Micro Economics
Prof. Dr. Mohammed I. Migdad
Professor of Economics
2015-2016
1
• The first semester
• September
• 2015
2
Economics
Is the newist of sciences
&
the oldest of art
Paul A. Samuelson
3
)‫• (ما عال من اقتصد‬
•
"Will not be poor, any person who
deals with the economic rationality."
• Prophet Mohammed
(Pease be upon him)
Contents of the course
• CONTENTS: This course introduces
basic concepts in Economics and
treats main topics in Microeconomics
theory .
• It consists of the following chapters:
5
Chapter 1, Introduction
includes
1. How to study economics.
2. Definitions of economics.
3. branches, pitfalls in economic, scarcity
law, collecting data and basic analysis.
4. The three problems of economic
organization.
5. Methodology and how to analyze.
6. How to read graphs.
6
Chapter 2, Supply and demand
1.
2.
3.
4.
Markets and economic systems.
Consumers demand.
Firms supply.
Equilibrium between demand &
supply.
5. Price of goods & price theory.
6. Rule of Governments in economics.
7. Effects of D&S change on market
equilibrium.
7
Chapter 3, Elasticity & its
applications
1.
2.
3.
4.
5.
6.
7.
8.
Price elasticity of demand.
Elasticity & total revenue.
Practical applications to PED.
Cross price elasticity.
Income elasticity.
Price elasticity of Supply.
Supply elasticity in the S&L run.
Elasticity and tax incidence.
8
Chapter 4, consumer
behavior theories
1.
2.
3.
4.
5.
Choice and utility theory.
Marginal utility theory.
Utility theory and the low of demand.
Consumer surplus.
The indifference curve theory.
9
Chapter 5, theory of production
1. Pasic concept of production
2. The marginal rate of technical
substitution.
3. The isoquant & isocost curves.
4. Producer equilibrium.
5. Expansion path & return to scale.
6. Shapes of production functions.
10
Chapter 6, Analysis of cost
1. Normal & Economic profit.
2. The relation between cost &
production curves in the short run.
3. Cost in the long run.
4. Return to scale and the shape of the
A.C. in the L.R.
5. Profit maximization.
6. Price discrimination.
11
Chapter 7, Industrial
organization in different markets
1.
2.
3.
4.
5.
Major market forms.
Perfect competition markets.
Monopoly and monopsony.
Oligopoly and ologopsony.
Concentration ratio for industry.
12
EVALUATION
•
•
•
•
EXAMS + ASSIGNMENTS
Final Exam 60%,
Midterm Exam 30%,
Assignments & Discussion 10%
13
MAIN TEXTBOOKS
• 1- Introduction to Microeconomics, M. I.
Migdad, 2013, I. U. Gaza, Economic
department.
• 2- Economics, Samuelson Paul A and
Nordhaus William D, 2005.
• 3- The Micro Economy Today, Schiller
Bradley r. 1995.
14
How to study economics
• The study of economics involves learning
how to organize facts in economic way.
• The old way thinking and the “Good
versus bad model”.
15
Good V Bad Model
• GvB model involves the “zero sum game”,
that means “one’s loss is another’s gain.
• This theory is not always correct, and
economist believe in “win win theory”.
16
Understanding economics
Those who do not understand economics •
still try to see patterns in the facts they
observe; they try to make sense of the
world around them. Sometimes they use a
simplistic "good-versus-bad" model. In a
good-versus-bad model there are two
conflicting groups classified as good
people and bad people.
Understanding economics
These groups are usually involved in a •
zero-sum game; one's loss is another's
gain. The Zero-sum Game is not always
correct especially in economics. In
economics one's gain doesn’t necessarily
mean another's loss.
continue
• To study economics, we must take into
consideration separating all factors
affecting each case we intend to study.
• We study each part alone while other
factors keep constant.
19
Economics and politics
• The economic studies cannot be isolated
from politics,
• Some said economic is larger than to be
managed by economists
20
The definition
• Economics driven from the Greek words
(okos) means house and (nemo) means
rules.
21
Definition of Economics
It is the study of wealth (Adam smith)
Or
It is the study of welfare (Pegout)
Or it is
A study of exchange and production
22
D. Of Economics
• Economics is the social science that
study the allocation of the scarce
recourses to satisfy the unlimited
wants.
• Economics is a science which studies
human behavior as a relationship
between ends and scarce means which
have alternative uses."
23
Marshall defined economics as
"a study of mankind in the ordinary
business of life; it examines that part
of individual and social action which
is most closely connected with the
attainment and with the use of the
material requisites of wellbeing. Thus
it is on one side a study of wealth; and
on the other, and more important side,
a part of the study of man."
24
The standard definition
"Economics is the social science which
examines how people choose to use
limited or scarce resources in
attempting to satisfy their unlimited
wants
25
The definition includes:
•
•
•
•
Economics is a human social science.
Study of factors of production.
Study of scarcity and choice.
Study the society’s economic goals and
solving economic problems.
26
Why we study economics
•
•
•
•
Hope to make money.
Worry to be considered illiterate if they
cannot understand the laws of demand and
supply.
To understand the effect of the information
revolution on shaping our society.
To understand the effect of internet.
27
Continue
• To be fully informed about the
international trade.
• To study the tradeoff between inflation
and unemployment.
• To help you invest your saving.
• To know how to make economic
decision.
28
Factors of production
• Any production operation needs four main
factors of production:
• Labor
• Capital
• Land
• management
29
Inputs and outputs
• Imputes are the resources available for the
society.
• Another terms for inputs are factors of
productions.
• FoP are land, labor, capital and
management.
30
5 or 7 ms as FoP
• Some time we call them as 7M and they
are: man, machine, materials, money,
methods’ management, markets, matter
(information), motivation.
• And 5 ms are: men, machines, methods,
materials, money.
31
land
• Or more generally natural resources that
represents the gift of nature to our
productive process.
• It includes the land it self, the energy
resources that fuel our cars & heat our
homes, nonenergy resources like copper,
iron and sand, the environmental
resources, such as clean air and drinkable
water.
32
labor
• Includes the human time spend in
production at all skill levels.
• Includes also human time spend in
management.
33
capital
• Capital resources from the durable goods
of an economy.
• Capital goods include machines, roads,
trucks.
34
management
• We might consider it as a part of the labor
or as a fourth factor of production.
35
Scarcity and Choice
• Scarcity means that people want more
than is available. Scarcity limits us both as
individuals and as a society. As
individuals, limited income (and time and
ability) keep us from doing and having all
that we might like.
36
Scarcity for society
• As a society, limited resources (such as
manpower, machinery, and natural
resources) fix a maximum on the amount
of goods and services that can be
produced
37
Scarcity requires choice
• People must choose which of their desires
they will satisfy and which they will leave
unsatisfied.
• When we, either as individuals or as a
society, choose more of something,
scarcity forces us to take less of
something else.
38
New definition
depends on Scarcity & Choice
• Economics is sometimes called as:
• “The study of scarcity” because economic
activity would not exist if scarcity did not
force people to make choices.
39
Scarcity, Choice, and
Opportunity Cost
• Human wants are unlimited, but
resources are not.
• Three basic questions must be
answered in order to understand an
economic system:
– What gets produced?
– How is it produced?
– Who gets what is produced?
40
Scarcity, Choice, and Opport. Cost
41
Scarcity and socoety
• Every society has some system or
mechanism that transforms that society’s
scarce resources into useful goods and
services.
42
Scarcity, Choice, and
Opportunity Cost
• Capital refers to the things that are
themselves produced and then used to
produce other goods and services.
• The basic resources that are available
to a society are factors of production:
–Land
–Labor
–Capital
43
Scarcity, Choice, and
Opportunity Cost
• Production is the process that transforms
scarce resources into useful goods and
services.
• Resources or factors of production are the
inputs into the process of production;
goods and services of value to
households are the outputs of the
process of production.
44
Scarcity and Choice
in a One-Person Economy
• Nearly all the basic decisions that
characterize complex economies must
also be made in a single-person
economy.
• Constrained choice and scarcity are
the basic concepts that apply to every
society.
45
Scarcity and Choice
in a One-Person Economy
• Opportunity cost is that
which we give up or forgo,
when we make a decision or
a choice.
46
Scarcity and Choice
in an Economy of Two or More
• A producer has an absolute
advantage over another in the
production of a good or service if it
can produce that product using
fewer resources.
47
Scarcity and Choice
in an Economy of Two or More
• A producer has a comparative
advantage in the production of a
good or service over another if it
can produce that product at a lower
opportunity cost.
48
Basic problems of economic
organization
Or basic three questions
49
The three problems of
economics
• What commodities are produced and
what quantities?
• How are goods produced?
• For whom are goods produced?
50
What commodities are produced
and what quantities?
• The society have to decide and determine
how much of each goods will make and
when they will be produced.
• Will we produce pizzas or shirts today, few
high quality shirts or many cheap shirts.
• Or will we produce fewer consumer goods
and more investment goods
51
How are goods produced?
• The society have to determine who will
produce with what resources and what
techniques they will use.
• Who farms and who teaches?
• Is electricity generated from oil, from coal
or from the sun?
• Will factories be run by people or robots?
• Will we use the labor intensive or capital
intensive technique?
52
For whom are goods
produced?
• Who gets to eat the fruits of economic activates?
• Is the distribution of income and wealth is fair and
equitable?
• How is the national product divided among
different household?
• Are many people poor and few rich?
• Do high wages go to teachers or farmers?
• Will society provide minimal consumption to the
poor? Or must people work if they are to eat?
53
Economic problem
• The economic problem: Given scarce
resources, how, exactly, do large,
complex societies go about answering
the three basic economic questions?
• To answer the three basic questions we
need to study the economic systems.
54
Branches of Economics
Economics is usually divided into
two main branches
55
Branches of Economics
• Microeconomics examines the
economic behavior of actors such as
businesses, households, and
individuals with a view to understand
decision making in the face of
scarcity and the allocation
consequences of these decisions.
Branches of Economics
• Macroeconomics examines an
economy as a whole with a view to
understanding the interaction
between economic aggregates such
as national income, employment ,
international trade, and inflation.
Relationship between Micro and Macro Economics
• Microeconomics inspires theoretical and
evidential support from macroeconomic bases
• Economics has many sub-branches other than
micro and macro-economics, but those subbranches are still involved under the main two
branches.
Some Sub-Branches of Economics
1- International economics.
2- Labor and welfare
economics.
3- Nero-economics
economics.
4- Information economics.
5- Resource economics.
6- Environmental
economics.
7- Managerial economics.
8- Financial economics.
9- Urban economics.
10- Development
economics.
11- Economic geography.
12- Health economy.
13- Political economy.
14- Economic development.
15- Econometrics.
16- Mathematical
economics.
17- Money and banking.
The Economic Role of
Government
• In the real world, markets do not always
operate as smoothly as we might like.
Market imperfections lead to a wide range
of problems, and governments step in to
address them.
60
Gov. intervention
• Governments intervene in a market
economy in order to promote efficiency.
61
Role of Government
• Market allocations are only efficient when
conditions of perfect competition hold; this
means that no firm or consumer is large
enough to affect input or output market
prices.
62
con
• When there are many small firms in a
market, competition forces all firms to
operate with lowest possible costs and
prices.
63
Role of Government
• Market allocations become inefficient when
externalities occur. Externalities are the
positive or negative effects on outside parties
that production or consumption in an industry
yields. For example,
64
Cont.
• When people receive education,
schools and students benefit, but so do
others in the community who now have
neighbors who are better educated.
65
Role of Government
• Governments intervene in a market economy
in order to promote equity, or fairness, in the
distribution of resources and income.
66
Cont.
• This is a difficult concept because there
is no universal definition of fairness.
Markets distribute goods and services
to those who have the money to
purchase them, not necessarily to those
who need or deserve them the most.
67
Role of Government
• Governments intervene in a market economy
in order to promote macroeconomic growth
and stability using monetary and fiscal policy.
68
Fiscal policies
• Fiscal policies of government (the
power to tax and spend) and monetary
policies (the power to adjust the money
supply and interest rates) help to move
an economy along a stable path,
avoiding periods of excessive inflation
and unemployment.
69
Monetary policy
Includes:
• interest rate policies
• Money creation and issuing
70
The logic of economics
• How do economic go about the complex
understanding of the economic activities.
• The following are the some of the
common fallacies encountered in
economic reasoning:
71
The post hoc fallacy
• This involves the inference of causality.
The post hoc fallacy occurs when we
assume the previous event cause the later
one, which is not necessary correct
assumption.
72
The failure of holding other things
constant
• Remember to hold other things constant
when you are analyzing the impact of one
variable on the economic system.
• e.g. the effect of tax rate on tax revenue.
73
The fallacy of composition
• Some times we assume that what holds
true for part of a system also holds true for
a whole.
• In economics however, we find that the
whole is different than the sum of parts.
• When you assume that what is true for the
part is also true for a whole, you are
committing the fallacy of composition.
74
Examples
• If one farmer produce cucumber, he will
have a higher income, but if all farmers
produce cucumber they will have lower
income.
• If high tariff is put on a particular industry,
the producer in that industry is likely to
profit, if high tariffs are out on all products,
all producers and consumers will be worse
off.
75
The distribution system
• We have different distribution systems
depending on and though alternative
economic systems.
• We have market, command, mixed and
Islamic economy.
76
Positive and Normative
Economics
•
•
•
•
This is to study
what is for positive economics
or
what ought to be for normative
77
Positive economics
• Positive economics studies economic
behavior without making judgments. It
describes what exists and how it works.
78
Positive economics includes:
– Descriptive economics, which
involves the compilation of data that
describe phenomena and facts.
– Economic theory, which involves
building models of behavior.
• An economic theory is a general
statement of cause and effect, action
and reaction.
79
Normative economics
• Normative economics, also called policy
economics, analyzes outcomes of
economic behavior, evaluates them as
good or bad, and may prescribe courses
of action.
80
Collection of economic data
•
•
•
•
Economic data includes quantitative and
qualitative data.
Quantitative data includes the numeric or
measurable data.
i.e. prices, quantities, profit, product,
cost, and so on.
Qualitative data, includes descriptive
data such as, quality.
81
Primary and secondary data
• We collect primary economic data through
questionnaires, meetings, focus group,
and so on.
• And we collect the secondary data through
books, magazines, the net, and the
Palestinian bureau of statistics.
82
Models
• Formulation of models of economic
relationships, for example, the relationship
between the general level of prices and
the general level of employment
83
Statistics
• Taking economic statistics of production
and applying the
• the data collected, and applying the model
being used to produce a representation of
economic activity
84
How to read Graphs
• To be explained in the lecture
85
Appendix:
How to Read and Understand Graphs
A graph is a diagram showing
how two or more sets of data or
variables are related to one
another.
86
Appendix:
How to Read and Understand Graphs
A time series 
graph shows
how a single
variable
changes over
time.
Total disposable personal income
Total Disposable Personal Income in
the United States: 1975-2002 (in
billions of dollars)
8000
7500
7000
6500
6000
5500
5000
4500
4000
3500
3000
2500
2000
1500
1000
1975
1980
1985
1990
1995
2000
Year
87
Appendix:
How to Read and Understand Graphs
 The Cartesian coordinate system is the most
common method of showing the relationship
between two variables.
 The horizontal line is
the X-axis and the
vertical line the Yaxis. The point at
which the horizontal
and vertical axes
intersect is called the
origin.
88
Appendix:
How to Read and Understand Graphs
• The point at which
the line intersects
the Y-axis (point a)
is called the Yintercept.
89
Appendix:
How to Read and Understand Graphs
• The point at which the
line intersects the Y-axis
(point a) is called the Yintercept.
• The Y-intercept, is the
value of Y when X = 0.
90
Appendix:
How to Read and Understand Graphs
• The slope of the line
indicates whether the
relationship between
the variables is positive
or negative.
• The slope of the line is
computed as follows:
Y
Y1  Y0
b=

 X X1  X 0
91
1.6 How to Analyze Economic Problems
Methods used in analyzing economic problems:
First: The Economic Theory
Second: The Economic Model (The
Econometrics Technique)
Third: Marginal Analysis
Fourth: Partial and General Equilibrium
Fifth: Graphs and Diagrams
How to Read and Understand Graphs
 This line slopes
upward, indicating
that there seems to
be a positive
relationship between
income and
spending.
 Points A and B,
above the 45° line,
show that
consumption can be
93
greater than income.
Appendix:
How to Read and Understand Graphs
An upward-sloping
line describes a
positive relationship
between X and Y.
A downward-sloping
line describes a
negative relationship
between X and Y.
94
Appendix:
How to Read and Understand Graphs
5
b
 0.5
10
0
b
0
10
7
b 
  0.7
10
10
b

0
95
Appendix:
How to Read and Understand Graphs
96
Appendix:
How to Read and Understand Graphs
97
Appendix:
How to Read and Understand Graphs
98
Linear and Non Linear Relationship(s)
Types of Relationships
The Marginal Effect
• Slope =
Change in the dependent variable Y/
The change in the independent variable X
The Relationship between the Variables Is
Linear Positive
y
Slope Calculation
y
x
x
The Linear Positive Relationship between X and Y
The Linear Negative Relationship between X and Y
The Non Linear Positive Relationship between X
and Y
Non-Linear Negative Relationship between X and Y
Other Types of Non-Linear Relationships between
X and Y
THE END of
CHAPTER 1