Micro - CH 1 Introduction

Introduction
To
Microeconomics
College of Applied Business

Introduction to Economics
• The word economics was derived from Greek
work “OEKONOMICUS” which means household
study.
• It was first used by Greek Philosopher
Xenophon in 600 BC.
• It was formally defined by Adam Smith in 1776
as ‘Economics is the science of wealth’.
• Therefore Adam smith is also called as father of
economics.
Definitions of Economics
• Adam Smith (1776, the wealth of nations)-
“Economics is the science of wealth”
• Alfred Marshall (1890, principle of economics)-
“Economics is the study of mankind”
• L. Robbins (1931, nature and significance of
economic science)-
“Economics is the science of scarcity and choice”
• P.A.Samuelson (1980’s) –
“Economics is the study of dynamic growth and
development”
Nature of Economics
• Economics as a Science and as an Art.
– Economics is a science because it is systematic
body of knowledge which deals with the cause and
effect relationship of economic variables.
– But is not the practical/theoretical science, it is
social science.
– Economics is also an art because it not only studies
cause and effect but also practices knowledge.
– And its conceptions can vary from person to
person.
Positive economics and Normative economics.
Positive Economics Normative economics
1. Statements are empirically verified. 1. May or may not be verified.
2. Universal and didn’t differ from person to 2. Depend upon personal belief and value
person. judgments and can differ from person to
person.
3. Don’t dependent on value judgment. 3. Value judgment makes its ends good or
bad.
4. It relies on scientific logics. 4. It relies on ethical logics.
5. It answers the question, what is? 5. It answers the question, what ought to
be?
6. It formulates theories, principles. 6. It implements policies.
7. Aim is to study about society which makes 7. Makes prescription or recommendation to
decision about production, consumption suggest what should be done for
etc. economic betterment.
8. Objective and quantitative. 8. Subjective and qualitative.
9. It is like physics, chemistry. 9. It is like ethical science.
10. Eg. When Price increases Quantity 10. Eg. Water resources should be used for
demanded decreases. economic development.
Deductive and Inductive method of analysis.
• Deductive method of analysis is related to
‘General to Particular phenomenon.
• It studies general examples and derives
conclusions/theories.
• Inductive Method of analysis is related to
‘Particular to general’ phenomenon.
• It makes assumptions about certain theories
and tries to prove by using appropriate
examples.
History of Economic Thought
• Pre-Classical economic thought
– Mercantilism and Physiocracy (15-18 th century)
• Classical economic thought (1776AD-1890AD)
• Neo-classical economic thought (1890 AD-1929AD)
• Period of great depression (1929AD – 1936AD)
• Modern economic thought (1936AD -1980’s)
• Post-Modern economic thought (1980’s onwards)
Introduction to Microeconomics
• Microeconomics is derived from Greek word “Mikros”
which means small. It was first coined and used in 1933 by
German economist named Ragner Frisch.
• It is a branch of economics that studies the nature,
relationship and behavior of individual households and
firms in making decisions on the allocation of available
limited resources.
• It is a branch of economics that studies the nature,
relationship and behavior of individual households and
firms in making decisions on the allocation of limited
resources.
• It is the worm’s eye view analysis of economic variables.
Introduction to Microeconomics (contd..)
• The main objective of microeconomics is to study
principles, problems and policies related to optimal
allocation of resources.
• One of the goals of microeconomics is to
analyze market mechanisms that establish relative
prices amongst goods and services and allocation of
limited resources amongst many alternative uses.
• Microeconomics analyzes market failure, where
markets fail to produce efficient results, and describes
the theoretical conditions needed for perfect
competition.
Definitions of Microeconomics
• According to A.P. Lerner, “Microeconomics consists
of looking at the economy through microscope.”
• According to K.E. Boulding, “Microeconomics is the

study of particular firm, particular household,
individual price, wage, income, industry and
particular commodity.
Scope of Microeconomics
1. Theory of Demand and Supply
2. Theory of Consumer Behavior
3. Theory of Production
4. Theory of Product Pricing
5. Theory of Factor Pricing
6. Theory of Economic Welfare etc.
Scope of Microeconomics
Theory of Theory of Theory of Theory of Theory of

Theory of
Demand Consumer Product Factor Economic
Production
and Supply Behavior Pricing Pricing Welfare
Types of Microeconomics:
1. Simple Micro-Statics
• It deals with one static equilibrium point of
individual economic units.
• It is related with study of one static point of
time from still picture point of view.
• It doesn’t involve dynamic changes of an
economy and assumes all the other things
remaining as constant.
Graphically,
Price
D S
E
P
O Q Quantity
2. Comparative Micro-Statics
• It compares two or more static equilibrium points
of different points of time.
• Conclusion will be drawn from the comparative
study.
• Compares two still pictures.
• Does not provide the answer of the following
questions:
1. What are the causes responsible for breaking initial
equilibrium point?
2. What are the causes of attaining final equilibrium
point ?
3. What is the actual process in between them?
Graphically,
Price
D1
D S
E1
P1
E
P
O Q Q1 Quantity
3. Micro-Dynamics
• Explains lagged relationship between
microeconomic variables.
• Analyses the equilibrium situations from
motion picture point of view.
• It is related to the period of time.
• Also explains the whole process of moving
equilibrium points.
• Answers all the questions which were not
answered by comparative micro-statics.
Graphically,
Price
D1
D S
P1
P3 E1
P’
P2
P E
O Q Q2 Q’ Q1 Quantity
Uses of Microeconomics:
1. To understand the operation of laissez-faire
economy.
2. Useful in business decision making:
a) Determination of price of the product.
b) Demand forecasting
c) Optimum allocation of resources
d) Managerial decisions
e) Financial decisions
3. To examine the conditions of economic welfare
4. Efficient utilization of resources
5. Useful in international trade.
6. To provide tools for economic policies.
Limitations of Microeconomics:
• Microeconomics assumes laissez-faire
economy which is not realistic.
• Microeconomics provides the partial analysis
assuming all the other things remaining the
same.
• Microeconomics can’t reflect the actual
situation of the economy.
• The policies issued for microeconomics may
not be applicable for whole economy.
• Microeconomic analysis is based on the
various unrealistic assumptions.
Differences Between Micro and Macroeconomics
Basis of Microeconomics Macroeconomics
Difference
1. Origin and - it was originated form Greek - it was originated form Greek word
development word ‘MICROS’-means small. ‘MACROS’-means large.
- Initiated by Classical - Initiated by J.M.Keynes.
economists.
2. Objective of - Its objective is optimum - Its objective is full employment and
study allocation of resources. growth of resources.
3. - It is based on partial - It is based on general equilibrium

Methodology equilibrium analysis. analysis.
of study
4. Structure of - It believes in Laissez-faire - It believes in command economy.
an economy economy.
5. Economics - Individual demand and - Aggregate demand and aggregate

variables supply supply.
6.Subject - Consumer, producer, - Full employment, Price Level, national

matter economic welfare etc. income, Economic Policies etc.
Interdependence between Micro and Macroeconomics
• Samuelson, “There is really no opposition between micro and
macroeconomics. Both are absolutely vital. You will be less
than half educated if you understand the one while being
ignorant of the other.”
Dependency of Micro on Macro: Dependency of Macro on Micro:
1. Determination of price of the 1. Determination of National
product. Income.
2. Determination of wage rate. 2. Determination of General
3. Determination of welfare Price Level.
situation. 3. Determination of Total
4. Determination of interest rate. consumption, saving and
5. Determination of profit Investment of an economy.
margin. 4. Determination of Per capita
6. Determination of cost of Income .
production etc . 5. Determination of Employment
level.
Thank You!

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Introduction

College of Applied Business

• According to K.E. Boulding, “Microeconomics is the

Theory of Theory of Theory of Theory of Theory of

3. - It is based on partial - It is based on general equilibrium

5. Economics - Individual demand and - Aggregate demand and aggregate

6.Subject - Consumer, producer, - Full employment, Price Level, national

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