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• Basic issues in Economics:

Introduction to Microeconomics Scarcity, Efficiency and
IN Alternatives
and Basic Concepts THIS
LECTURE • Introduction to
Microeconomics
• Scope and Purpose of
Annu S. Pant Microeconomics and its
Visiting Faculty – ECONOMICS Significance in Business
Kathmandu University School of Management (KUSOM)
2015
Decision Making

Scarcity Effects of Scarcity

The condition in which •Need to make choice
our wants are greater •Need for a rationing device
than the limited •Competition
resources available to
satisfy those wants.

Need to Make Choice

Scarcity = wants > limited resources •What is good and what is bad?
•Good - Anything from which individuals receive
What is wants? utility or satisfaction
* Anything that provides utility • Bad - Anything from which individuals receive
What is utility? disutility or dissatisfaction
* The satisfaction one receives from a •Disutility - The dissatisfaction one receives from a
bad
good
PEOPLE WANT GOODS NOT BADS.

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Factors of Production
•Goods can be tangible or intangible
•Goods do not appear with the snap of your finger.
Resources
•It takes factors of production or resources to Land - All natural
produce them. resources, such as
minerals, forests, water,
•Factors of Production : Land, Labor, Capital, and unimproved land
Entrepreneurship.

Factors of Production Factors of Production

Resources Resources
Capital - Produced goods
Labor - The physical and that can be used as inputs
mental talents people for further production,
contribute to the such as factories,
production process machinery, tools,
computers, and buildings

Factors of Production Characteristics of Resources

Resources
Entrepreneurship - The particular talent that
some people have for:
organizing the resources of land, labor, and
capital to produce goods
seeking new business opportunities
 developing new ways of doing things
•Resources are scarce
•Resources have alternative uses
This leads to economic problem – the problem
of choice.
What is the motive of making choice?
- Welfare at individual, producer and
government level.

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Economic Problem/Resource Allocation
Economic problem or Problem of choice
There are three critical issues
1.what to produce + How much to produce
2.how to produce
3.for whom to produce
Economics examines how societies address these
three issues: allocation of scarce resources
How to Produce
Choice of technique of production that
maximizes output or minimizes costs or by
choosing the efficient technique of production
Labor Intensive – more labor and less capital
used
Capital Intensive – more capital less labor is
used
QUESTIONS
In USA which technique of production should
be used?
Capital Intensive as capital is in abundance
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What to Produce
•To make a choice of wants which are important for
the economy as a whole on the basis of the
technology available, cost of production, demand
for the commodity. It is studied under Price Theory.
•How much to produce is the problem of
determining the quantity for each good to be
produced on the basis of the technology available,
cost of production, demand for the commodity
QUESTIONS
In a country like Nepal which technique of
production should be used?
Labor intensive as labor is in
abundance so as to raise the standard of living
of the people.
For Whom to Produce
It is concerned with the distribution aspect of product
among various sections of the society.
It is related to the buying capacity of the consumers
in the market.
Buying capacity is dependent on his purchasing
power / income
Production will be carried out for those consumers
who can pay.
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Institutions for Allocation of
Resources
Institutions, including laws and customs, define a
society’s procedures for allocating resources
In a capitalist economy:
– Means of production are owned and controlled by and
for the benefit of private individuals
– Resources are allocated by voluntary trading among
businesses and consumers
Planned Economy
In such an economy:
–Economic decisions are highly centralized
–The state owns and controls the means of
production and distribution
No economy is completely
centralized or decentralized; all
economies are a combination
of both.
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Market Economy
•Private Ownership of Property
• Freedom of Enterprises
• Profit Motive of Production
• Price Mechanism guides production decisions
• Existence of competition
• Consumers are supreme
• Very unequal distribution of Income
• Absence of role of Government
Planned Economy
•Public ownership of property or factors of production
•No freedom of enterprise
•Social welfare motive
• Planning mechanism guides production
• No competition
•Absence of consumer’s sovereignty
• Restriction of freedom of occupation
• Inequalities of income greatly reduced
• Complete role of government
Mixed Economy
•Ownership of property both by private and public sector.
•Freedom of enterprise in private sector but no freedom in
public sector.
•Private sector – profit motivated;
Public sector – welfare motivated
•Private Sector – Price mechanism
Public Sector - Government
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Mixed Economy ECONOMICS Redefined

• Competition exists only in private sector
Economics is the science that studies human
• Consumer sovereignty exists
• Freedom of occupation exists
behavior in regards to the allocation of scarce
• Considerable inequality of income exists
resources so that consumers attains the
• Full role of government in public sector and limited role in maximum level of satisfaction, producers
private sector. attains the maximum level of profit and the
• Price mechanism resolves the central problems of economy nation attains the maximum level of social
in private sector while central planning authority decides in
public sector
welfare.

Need for Rationing Device Competition

A means for •It’s the result of scarcity of resources
deciding who gets •Competition takes the form of people
what of available trying to get more of the rationing device.
resources and goods
•If dollar price is the rationing device
If you are willing and able to pay people would compete to earn dollars.
the price the good is yours.

Opportunity Cost Study or ?????

The most highly valued opportunity or
alternative forfeited when a choice is
made.

Benefit Cost

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Opportunity Cost Economics the Science of Scarcity

The higher the opportunity cost of doing The science of how individuals and societies
something, the less likely it will be done.
deal with the fact that wants are greater than
Why young rock stars, movie stars, and fashion the limited resources available to satisfy those
models rarely go to college? wants.
BECAUSE
The opportunity cost are sufficiently high
for the individual that the benefits of attending
college are outweighed by the cost.

Production Possibility Curve Production Possibility Curve

Represents the possible combinations It is a hypothetical model of an economy
of two goods that can be produced in
a certain period of time with a given state of that produces only two products.
technology and fully and efficiently employed
resources.

When at PPF, 4-6% labor unemployment rate and

85-90% use of plant and machinery is an
accepted norm.

Tabular & Graphical Presentation of

Production Possibility Curve
Assumptions
-Economy produces only two goods.
-Economic resources are given and fixed
- Resources are not specific i.e. they can be shifted
from the production of one good to other good.
- Resources are fully employed i.e. there is no wastage
of resources. Resources are not lying idle.
- State of technology in the economy is given and
remains unchanged.
- Resources are efficiently employed
PPC – when MRT is Constant
What is marginal opportunity cost or MRT
(marginal rate of transformation)?
It means the sacrifices made in terms of
units of Y to produce an additional unit of X.
When MRT is constant PPC will be a
downward sloping straight line.

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Tabular & Graphical Presentation of

PPC – Constant Opportunity Cost
PPC – when MRT is NOT Constant
When MRT is not constant in fact,
increasing - PPC will be a downward
sloping curve concave to the origin.

PPC – Increasing Opportunity Cost PPC – Increasing Opportunity Cost

PPC – Framework for

Understanding
(a) Scarcity and Choice
•All the points on PPC shows what to produce
and how much to produce.
•All points on the curve are efficient and
attainable.
•Depending on nation’s policy it can choose any
point on the curve
•All points on PPC imply that most efficient
technology is employed

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(b) Productive Efficiency and Inefficiency (c) Unemployment

Productive Efficiency •Any point inside PPC shows that
The condition where the maximum output is
produced with given resources and technology resources are unemployed or
Productive Inefficiency
The condition where less than the maximum underemployed or are lying idle.
output is produced with given resources and •By increasing the use of resources
technology. Productive inefficiency implies that
more of one good can be produced without any production can be increased
less of another good being produced.

(d) Attainable and Unattainable

(e) Economic Growth
Regions and Productive Efficiency
An increase in resources or an
advance in technology can increase
the production capabilities of an
economy, leading to economic
growth and shift outward in the
production possibilities frontier.

(e) PPC and Economic Growth Economic Growth and Shift in PPC
PPC will shift to the right when
-New stock of resources are discovered
-There is an advancement in technology
PPC will shift to the left when
- Resources are destroyed because of national
calamity like earthquake, fir, war etc.
- There is the use of outdated technology

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Advancement in Technology and PPC
An advancement in
technology commonly
refers to the ability to
produce more output with
a fixed amount of
resources or the ability to
produce the same output
with fewer resources.
Positive Vs. Normative Economics
Positive - The study of “what is” in economic
matters.
Cause Effect
Deals with actual or realistic situation
Can be empirically verified.
eg. What determines the price rise? Govt has
adopted policies to reduce unemployment. Rate
of inflation is 6% in Nepal.
Microeconomics
Microeconomics is the study of human
behavior of individual decision making units,
such as consumers, resource owners and firms.
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Advancement in Technology
and PPC
Fig A
Advancement in technology
Fig B
Advancement in technology
Fig C
Advancement in technology
Of both Good X and Good Y of Good X only of Good Y only
Positive Vs. Normative Economics
Normative - The study of “what should be” in
economic matters
Judgment and Opinion (ethics)
Deals with idealistic situation
Cannot be empirically verified.
Eg – What is a fair price rise?
Unemployment is worse than poverty. Rate of
inflation should not be more than 6%.
Microeconomic Questions
•How does a market work?
• What level of output does a firm
produce?
• What price does a firm charge for the
good it produces?
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Microeconomic Questions
•How does a consumer determine how
much of a good he or she will buy?
• Can government policy affect business
behavior?
• Can government policy affect consumer
behavior?
Limitations of Microeconomics
•Fails to explain the functioning of the economy
as a whole
•The assumption of full employment is a rare
phenomenon. It is therefore an unrealistic
assumption.
•Fails to explain unemployment, poverty,
illiteracy and other problems prevailing in the
economy.
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Importance of Microeconomics
•Helps in formulating economic policies to enhance
economic efficiency and attain greater social welfare.
•It explains the working of a capitalist economy where
individual units are free to take their decisions
•Describes how individual units attain equilibrium position
•Helps govt in formulating correct price policies
•Helps in efficient employment of resources by the
entrepreneurs
•Helps business economists to make predictions and
business forecasts
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BASIC DEMAND
AND SUPPLY ANALYSIS
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