MICROECONOMICS

MICROECONOMICS IS THE STUDY OF INDIVIDUALS, households and firms’ behavior in decision making and allocation of
resources.

it generally applies to markets of goods and services and deals with individual and economic issues

Macroeconomics is a branch of economics that deals with how an economy functions on a large scale.

MICROECONOMICS MACROECONOMICS

Deals with individual economic variables Deals with Aggregate economic variables

Applied to operational or internal issues Applied to environment and external issues

Demand and Supply Aggregate Demand and Aggregate Supply

Microeconomics
ADVANTAGES DISADVANTAGES
1. Understand the working of the economy 1. Excessive Generalization
2. Efficient allocation of resources 2. May is not true in aggregates
3. Useful in business decision-making 3. Assumption of full employment unrealistic
4. Study of human behavior 4. Concentration on small parts
5. Examine conditions of economic welfare
6. Formulation of public policies
Macroeconomics
ADVANTAGES DISADVANTAGES
1. It is helpful in determining the BOP 1. Stabilization measures at the national level
(balance of payments). may not have a positive impact on different
segments of an economy.
2. Visibility
2. Macroeconomic decisions may even damage
3. Accessibility of information
the interests/goals of individual economic units.
4. It is also helpful in planning or making
decisions of the economy.

Importance of Microeconomics and Macroeconomics

MICROECONOMICS
 • It is helpful in determining the prices of a product along with the prices of factors of production within
the economy.
MACROECONOMICS
• It maintains stability in the general price level and resolves the major problems of the economy like
inflation, deflation, reflation, unemployment and poverty as a whole.

POSITIVE AND NORMATIVE ANALYSIS

o Two branches of modern economics

o Positive economics deals with the various economic phenomena. It is regarded to as the ‘WHAT’
o Normative economics focuses on what economics should be and the value of its fairness. It is the
‘SHOULD BE’ or ‘OUGHT TO BE’

WHAT IS POSITIVE ANALYSIS?

o Descriptive

o They make a claim about how the world is.

o It relies on objective data analysis, relevant facts, and associated figures.

o It attempts to establish any cause-and-effect relationships or behavioral associations

o It is objective and fact-based where the statements are precise, descriptive, and clearly measurable.

EXAMPLEs
1. Government-provided healthcare increase public expenditures.
2. Monopolies have proved to be inefficient
3. The desired rate of return on gambling stocks are higher compared to others
4. The relationship between wealth and demand is inverse in case of inferior goods
5. House prices reduce once the on interest rate on loans get higher
6. Car scrap page schemes can result in fall I the prices of second hand cars

WHAT IS normative ANALYSIS

o Prescriptive
o They make a claim about how the world ought to be.

o It focuses on the ideological, opinion-oriented, prescriptive, value judgments, and "what should be"
statements aimed toward economic development, investment projects, and scenarios.
o Its goal is to summarize the desirability quotient among individuals and quoting factors like ‘what can
happen’ or ‘what ought to be’
 o It is subjective and value-based, originating from personal perspectives, feelings, or opinions involved in
the decision-making process.
EXAMPLEs
1. Government should provide basic healthcare to all citizens..
2. The government should implement strict wealth tax laws to decrease the un even distribution of wealth
3. No individuals should be entitled to inheritances as it belongs to society
4. Import duties should be increased on goods coming from nations with humble human rights records
5. Investors ought to be more socially responsible and stop investing vice stocks
6. Developing countries should only accept democracy when entire population is educated and liberated
Importance of positive & normative analysis
o Required in order to create the policies of a country, region, industrial sector, institution, or business.
o A clear understanding of the difference between positive and normative economics may lead to better
policy-making if policies 

Positive analysis
o Data, facts and figures NORMATIVE analysis
o Objective o Personal perspective and opinion

o Describes the cause and outcome of o Subjective

relationships
o Provides value of judgment
o The study of ‘WHAT IS’
o The study of ‘WHAT SHOULD BE’
o Can be tested scientifically and either
o Cannot be proven scientifically
proven or disregarded
o Provides solution but based on personal
o Provides more scientific and calculated
values
clarification
Positive and Normative Analysis
 Branch of modern economics
 Basis in creating/ making public policy

Market Failure- occurs when the free market fails to allocate resources at the socially optimum level and this
leads to a net loss in social welfare.
Externalities- arise when the actions of one economic agent make another economic agent worse or better off,
yet the first agent neither bears the cost nor receives the benefits of doing so.
Negative Externality
 Detrimental third party effects as a result of the actions from a separate agent.
Positive Externality
 Third party benefits that accrue as a result of actions from a separate agent.

NEGATIVE CONSUMPTION EXTERNALITIES

 A negative consumption externality leads to a marginal social benefit that is below the marginal
private benefit, and a social optimum quantity (Q2) that is lower than the competitive market
equilibrium quantity (Q1). There OVERCONSUMPTION in the quantity as seen from Q1 – Q2
with an associated deadweight loss.

NEGATIVE PRODUCTION EXTERNALITIES

 A negative production externality leads to a marginal social cost that is above the marginal
private cost, and the social optimum quantity (Q2) that is lower than the competitive market
equilibrium quantity (Q1). There is OVERPRODUCTION of Q1 – Q2 with an associated
deadweight loss
POSITIVE CONSUMPTION EXTERNALITIES
 A positive consumption externality leads to a marginal social benefit that is above the marginal
private benefit, and the social optimum quantity (Q2) that is higher than the competitive market
equilibrium quantity (Q1). There is UNDERCONSUMPTION of Q1 – Q2 with an associated
deadweight loss. The deadweight loss area implies that if we consume more, the extra unit units
consumed brings more benefit than cost, so by not consuming those extra units, we’re actually
losing out.
POSITIVE PRODUCTION EXTERNALITIES
 A positive production externality leads to a marginal social cost that is below the marginal
private cost, and the social optimum quantity (Q2) that is higher than the competitive market
equilibrium quantity (Q1). There is UNDERPRODUCTION of Q1 – Q2 with an associated
deadweight loss. Same issue before, by producing more extra unit, each unit produces brings
more benefit than cost, and by not producing them, we’re actually losing out the extra potential
benefits.

NEGATIVE EXTERNALITY (OVERPRODUCTION/OVERCONSUMPTION)

 Because individual don’t account for the negative externalities, the social benefit/cost curves
take into account these negative externalities in consumption and production, so the truth,
SB<PB (consumption) and SC>PC (production), but the private consumer and producer doesn’t
take that into account because they only think of themselves, their self-interest, they doesn’t
think about how the society feels, and what the true society benefits and costs are, so they just
continue in consuming and producing.

POSITIVE EXTERNALITY (UNDERPRODUCTION/UNDERCONSUMPTION)

 The goods and services that generate positive externalities are underprovided, compared to
what the society rely. And that is because private individuals don’t take into account the third
party cost and benefits, they only care about themselves. The MSB (consumption) and MSC
(production), accounts the social positive externalities but the private individual only considers
his own which leads to misallocation.
EXTERNALITY THEORY: MARKET OUTCOME IS INEFFICIENT
  With a free market, quantity and price are such that MPB = MPC
 Social optimum outcome is such that MSB = MSC
EXTERNALITY THEORY: GRAPHICAL ANALYSIS- One aspect of the graphical analysis of
externalities is knowing which curve to shift, and in which direction.

 Negative Production Externality: MSC curve lies above MPC curve

 Negative Consumption Externality: MSB curve lies below MPB curve
 Positive Production Externality: MSC curve lies below MPC curve
 Positive Consumption Externality: MSB curve lies above MPB curve

PRODUCTION POSSIBILITIES FRONTIER- It can be used to demonstrate the point that any nation’s
economy reaches its greatest level of efficiency when it produces only what it is best qualified to
produce trades with other nation’s for the rest of what it needs.

WHAT IS PRODUCTION POSSIBILITIES FRONTIER (PPF)?

 ● The production possibilities frontier is a graph that shows the various combinations of output
which the economy can possibly produce given the available factors of production and
production technology that firms use to turn these factors into output.
 ● It illustrates the trade-offs facing an economy that produces only two goods. It shows the
maximum quantity of one good that can be produced for any given production of the other.

Opportunity Cost - The lost of potential gain from other alternatives when one alternative is chosen
scarcity - refers to limitations - limited goods or services, limited time, or limited abilities to achieve
desired ends.
Shift in the Production Possibilities Frontier
 The production possibilities frontier shows the trade - off between the outputs of different goods
at a given time, but the trade-off can change over time.

Importance of Production Possibility Frontier (PPF)

 The Production Possibility Frontier (PPF) is extremely important in describing a range of

economic phenomena. The PPF can be used to explain the concept of opportunity cost:
rather than measuring costs in dollars which are rather arbitrary ( and change with
inflation ), we can measure the cost of producing one good in terms of not producing
other goods.

MARKETFORCES
 Competitive pressure in a free market that impact price and output levels.
 Where everyone is free to participate as they like without any interference of the
governance.
 Determine the price and quantity of a good or services in a market.

GOVERNMENT
  The most powerful movers of the market
 Hold control over competitive markets as they are the ones that regulate economic
activity over time
 Two ways to regulate: Fiscal, Monetary Policies
FISCAL
 Fiscal Policy refers to the decisions of the government about taxation and spending. In other words,
fiscal policy helps mobilizing resources for financing projects that includes development activities for
public use. For taxation, Government is trying to minimize the income inequalities as much as possible
kaya may process tayo on how we charged taxes depending on your salary.
 kasi the higher the taxes the lower the spending but the lower the taxes the higher the spending.
 And for government spending it includes the expenditures on infrastructure, railways or roads even the
government salaries and welfare programs that affects our GDP. how does it affects the GDP because
if the government spending causes the UNEMPLOYED to gain jobs then they will have more income to
spend leading to an aggregate demand.

MONETRAY POLICIES
 it refers to central bank activities that engage in the management of money supply and interest rate in
an economy to prevent inflation and unemployment. So how monetary policy affects the market. The
monetary policy of the government can impact stocks based on how interest rates change. Example,
for the interest rate adjustment, if a central bank increases the discount rate, the cost of borrowing for
the bank increases. If that happens the banks will now increase the interest rate they charge the
customers. The cost of borrowing now will increase and the money supply will decrease therefore, this
policy is utilized when the government wants to control inflation levels.

INTERNATIONAL TRANSACTIONS

 Exchange of goods and services over national borders

 Strength of an economy and its currency is highly dependent on the flow of funds between countries

S U P P L Y and D E M A N D
 Supply and Demand for products, services, currencies, and other investments creates push-pull
dynamic in prices

SPECULATIONS and EXPECTATIONS

 Integral parts of the financial system

 Future action is dependent on current acts and shapes both current and future event
 Sentiment indicator are commonly used to measure how certain groups are feeling about the current
economy

THE IMPORTANCE OF MARKET FORCES TO OUR ECONOMY

 These Market Forces influence what goods should be produce, how many goods should be produce,
and at what price the goods should be sold.
 These will increase productivity, efficiency and innovation of our market economy.

 The 4 Market Forces are Government, International Transactions, Supply and Demand, Speculation
and Expectation
 It is important to understand how all these elements come together to create trends
 The factors are categorically different but they are closely linked to one another