Introduction to Microeconomics
• Economics
– How an individual or business manages unlimited
wants with limited resources
• Microeconomics
– the study of the consumers and producers that make
up the economy: households, firms, governments,
and community organizations
Market Economy
• Production and consumption are the result of
decentralized decisions by many firms and
individuals.
• No central authority telling people what to do.
• Producers make what they want.
• Consumers buy what they want.
Command Economy
• Central authority making decisions about
production and consumption.
• Historically have not worked well.
• Famous for long lines at shops.
Adam Smith
• First economist, kinda
• Wrote “Wealth of Nations”
• Individuals, in pursuing their own interests often
end up serving the interests of society as a
whole.
Invisible Hand
• “(A businessman) intends only his own gain, and
he is in this, as in many other cases, led by an
invisible hand to promote an end which was no
part of his intention.”
-Adam Smith
• Invisible Hand refers to the way a market
economy manages to harness the power of selfinterest for the good of society.
WHY INVISIBLE HAND!
Self-interest can be bad
• When traffic is congested each driver is
imposing a cost on all the other drivers on the
road.
• People get in each other way, take their TIME, a
very scarce resource.
• This leads to…
Market Failure
• When individual pursuit of self-interest leads to
bad results for society as a whole.
• Air, water pollution. These can become scarce.
• Use of natural resources. Scarce.
Economics
• Economic analysis can be used to diagnose cases
of market failure.
• Often, economic analysis can be used to devise
solutions for the problem.
Economics
• “Economics is the ordinary business of life.”
Alfred Marshall
• “Economics…is not a body of concrete truth,
but an engine for the discovery of concrete
truth.”
Alfred Marshall