ECN 211 LECTURE NOTE

Department of Economics Covenant University Ota Nigeria

1.0 FOUNDATIONS OF MICROECONOMICS

Microeconomics is a branch of economics that studies the behavior of individuals and small

impacting household and firms in decisions regarding allocation of scarce resources. It examines

how the decisions and behavior affects the supply and demand for goods and services, which

determines prices, quantity demanded and quantity supplied. The fundamentals of

microeconomics lie in the analysis of preference relations.

Some basic concepts

Definition 1.01: Preferences relations are a set of different choices that individuals or firms can

choose from between any two or more bundles of choices. This choice making quality of

individuals, households and firms is based on the concept of rationality.

Definition 1.02: Rationality in economics is based on the fact that individuals, households and

firms will always make prudent decisions. Under the rational choice theory individuals will

always act by balancing cost against the benefits derived from purchasing or undertaking an

activity in such a way to maximize their gains.

competitive i.e. a situation where there are a.) Many buyers and many sellers b.) Firms and

individuals are price takers c.) There is free entry and free exit into the markets.

However the theory works well in situations that meet these above assumptions. In real life situations the

assumptions fail because some individuals and firms are capable for instance to influence price and in

certain conditions influence entry of new firms into the market.

One major advantage of perfect competitive markets is the optimality of resource allocation.

Definition 1.0.4: Demand, Supply and Equilibrium: The law of supply and demand states that in a

competitive market, the unit prices of a particular good will vary until it settles at a point where the

quantity demanded by consumers will be equal to the quantity supplied resulting in economic equilibrium

for price and quantity.

Definition: 1.0.5: Elasticity: This is the degree of response of one economic variable to another.

Some types of elasticities in economics are a.) Price elasticity of demand b.) price elasticity of supply c.)

Income elasticity of demand d.) elasticity of substitution

Definition: 1.0.6: Consumer demand theory: This relates preferences for the consumption of both goods

and services to individual consumption expenditures. This relationship between preferences and

consumption expenditures is used to relate to the consumer demand curve. It analyses how the consumer

may achieve equilibrium between preferences and expenditure by maximizing their utility subject to

budget constraints.
Definition: 1.0.7: Theory of Production: This is the study of the economic process of converting inputs

into outputs. Therefore production uses resources to create goods or service that is suitable for exchange

in a market economy.

Production is measured as the rate of output over a period of time. Since production itself is a flow

concept. i.e. a concept that occur over time and space.

Producers are basically saddled with three major challenges

a.) What to produce? [The form of the goods and services to be created]

b.) For whom to produce [Identify the target market or set of customers that will purchase the goods]

c.) How to produce? [ The challenges of setting up the production facility]

Factors of Production: The known factor of production include a.) Land b.) Labour c.) Capital

Fixed factor of production: This is one whose quantity cannot readily be changed e.g. a piece of

equipment, land, factory space, management personnel. A variable factor of production is one whose

quantity and usage can be easily changed e.g. electricity power consumption, transportation, services,

raw materials.

The Short Run: This is defined in production as a period in which at least one of the factors of

production is fixed.

The long-run is defined in production as the period in which all factors of can be adjusted by

management.
 a.) Total product: The total products of a variable factor of production are the outputs possible

using various levels of variable inputs.

b.) The average product is the total product divided by the number of inputs

c.) The marginal product of a variable input is the change in total output due to one unit change in

the variable input or the change in total output due to an infinitesimally small change in input.

The production function is usually represented using isoquants.

2.0 WHAT IS MICROECONOMICS

Definition 2.0.1: It is the study of individuals, households and firms behavior in decision making

and allocation of scarce resources. It generally applies to markets, goods and services and deals

with individuals and economic issues.

It can also be defined as the study that deals with what choices people make, what factors

influence these choices and how their decisions affect the goods market through price, supply

and demand.

3.0 DECISION-MAKING UNITS

Individuals, households and firms are often regarded as the decision making units in

macroeconomics. The study of individuals, households and firms allows us to understand the

decision making process of firms, households and individuals.

Definition3.0.1 Individuals: These are people living in a society that have the capability to

determine their consumption choices and efficiently allocate their resources to satisfy their

needs.
 Definition 3.0.2: Households: These are made of group of individuals living within family unit

that have the capability of collectively determining their consumption choices and efficiently

allocating their resources to meet their collective household needs.

Definition 3.0.3: Firms are economic agents carrying out productive activities within a society.

4.0 MICROECONOMICS AND MACROECONOMICS

Definition4.0.1 We have earlier defined Microeconomics as the study of individual households

and firms behavior in decision making and allocation of scare resources. It studies a unit rather

than the whole.

Macroeconomics is derived from a Greek word that means large “uakpo”. It studies the

behavior of the economy as a whole. Therefore it deals with total or big aggregates such as

National income, employment, total consumption, and aggregate savings.

Why is microeconomics important

a.) It helps to understand the fundamentals of the free market economy, since it tells us how

prices of products and factors of production are determined. It also describes how goods

and services are produced and distributed among various people.

b.) It also explains the conditions for efficiency and optimality. Since it describes economic

practices that are likely to lead to optimality and efficient allocation of resources.

Some uses of macro economics

light on the forces responsible for the level of aggregate employment and output in an

economy

b.) It explains the determinant of output prices

c.) It explains the concept of economic growth. It formulates the policy of

d.) Business cycles: It helps us to understand causes of fluctuations in national income and

how to formulate policies to control business cycles e.g. through the control of inflation

and deflation

e.) It explains the concept of international trade etc.

5.0 USES AND LIMITATIONS OF MICROECONOMICS

Uses of microeconomics

a.) It allows for the study of individual human, households and firms behavior.

b.) It studies smaller units leading to a better understanding to what with happen at aggregate

level.

c.) It explains how individuals allocate their scarce resources in an efficient manner.

d.) It explains the concepts of free markets and gives good understanding of the market system.

The study of micro-economics despite its advantages has several limitations some include the

a.) It studies a part rather than the whole of the economy

b.) There are also some limitations of the assumptions of free market economy.

6.0 ECONOMY SYSTEMS

An economy system is a system of production and exchange of goods and services as well as the

allocation of resources in a society.

comprise the economic structure of the society.

Economic systems can be distinguished along two lines

a.) How economic activity is co-ordinated

b.) According to the ownership of the means of production

How economic activity is coordinated by the market depends largely on how the society decides on

the extent of decentralization of decisions that is made by businesses, individual and consumers that

want. And to what extent they want decisions centralized so that business and consumers act more

in national interest.

Who owns the means of production also shapes the kind of economic system in practice are they

state or publicly owned or are they owned by individuals.

Types of economy systems

a.) Capitalist Economy Systems: This is an economic system where the means of production is

owned by private individuals and a market economy is employed for the coordination of

business activities. Production in this instance is geared towards private profits rather than

public needs.

b.) Socialist Economy Systems: This is an economic system in which the means of production is

owned by the public or state. Here production is geared towards satisfying public needs

rather than profits.

c.) Mixed Economy Systems: This is an economic system that combines the feature of both the

capitalist and socialist economic systems. This means that the means of production are partly

owned by the state and private individuals. It is characterized by substantial state

intervention and a sizeable public sector along with a dominant private sector.