Ch01 - Microeconomics

ECU07101
MICROECONOMICS
Dr. MGALE, Y.J - IRDP

Email: ymgale@irdp.ac.tz
2023 Website: www.irdp.ac.tz 1
Chapter 1
Preliminaries
©Mgale,2023
Introduction
 Understanding Microeconomics
 What are the key themes of
microeconomics?
 What is a Market?
 What is the difference between real and
nominal prices
 Why study microeconomics?
©Mgale,2023 Chapter 1 3
Understanding Microeconomics
 Microeconomics is the study of what is likely to
happen (tendencies) when individuals make
choices in response to changes in incentives,
prices, resources, and/or methods of
production.
 Individual actors are often grouped into
microeconomic subgroups, such as buyers,
sellers, and business owners.
 These groups create the supply and demand for
resources, using money and interest rates as a
pricing mechanism for coordination.
Themes of Microeconomics
 Microeconomics deals with limits

Limited budgets
Limited time
Limited ability to produce
 How do we make the most of limits?
 How do we allocate scarce resources?
 Workers, firms and consumers must

make trade-offs
Do I work or go on vacation?
Do I purchase a new car or save my money?
Do we hire more workers or buy new
machinery?
 How are these trade-offs best made?
 Consumers
Limited incomes
Consumer theory – describes how
consumers maximize their well-being, using
their preferences, to make decisions about
trade-offs.
How do consumers make decisions about
consumption and savings?
 Workers
Individuals decide when and if to enter the
work-force
 Trade-offsof working now or obtaining more
education/training
What choices do individuals make in terms of
jobs or work places?
How many hours do individuals choose to
work?
 Trade-off of labor and leisure
 Firms
What types of products do firms produce?
 Constraintson production capacity & financial
resources create needs for trade-offs.
Theory of the Firm – describes how these
trade-offs are best made
 Prices
Trade-offs are often based on prices faced
by consumers and producers
Workers made decisions based on prices for
labor – wages
Firms make decisions based on wages and
prices for inputs and on prices for the goods
they produce
 Prices
How are prices determined?
 Centrally planned economies -governments
control prices
 Market economies – prices determined by
interaction of market participants
Markets – collection of buyers and sellers
whose interaction determines the prices of
goods.
Theories and Models
 Economics is concerned with explanation

of observed phenomena
Theories are used to explain observed
phenomena in terms of a set of basic rules
and assumptions.
 The Theory of the Firm
 The Theory of Consumer Behavior
Theories and Models
 Theories are used to make predictions

Economic models are created from theories
Models are mathematical representations
used to make quantitative predictions
Theories and Models
 Validating a Theory
The validity of a theory is determined by the
quality of its prediction, given the
assumptions.
Theories must be tested and refined
Theories are invariably imperfect – but gives
much insight into observed phenomena
The Uses of Microeconomics
 Microeconomics can be applied in a positive or
normative sense.
 Positive microeconomics describes economic
behavior and explains what to expect if certain
conditions change.
 If a manufacturer raises the prices of cars,
positive microeconomics says consumers will
tend to buy fewer than before.
 Microeconomics could also explain why a higher
minimum wage might force a Company to hire
fewer workers.
 These explanations, conclusions, and predictions of
positive microeconomics can then also be applied
normatively to prescribe what people, businesses,
and governments should do in order to attain the
most valuable or beneficial patterns of production,
exchange, and consumption among market
participants.
 This extension of the implications of
microeconomics from what is to what ought to be
or what people ought to do also requires at least
the implicit application of some sort of ethical or
moral theory or principles
Positive & Normative Analysis
 Positive Analysis – statements that

describe the relationship of cause and
effect
Questions that deal with explanation and
prediction
 What will be the impact of an import quota on
foreign cars?
 What will be the impact of an increase in the
gasoline excise tax?
Positive & Normative Analysis
 Normative Analysis – analysis examining

questions of what ought to be
Often supplemented by value judgments
 Should the government impose a larger
gasoline tax?
 Should the government decrease the tariffs on
imported cars?
What is a Market?
 Markets
Collection of buyers and sellers, through their
actual or potential interaction, determine the
prices of products
 Buyers: consumers purchase goods, companies
purchase labor and inputs
 Sellers: consumers sell labor, resource owners sell
inputs, firms sell goods
 Arbitrage
The practice of buying a product at a low price
in one location and selling it for more in another
location
What is a Market?
 Market Definition
In the view of economists, there are only two
markets: the factor market and the goods and
services market.
They also can be called the input market and the
output market.
The input market supplies the resources needed to
make finished products.
The output market buys and uses the finished
products.
The factor market is driven by demand in the goods
and services market.
What is a Market?
 Defining the Market

Many of the most interesting questions in
economics concern the functioning of
markets
 Why are there a lot of firms in some markets
and not in others?
 Are consumers better off with many firms?
 Should the government intervene in markets?
Market Price
 Transactions between buyers and sellers

are exchanges of goods for a certain
price
Market price – price prevailing in a
competitive market.
 Some markets have one price: the price of gold
 Some markets have more than one price
©Mgale, 2023 Chapter 1 22

Why Study Microeconomics?
 Microeconomic concepts are used by everyone to
assist them in making choices as consumers and
producers.
 It examines how individuals, households and

firms' decisions and behaviours affect the supply
and demand for goods and services, which
determines prices, and how prices, in turn,
determine the supply and demand of goods and
services.
Key takeaways
 Microeconomics studies the decisions of individuals
and firms to allocate resources of production,
exchange, and consumption.
 Microeconomics deals with prices and production in
single markets and the interaction between different
markets but leaves the study of economy-wide
aggregates to macroeconomics.
 Microeconomists formulate various types of models
based on logic and observed human behavior and
test the models against real-world observations.
Homework
 Why is it important to study

microeconomics?
 Microeconomics vs. Macroeconomics:
how they differ and why both are
essential?

Ch01 - Microeconomics

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Ch01 - Microeconomics

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ECU07101

Dr. MGALE, Y.J - IRDP

 Microeconomics deals with limits

 Workers, firms and consumers must

 Economics is concerned with explanation

 Theories are used to make predictions

 Positive Analysis – statements that

 Normative Analysis – analysis examining

 Defining the Market

 Transactions between buyers and sellers

©Mgale, 2023 Chapter 1 22

 It examines how individuals, households and

 Why is it important to study

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