MICROECONOMICSMICROECONOMICS

1. Meaning2. Nature3. Scope4. Relationship with other disciplines5. Importance

Outline

What is Economics? Economics is the study of efficient use of scarce

resources for producing goods and services, and distributing them among people.

Resources are scarce and human wants are unlimited.

Need appropriate choice or allocate resources properly.

Economics helps us make rational choice.

Hence, it is a science of choice with scarce means and unlimited ends.

It helps us to entangle many economic issues emanating from scarcity.

X, Y, Z,…

R5

R4

R3

R1

R2

Wants

Economics

Unlimited Limited (Resources)

Economics is, therefore, a science of SCARCITY and CHOICE

Efficient Allocation of Resources

Economics

Utopian world

Imagine the world without scarcity. Infinite quantities of every good could be produced and human wants are fully satisfied. People don’t need to worry about their living since all of them could have as much as they need. Then, economics would no longer be a useful subject.

What is Economics? (contd.)

Given the limited resources and unlimited wants, it is necessary to make the best use of limited resources.

Resources should be used “efficiently”(most effective use) in satisfying people’s wants .

Economics makes significant contribution in this regard.

What is Economics? (contd.)

Economics concerns with economic behavior of human beings living in society.

Not the exact or pure science, but a social science. Economic theories or models are built from observing

behavior of people. Society is the laboratory to test laws of economics,

unlike the controlled laboratory for natural science. Economic life is an enormously complicated hive of

activity, with people buying, selling, bargaining, investing and persuading.

Because economic relationships are often complex, involving many different variables, so that confusion may arise.

Nature of Economics

However, the ultimate goal of economic science is to improve the living conditions of people.

For this, economics tries to answer the three important questions

• what commodities to produce?

• how much to produce?

• for whom to produce?

Economics confronts with economic problems that arise because of unlimited wants, limited means and possibility of alternative uses of means.

Nature of Economics (contd.)

Nature of Economics (contd.)

Positive Vs. Normative Economics

Positive Economics Has to do with "what is" Uses the scientific method Involves no value judgment

Normative Economics Describes what “ought to be” Is the policy study Involves value judgment

Microeconomics is the foundation of economics. Other branches of economics emerged from

Microeconomics. Microeconomics concerns with the economic

behavior of individual entities such as households, firms and markets.

Also called “Price Theory” because it explains how various prices are determined in the markets.

Microeconomics primarily deals with demand and supply, and their interactions in the different types of markets.

What is Microeconomics?

Microeconomics explains how a the economic agents (consumers, producers, government, etc.) optimize their objective functions , i.e.,

-how consumers maximize satisfaction?

-how firms maximize profits?

It is also the subject exploring the price determining mechanism in different market structures.

What is Microeconomics? (contd.)

Scope of economics means the sphere of study which particularly covers the subject matters of economics.

There are many different types of subjects, but economics is related to the use of limited resources to fulfill unlimited wants.

We can see the farmers tiling the field, workers working at factories, doctors attending to patients, teachers teaching students and so on. These are economic activities.

It is with this part of human life that economics deals.

Scope of Economics

An individual wants food, clothes and shelter. To get these things, s/he must have money, for which s/he must work, which leads to satisfaction.

Hence, wants-efforts-satisfaction make the subject matter of economics .

In a primitive society, production and consumption have close and direct link.

A primitive man feels hungry, he picks up some fruit, eats it and is satisfied.

But, in a modern society things are not so simple and straight.

Scope of Microeconomics

A man produces that he does not consume and consumes that he does not produce. Money plays important role for exchange of goods and services.

Most of the things we need today are made in factories.

To make them, the worker gives -labor, the landlord-land, the capitalist-capital, while the businessman organizes the work of all these.

They all get reward in money as wage, rent, interest and profit. This process is called distribution.

Scope of Microeconomics (contd.)

Hence, the scope of economics covers consumption (the satisfaction of wants), production (creating utilities), exchange (market, money, credit and banking etc.) and distributions (factor pricing).

These are the coverage of microeconomics. But, the scope of economics has been extended to the study of the economy as a whole (macroeconomics), public finance (government expenditure, revenue and public debt) and so on.

Scope of Microeconomics (contd.)

Anatomy of Economics

Economics

MacroeconomicsMicroeconomics

Product Pricing Factor Pricing Theory of Eco. Welfare

Theory of Demand and Supply

Theory of production and cost

Rent Wages Interest Profits

Economics has relation with almost all other disciplines

Economics and Politics: All political problems have their roots in economic causes. Political institutions affect economic condition.

Economics and History: Economics makes use of history in understanding the background of the present-day economic problems.

Economics and Ethics: Ethics is a science of what ought to be. Economics has to make the policy prescriptions based on value judgment.

Relation with other Disciplines

Economics and Geography: Geography affects the economic behavior. Country’s agriculture, industry and other economic activities also depend on geographical factors.

Economics and Sociology: Both are social sciences. The former is for economic behavior and the latter for social behavior. Both are interrelated.

Economics and Statistics: Economists use statistical tools to analyze many economic data to test theories and examine the economic behavior of people.

Economics and Mathematics: Economics also use many mathematical formulas and tools to explain the economic theories and to express economic relation in mathematical forms.

Relation with…..(contd.)

Efficiency:

This is getting the highest amount of satisfaction from available resources. Efficiency is achieved when society cannot change the distribution of resources in any way that would increase the total amount of satisfaction obtained by society.

Equity:

This is the fairness with which income or wealth is distributed within a society. Equity occurs when income or wealth is fairly distributed. But the standards of fairness differ and puts us into normative economics.

Microeconomic Goals

Understanding the working of the economy:It helps us to know the working of the economy- consumer behavior, production process, price determination, wage determination etc.

Efficient use of resources: It teaches us to make best use of resources. It

provides ideas to maximize utility for consumers from their limited income and ways to maximize profit for the producers. In fact, microeconomics says which commodity to produce, how much to produce and for whom to produce.

Importance of Microeconomics

Useful in business decision making:Microeconomics can be used to analyze problems faced by business executives. It is helpful to make decision in the areas of demand analysis, production, and pricing.

Formulating and analyzing public policies:Microeconomics is helpful for making rational public policies such as tax policy, subsidy, trade policy. In addition, it is also helpful to understand the possible impacts on the business from the change in these policies.

Importance of …. (contd.)

Increasing Economic Welfare:

Microeconomics suggests possible ways of improving welfare of people in the society. Microeconomics shows what should be done by markets and what should be done by the government so as to enhance the welfare and living standard of the people.

Importance of …..(contd.)

Pure Capitalism or Laissez Faire EconomyPrivate ownership of property and resources Freedom of enterprise and choice Existence market competition Absence of central planning

Command Economy Public ownership of property and resources Determination of production, prices and distribution

by central authority (government). Existence of central planning

Mixed Economy Possesses the characteristics of both (capitalist and

command) economies Real world economy

Basic Types of Economies

Question for Review

1. What is microeconomics? How is it related with other disciplines?

2. Discuss the nature and scope of microeconomics.3. What are microeconomic goals ?4. Discuss the importance of microeconomics.

Reference: Macroeconomics, Samuelson and Nordhaus