Welcome
to
Spring Semester’ 2022
Lecture - 1
Topic:
Fundamental Issues of
Economics
Welcome
to
Microeconomics
Date: 22/02/2022
BUS1302, Section - 3
Instructor
Shamsuddin Ahamad, PhD
CONTENTS
02
01
Importance of
Micro – Economics
Basic idea on Micro and
Macro Economics
03
Three Key Ideas
01
Basic idea on Micro and
Macro Economics
The whole economic theory is broadly divided into two parts –
1. Micro economics
2. Macro economics
The term ‘micro’ and ‘macro’ were derived from Greek words ‘Mikros’ and ‘Makros’
1. ‘Micro’ meaning ‘small’
2. ‘Macro’ meaning ‘large’
So,
(i) Micro economics deals with the analysis of an individual unit/level
(ii) Macro economics deal with economy as a whole such as on a city, county, or national level.
For example,
❖ In micro economics we study
✓ how price of goods or factors of production are determined. or
✓ How a local business decides to allocate their funds.
✓ Allocation of your income by deciding how much to buy of various goods and services and
how much to save
❖ In macro economics we study what are the causes of high or low level of employment,
GDP, growth etc.
01
Basic idea on Micro and
Macro Economics
Microeconomics
Macroeconomics
Studies the individual or small economic
variables of the economy
Deals with whole economy
Ex: Individuals consumption, saving
investment and income
Ex: national income, full employment and
price level
Studies principles, problems and policies
concerning the optimum allocation of
resources
Studies the problems, policies and
principles relating to full employment and
growth of resources.
Deals with the determination of price,
consumer’s equilibrium, distribution and
welfare, etc.
Studies full employment, price level,
national income, trade cycles, etc.
01
More on Micro Economics
According to K. E. Boulding, “Microeconomics is the study of particular firm, particular households,
individual price, wage, income of the industry and particular commodity.”
According to Mc. Connel –” In micro economics we examine the trees not the forests.”
Similarly according to A.P. Lerner – “microeconomics is microscopic study of the economy.”
Microeconomics tries to explain how an individual allocates his money among various needs and maximize
satisfaction level
The fundamental Q. of Microeconomics are:
✓
How households and firms make choices
✓
How they interact in the markets
✓
How the government attempts to influence their choices
✓
What goods and services should be produced?
✓
How to produce those goods and services?
✓
Who gets the goods and services?
✓
How are the prices of goods and services determined?
✓
Why does government control the prices of some goods and services,
and what are the effects of those controls?
02
1)
Importance of Micro Economics
Efficient allocation/distribution of resources:
Microeconomics concern about how a Consumer allocate their limited resources to get maximum satisfaction and
Producers allocate resources to maximize their output
2) To understand the working of market economy:
Demand and supply play vital role in the market economy.
Microeconomics help to understand how an market economy run without the role of gov.
3) To provide tools for economic policies:
Microeconomics is highly helpful in the formulation of economic policies (tax, loans, price, demand and production etc.)
that affect the economy and promote the welfare of the society.
In this way, microeconomics assists private sectors as well as government
4) Useful in Business Decision –Making:
a) Pricing Policy
b) Optimal allocation of resources
c) Optimal production decision
d) Demand analysis and forecasting
e) Analysis of cost of production
03 T h r e e K e y
Economic Ideas
We interact with one
another in markets.
Market:
A group of buyers and
sellers of a good or service
and the
institution or
arrangement by which they
come together to trade.
03 T h r e e K e y
Economic Ideas
In analyzing markets, we generally
assume:
1.
People are rational
-
Rational consumers and firms
consider the cost and benefits of
each action and try to make the
best decision possible using
available information.
Example: Apple doesn’t randomly choose the
price of its smartwatches; it chooses the price(s)
that it thinks will be most profitable.
03 T h r e e K e y
Economic Ideas
2. People respond to economic
incentives
By offering rewards to people who change their
behavior is incentive. rational people respond to
incentives.
Example; by offering a raise in the salary of works
harder can influence people to work hard which is a
positive incentive. Whereas putting a tax on a good,
say fuel, can induce people to consume it less which is
a negative incentive.
03 T h r e e K e y
Economic Ideas
3.
Optimal decisions are made at the margin
Decision = selecting the suitable action from several alternative option.
• The problem of decision making arises whenever a number of alternatives are
available. Such as :
•What should be the price of the product?
•How many workers should be employed?
03
Three Key Ideas
Marginal Benefit
Idea 1: People Are Rational:
Idea 2: People Respond to Economic Incentives:
Idea 3: Optimal Decisions Are Made at the Margin:
Marginal mean extra or additional.
Marginal Cost
Marginal benefit is the benefit that a
person receives from consuming one
more unit of a good or service.
Marginal cost is the opportunity cost of
producing one more unit of a good or
service.
Marginal benefit is measured as the
maximum amount that a person is
willing to pay for one more unit of the
good or service.
The marginal cost is measured as the
value of the best alternative forgone to
get one more unit of the good or
service.
Comparing MC and MB is known as
marginal analysis