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Session 1

This document provides an introduction to microeconomics. It discusses key microeconomic concepts like scarcity, trade-offs, opportunity cost, and supply and demand. It also compares different economic systems like capitalism and communism. The document outlines the scientific method used in economics and discusses how individuals and firms make decisions by weighing costs and benefits at the margin in response to incentives and prices.

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Akshit Gaur
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25 views17 pages

Session 1

This document provides an introduction to microeconomics. It discusses key microeconomic concepts like scarcity, trade-offs, opportunity cost, and supply and demand. It also compares different economic systems like capitalism and communism. The document outlines the scientific method used in economics and discusses how individuals and firms make decisions by weighing costs and benefits at the margin in response to incentives and prices.

Uploaded by

Akshit Gaur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Microeconomics

Madhuparna Karmokar
NAB M 205
[email protected]
Introduction
Scarcity:
• society’s resources are limited
• society cannot produce all the goods and services people want to
have

Resources are allocated not by an all-powerful dictator but through the


combined choices of millions of households and firms.
Introduction
Societies are confronted with the following questions:
• what to produce?
• how to produce goods?
• who gets what?

The word economy comes from the Greek word oikonomos meaning
“one who manages a household”.
Economics: study of how society manages its scarce resources.
Institutions for Allocating Resources
Decentralization versus Centralization
• A capitalist economy is one in which the means of production are
mostly owned and controlled by and for the benefit of private
individuals, and the allocation of resources is governed by voluntary
trading among businesses and consumers.

• A communist economy is one in which the state owns and controls


the means of production and distribution.
Institutions for Allocating Resources
• Markets are economic institutions that provide people with
opportunities and procedures for buying and selling goods and
services.
• A market economy allocates scarce resources primarily through
markets. In a free market system, the government mostly allows
markets to operate as they will, with little regulation or other
intervention.
• Other ways to decentralize resource allocation without using markets:
• space on the beach are available on a first- come first-served basis.
• seats in an oversubscribed college class, may be assigned by lottery.
Microeconomics versus Macroeconomics
• Microeconomics deals with the behavior of individual economic units
like consumers, workers, investors, owners of land, business firms as
well as the markets that these units comprise.
• Macroeconomics deals with aggregate economic quantities, such as
the level and growth rate of national output, interest rates,
unemployment, and inflation.
Positive versus Normative Analysis
• Positive analysis:
• descriptive
• about how the world is.
• Example: Minimum-wage laws cause unemployment.

• Normative analysis:
• prescriptive.
• claim about how the world ought to be.
• Example: The government should raise the minimum wage.
The Scientific Method
Step 1: Initial observation
Step 2: Theorizing
Step 3: Identification of additional implications
Step 4: Further observation and testing
Step 5: Refinement of the theory
The Scientific Method
• Mathematical models
• Simplifying assumptions
• Data analysis
Some Central Themes (Decision)
• Theme 1: Trade-offs are unavoidable.
• To get something that we like, we usually have to give up something else that
we also like
• Making decisions requires trading off one goal against another
• Trade-offs the society faces
• Guns and Butter
• Clean environment and a high level of income
• Efficiency and equality
Some Central Themes (Decision)
• Theme 2: To choose well, focus on the margin.
• While some decisions have an all or nothing quality, most are matters of degree.
• To determine whether a particular choice is best, we ask whether a small
adjustment of the choice—also known as a marginal change —will lead to
improved results.

• Theme 3: People respond to incentives.


• An incentive is something that induces a person to act, such as the prospect of a
punishment or reward.
• Rational people make decisions by comparing costs and benefits, they respond
to incentives.
Some Central Themes (Decision)
• Theme 4: Prices provide incentives.
• The costs of buying goods and the benefits of selling them depend on their
prices.
• An increase in the price of a good reduces the incentive to buy and increases
the incentive to sell.
Some Central Themes (Market)
• Theme 5: Trade can benefit everyone.
• Trade occurs whenever two or more people exchange valuable goods or
services.
• Through trade, someone who owns a good that is of relatively little value to
him, but of substantial value to another, can exchange it for something he
values morehighly.

• Theme 6: The competitive market price reflects both value to


consumers and cost to producers.
Some Central Themes (Market)
• Theme 7: Compared to other methods of resource allocation, markets
have advantages.

• Theme 8: Sometimes, government policy can improve on free market


resource allocations.
Production Possibilities Frontier
Shows the combinations of output that the economy can possibly produce.
Opportunity Cost
• An opportunity cost is the cost associated with forgoing the
opportunity to employ a resource in its best alternative use.
• Opportunity cost = Explicit costs + Implicit costs
• Explicit costs: input costs that require an outlay of money by the firm
• Implicit costs: input costs that do not require an outlay of money by the firm
Decision Making
• Maximizing benefits less costs
• Thinking on the margin
• The marginal cost of an action at an activity level of X units equals the extra
cost incurred due to the marginal units, , divided by the number of marginal
units, .
• The marginal benefit of an action at an activity level of X units equals the
extra benefit produced by the marginal units, , divided by the number of
marginal units, .
• A sunk cost is a cost that the decision maker has already incurred, or to which she
has previously committed. It is unavoidable.

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