INTRODUCTION TO MICROECONOMICS

UNIT 1A

Harcourt

ECONOMICS 


Is economics about money? How?
How much money people are paid? How much they spend? How much money firms earn? How much money is there in total in the economy? It is much more than just about money.

Harcourt

ECONOMICS 

Production of goods and services How much economy produces (in total and at individual level)? What techniques of production are used? How many inputs are employed?

Harcourt

ECONOMICS  Consumption of goods and services What is the consumption level of the economy and how much it saves? What is the pattern of consumption in the economy? How much people buy of any particular good? How consumption pattern of people is affected by prices? Harcourt .

Definitions of Economics      Classic Adam Smith (1723-1790) Book: The Wealth of Nation He defined economics ³ as the study of nature and causes of generating of wealth of a nation´. Harcourt . He emphasized the production and expansion of wealth as the subject matter of economics.

Harcourt . Cannon & Baveridge also defined economics as a study of causes of material welfare of human beings.Definitions of Economics      Neo-classic Marshall (1842-1924) Book: The Principles of Economics He defined economics as a ³study of mankind in the ordinary business of life. it examines that part of individual and social actions which are closely connected with the attainment and with the use of material requisites of well-being´. Other Neo-classic economists such as Pigou.

Harcourt .Definitions of Economics     Modern L. Robbins (1830-1932) Book: Nature and Significance of Economics (1932) He defines economics as a ³science which studies human behavior as a relationship between ends and scarce means which have alternative uses´.

Because of scarcity. various choices have to be made between alternatives. Scarcity is the excess of human wants over what can actually be produced to fulfill these wants. Harcourt . Everyone has to make choices whether rich or poor and so the economists have to study how resources are distributed.THE ECONOMIC PROBLEM     The central economic problem is that of scarcity.

Efficient use of opportunity costs. Harcourt . competition and cooperation all work to solve the economic problem.The Economic Problem  How to make the most efficient use of scarce resources to satisfy these unlimited wants. resources: Minimize  Economics is the study of how markets.

Models: Deliberate simplification of relationships in order to explain how these relationships work.To solve the Economic Problem is to answer these questions    what is produced? how it is produced? who gets the product ? All economic systems coordinate society¶s choices to answer these questions. Harcourt   .

with or without the use of money.Definitions of Economics ( Cont«)  Samuelson ³Economics is the study of how people and society end up closing. Harcourt  . to employ scarce productive resources that could have alternative uses to produce various commodities and distribute them for consumption now or in the future among various persons and groups in society.

Definitions of Economics  Ceconnell Economics is a science of efficiency in the use of resources so as to attain the greatest or maximum fulfillment of society¶s unlimited wants.  Harcourt .

an apparatus of mind and technique of thinking which helps its possessor to draw correct conclusion´.M. Keynes ³The theory of economics does not furnish a body of settled conclusions immediately applicable to policy.  Harcourt . It is a method other than a doctrine.Definitions of Economics  J.

. How people interact with each other.    How people make decisions. The forces and trends that affect the economy as a whole. Harcourt ..Economists study.

People respond to incentives. The cost of something is what you give up to get it. 4. Harcourt . Rational people think at the margin. People face trade-offs.Ten Principles of Economics  How People Make Decisions 1. 2. 3.

6. Markets are usually a good way to organise economic activity.Ten Principles of Economics  How People Interact 5.Governments can sometimes improve economic outcomes. Harcourt . 7. Trade can make everyone better off.

9. Society faces a short-run trade-off between inflation and unemployment. A country¶s standard of living depends on its ability to produce goods and services.Ten Principles of Economics  How the Economy as a Whole Works 8. 10. Harcourt . Prices rise when the government prints too much money.

People face trade-offs. work Efficiency vs. clothing Leisure time vs.1.  To get one thing. Guns vs. we usually have to give up another thing. butter Food vs. equity Harcourt .

People face trade-offs.  Harcourt .  Efficiency means society gets the most it can from its scarce resources.1. Equity means the benefits of those resources are distributed fairly among the members of society.

2. The opportunity cost of something is what you give up to get it. Harcourt . University study vs.  Decisions require comparing costs and benefits of alternatives. work  Opportunity cost is what you give up to obtain some other item.

People make decisions by comparing costs and benefits at the margin. incremental adjustments to an existing plan of action. Marginal changes are small. Rational people think at the margin.3.  Harcourt .

4. MB = Marginal Benefits MC = Marginal Costs Harcourt .   Marginal changes in costs or benefits motivate people to respond. The decision to choose one alternative over another occurs when MB > MC. People respond to incentives.

   Harcourt .5. Trade can make everyone better off. People gain from their ability to trade with one another. Trade allows people to specialise in what they do best. Competition results in gains from trading.

6. Markets are usually a good way to organise economic activity.
In a market economy, households decide what to buy and who to work for. Firms decide who to hire and what to produce. Households and firms interact as if guided by an µinvisible hand¶.   

Harcourt

7. Governments can sometimes improve market outcomes.    

When the market fails (breaks down) government can intervene to promote efficiency and equity. Market failure occurs when the market fails to allocate resources efficiently. Market failure may be caused by an externality, which is the impact of one person or firm¶s actions on the well-being of a bystander. Market failure may also be caused by market power, which is the ability of a single person or firm to unduly influence market prices.
Harcourt

8. A country·s standard of living depends on its ability to produce goods and services. 

Standard of living may be measured in different ways:
By comparing per head income. By comparing the total market value of a nation¶s production. 

Almost all variations in living standards are explained by differences in countries¶ productivities.

Harcourt

8. Higher productivity Higher standard of living Harcourt . A country·s standard of living depends on its ability to produce goods and services (Cont«)  Productivity is the amount of goods and services produced from each hour of a worker¶s time.

9.  Inflation is an increase in the overall level of prices in the economy. Harcourt . Prices rise when the government prints too much money. One cause of inflation is the growth in the quantity of money.

Harcourt . Society faces a short-run trade-off between inflation and unemployment.10. The Phillips Curve  Inflation Unemployment It¶s a short-run trade-off.

Understand the cost of individual and social choices..     Think in terms of alternatives. ... Is like the scientific method. Involves thinking analytically and objectively.Economics trains you to. See how certain events and issues are related.. The economic way of thinking.

Develops theories.The Scientific Method   Uses abstract models to help explain how a complex. collects. real world operates. and analyses data to prove the theories. .

) Analytical (abstract reasoning) . Uses two approaches: Descriptive (reporting facts. etc.The Economic Way of Thinking   Includes developing abstract models from theories and the analysis of the models.

The Circular-Flow Model  The circular-flow model is a simple way to visually show the economic transactions that occur between households and firms in the economy. .

The Circular-Flow Diagram Market for Goods and Services Firms Households Market for Factors of Production .

The Circular-Flow Diagram Mark t f r s and Ser ices Spending Fir s useholds Market f r act rs f r ducti n .

The Circular-Flow Diagram Market for Goods and Services Revenue Spending Firms Households Market for Factors of Production .

The Circular-Flow Diagram Market for Goods and Services Revenue Spending Firms Households Wage. and profit Market for Factors of Production . rent.

The Circular-Flow Diagram Market for Goods and Services Revenue Spending Firms Households Wage. rent. and profit Market for Factors of Production Income .

land and capital Income . rent. and profit Market for Factors of Production Labor.The Circular-Flow Diagram Market for Goods and Services Revenue Spending Firms Households Wage.

rent. and profit Inputs for production Market for Factors of Production Labor. land and capital Income .The Circular-Flow Diagram Market for Goods and Services Revenue Spending Firms Households Wage.

rent. and profit Inputs for production Market for Factors of Production Labor. land and capital Income .The Circular-Flow Diagram Market for Goods and Services Goods and services sold Revenue Spending Firms Households Wage.

rent. and profit Inputs for production Market for Factors of Production Labor. land and capital Income .The Circular-Flow Diagram Market for Goods and Services Goods and services sold Goods and services bought Revenue Spending Firms Households Wage.

It concerned with the behaviour of individual entities such as markets. what causes financial crises & why some nations grow rapidly while others stagnate? .Microeconomics and Macroeconomics   Microeconomics focuses on the individual parts of the economy. Macroeconomics looks at the economy as a whole. It examines a wide variety of areas. how Central Banks manage money supply and interest rates. such as how total investment and consumption are determined. firms and households.

Three Big Macroeconomic Questions Macroeconomics focuses on three big questions: 1. What determines the standard of living? 2. Why does our economy fluctuate? Harcourt . What determines the cost of living? 3.

Harcourt .Three Big Macroeconomic Questions 1. What Determines the Standard of Living? The standard of living is the level of consumption that people enjoy on the average and is measured by average income per person.

Harcourt . The cost of living in the United States is the number of dollars it takes to buy the goods and services that a typical family consumes.Three Big Macroeconomic Questions 2. What Determines the Cost of Living? The cost of living is the amount of money it takes to buy the goods and services that a typical family consumes.

Why does our economy fluctuate? The Total Demand/Aggregate Demand (AD) & Total Supply/Aggregate Supply (AS) makes economy fluctuate or create boom and recession in an economy in a short-run.Three Big Macroeconomic Questions 3. Harcourt .

³What?´ Tradeoffs arise when people choose how to spend their incomes. Harcourt . and when businesses choose what to produce. when governments choose how to spend their tax revenues.The Three Microeconomic Questions  Microeconomic Tradeoffs The three microeconomic questions become sharper when we think in terms of tradeoffs.

Harcourt .The Three Microeconomic Questions ³How?´ Tradeoffs arise when businesses choose among alternative production technologies.

Government redistribution of income from the rich to the poor creates the big tradeoff²the tradeoff between equality and efficiency.The Three Microeconomic Questions ³For Whom?´ Tradeoffs arise when choices change the distribution of buying power across individuals. Harcourt .

Economists distinguish between two types of statements:  What is²positive statements  What ought to be²normative statements A positive statement can be tested by checking it against facts A normative statement cannot be tested. Harcourt .Economics is a Social Science  Social Science Economics is a social science.

Positive versus Normative Analysis  Positive Economics: It describes the facts of economy as it is. It deals with questions such as: Why do doctors earn more than dentists? Does free trade raise or lower the wages of most Americans? .

Positive versus Normative Analysis  Normative Economics: It involves value judgements. Called prescriptive analysis It deals with questions such as: Should unemployment be raised to ensure that price inflation does not become too rapid? Should the United States break up Microsoft because it has violated the antitrust laws? Harcourt .

Higher federal budget deficits will cause interest rates to increase. The income gains from a higher minimum wage are worth more than any slight reduction in employment.Positive or Normative Statements?     An increase in the minimum wage will cause a decrease in employment among the least skilled. Harcourt . Provincial governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.

Economics: A Social Science  Social science The task of economic science is to discover positive statements that are consistent with what we observe in the world and that enable us to understand how the economic world works. This task is large and breaks into three steps:  Observation and measurement  Model building  Testing models Harcourt .

Economics: A Social Science  Observation and Measurement Economists observe and measure economic activity. keeping track of such things as:  Quantities of resources  Wages and work hours    Prices and quantities of goods and services produced Taxes and government spending Quantities of goods and services bought from and sold to other countries Harcourt .

Economics: A Social Science  Model Building An economic model is a description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand. Harcourt .

Economics: A Social Science  Testing Models An economic theory is a generalization that summarizes what we think we understand about the economic choices that people make and the performance of industries and entire economies. It is a proposition about which model works. A theory is a bridge between a model and reality. Harcourt .

Harcourt . Economists try to isolate cause-and-effect relationships by changing only one variable at a time. holding all other relevant factors unchanged. To isolate the effect of interest. economists use the logical device called ceteris paribus or ³other things being equal´.Economics: A Social Science  Obstacles and Pitfalls in Economics Economists cannot easily do experiments and most economic behavior has many simultaneous causes.

. they are policy-makers. they are scientists. When they are trying to change the world.Two Roles of Economists   When they are trying to explain the world.

Economics is divided into microeconomics and macroeconomics. When individuals make decisions. . Rational people make decisions by comparing marginal costs and marginal benefits. Economics relies on both positive and normative analysis.Conclusion      Economics uses the scientific method. they face trade-offs.

Markets are usually a good way of coordinating trade. A country¶s productivity determines its living standards. Society faces a short-run trade-off between inflation and unemployment.Conclusion      People can benefit by trading with each other. Harcourt . Government can potentially improve market outcomes.

Harcourt . grew by about 1% in 1990. An unexpected freeze in central Florida reduced the citrus crop caused the price of oranges to rise. adjusted for inflation.Micro or Macro-economics? 1. 4. 6. 5. 3. The consumer price index rose by more than 6% in 1990. The employment rate in the United States was 6. Lowa.8 % in August 1991. laid off 15 workers last month. The Alpo dogfood plant in Bowser. 2. Last week Standard Chartered Bank lowered its interest rate on business loans by one-half of percentage point. Our National output.

4 per cent last year. 2. 3. KFC¶s Zinger Burger deal is quite cheap. It was too hot today. 5. The high temperature today was 89 degree. The general price level rose by 4. Inflation eroded living standards last year and should be reduced by government policies. 4.Normative or Positive Economics? 1. Harcourt .

grew by about 3% in 2000. Last year. London. The Chen garment plant in Cry don .7 % according to census 1998. adjusted for inflation. An unexpected rain during harvest season of cotton in Sindh reduced the cotton crop caused the price of cotton to rise. The consumer price index rose by more than 10% due to high rate of inflation in Pakistan. Our GDP.1. earned $ 5 million profit on Christmas sale this year.QUIZ ² 1 Q. Bank Al Habib laid off its 2% employees due to economy crises in the country. Micro or Macro-economics?       The population growth rate in Pakistan is 2. Harcourt .

2. Harcourt . Unemployment rate in the country should be reduced by government policies. Generally. Normative or Positive Economics?      The maximum temperature today was 24 degree and minimum temperature was 9 degree. It was too cold today early in the morning.4 per cent compare to last year. Government should import wheat from USA to tackle the crises of price hike in the country.Q. consumer¶s purchasing power is reduced by 4.

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer: Get 4 months of Scribd and The New York Times for just $1.87 per week!

Master Your Semester with a Special Offer from Scribd & The New York Times