot produce with
the given resources.
 It would not choose any point below the production possibility curve
because production at such a point would entail inefficiency in
production.
 The Problem of Selecting Method of
Production: 'How?'
 The abbreviated question 'how?' refers to the problem of the choice of
the method of producing the selected commodities.
 There are different methods of producing the predetermined
quantities of a number of commodities and services.
 For example, there are labor intensive and capital intensive methods
of production. Normally, production of a commodity or service
requires all inputs of production.
 The quantities put in the production of a commodity may be changed,
because, one input may be substituted another depending on the
relative prices of two inputs.
 Equal Product Curve

 An equal product curve shows the different combinations of two

inputs, which produce a given quantity of output.
The Problem of Distribution: 'For Whom?'

 The third problem of an economic society as abbreviated by the

phrase 'for whom?' refers to the problem of distribution of the
produced commodities and services among the consumers.
 An economy may be endowed with many natural and non-natural
resources so that it can produce a large volume of goods and services.
The people of the economy might still face problems in meeting their
wants for daily necessities if most of the produced commodities and
services go to the consumption of a small section of the people.
 Most least developed countries (LDCs) face the problems of both
inadequate resources and distribution of income.
 Methodology of Economics

 Economics is a science in the sense that it employs scientific methods

of acquiring and disseminating knowledge. There is, however, a sharp
distinction between the methods of acquiring knowledge used in
economics and those used in natural sciences like physics, chemistry,
etc.
 The natural sciences conduct controlled experiments with inanimate
matters and animals in laboratories whereas, Economics experiments
with human being who cannot be subjected to such controlled
experiments.
 Positive & Normative Economics

 Positive analysis is concerned with the description of economic

phenomena and analyzes organizations, functions and interactions of
economic agents in the economy. It also deals with the nature and
the consequences of different economic policies.
 Normative analysis is concerned with value judgments about
economic agents. It discusses how an economic agent should behave,
but positive analysis discusses how it behaves.
 Positive & Normative Economics

 For example, the government proposes enacting a law that determines the
minimum wage for workers in ready-made garments industry .
 Positive analysis deals with the following aspects of the minimum wage
regulation:
 What will be the implications of minimum wage for employment level and
price of garments?
 What will be the net effect of minimum wage regulation for the economy as a
whole?
 How will the efficiency and equity of the national economy be affected?
 Normative analysis is concerned with the question of whether the government
should implement the minimum wage act at all. It will take a host of
economic and non-economic factors into consideration for making value
judgments on this issue.
Distinction between Microeconomics and
Macroeconomics
 Microeconomics deals with behavioral patterns of the smallest
economic agents who make their decisions independently. It shows
how allocation of resources, production of commodities,
determination of price, etc., are affected by the independent
decisions of the consumers, producers and other economic agents.
 Microeconomics analyzes the decision-making process of different
economic agents under different behavioral assumptions.
 Consumer, households, production firms, markets for products,
markets for inputs are a few examples of microeconomic topics.
Distinction between Microeconomics and
Macroeconomics
 Macroeconomics deals with aggregate variables facing an economy.
Gross national product (GNP), aggregate employment level, the
general price level, the growth rate of the economy, etc., are few
examples of macroeconomic topics.
 The macroeconomic topics are quite distinct from the microeconomic
topics.
 For example, Macroeconomics shows how the equilibrium levels of
income and consumption of the economy are determined, whereas
Microeconomics determines the utility maximizing levels of
commodities of a consumer.
 Socialist and other Centrally Planned
Economics
 In socialist and other centrally planned economies, the answers to the
fundamental questions are dictated by central authority under the
government.
 Usually, a planning commission under close supervision of the
government takes decisions about the nature and production targets
of different commodities and services.
 In doing so, the planning commission usually makes use of the vast
wealth of data on consumers' tastes, preferences, and demand and
supply conditions prevailing in the country.
 Capitalist Economy

 In a capitalist economic system, answers to the four fundamental

questions are provided through the operation of the market
mechanism in the economy.
 A market for a commodity is the collection of consumers and
suppliers for that commodity, who interact among themselves for
exchanges.
 The participants of the market need not be concentrated in one
place. They may be widely scattered all over the whole country or
beyond the national geographic boundaries.
 Mixed Economy

 A mixed economic system is a system that combines aspects of both

capitalism and socialism.
 A mixed economic system protects private property and allows a level
of economic freedom in the use of capital, but also allows for
governments to interfere in economic activities in order to achieve
social aims.
 Private ownership of some key sectors of the economy is replaced by
state ownership. In the USA, anti-trust laws are in vogue to check and
curb the emergence of monopoly powers.
Thank you!