welcome

Subject Name
Sanjida Sayed Barsha
Lecturer
BBA (PROFESSIONAL)
ALHAJ MOCKBUL
HOSSAIN UNIVERSITY
COLLEGE

Chapter 1: Preliminaries Slide 1

Introduction
 Microeconomics deals with:
 Behavior of individual units
When Consuming - How we choose
what to buy
 Behavior of individual units
When Producing - How we choose what
to produce

Chapter 1: Preliminaries Slide 2

The Themes of Microeconomics
 Microeconomics
 Allocation of Scarce (limited) Resources and Trade-offs in a
market economy
 Microeconomics and Optimal Trade-offs
1. Consumer Theory
2. Workers
3. Theory of the Firm
 Microeconomics and Prices
 The role of prices in a market economy
 How prices are determined

Chapter 1: Preliminaries Slide 3

Theories and Models
 Microeconomic Analysis
 Theories are used to explain observed
phenomena in terms of a set of basic rules
and assumptions.
 For example
 The Theory of the Firm
 The Theory of Consumer Behavior

Chapter 1: Preliminaries Slide 4

Theories and Models
 Microeconomic Analysis
 Models: a mathematical representation of a
theory used to make a prediction.
 Validating a Theory: determined by its
predictive quality, given the assumptions.
 Evolving the Theory: testing and refining
theories is central to the development of
the science of economics.

Chapter 1: Preliminaries Slide 5

Nature of Economics- Science
or Art
 Economics as a Science
 Economics as an Art
 Economics both a Science and an Art

Chapter 1: Preliminaries Slide 6

Positive Versus
Normative Analysis
 Positive Analysis
 Positive analysis is the use of theories and
models to predict the impact of a choice.
 For example:
 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?

Chapter 1: Preliminaries Slide 7

Positive versus
Normative Analysis
 Normative Analysis
 Normative analysis addresses issues from the
perspective of “What ought to be?”
 For example:
 Consider the equity and efficiency trade-off of

an increase in the gasoline excise tax versus

import restriction on foreign oil.
 What Do You Think?
 What are the positive and normative issues of
raising the minimum wage?

Chapter 1: Preliminaries Slide 8

Different Branches of Economics

ECONOMICS

MICROECONOMICS MACROECONOMICS

Chapter 1: Preliminaries Slide 9

Microeconomics

 The term MICRO has been borrowed from

the Greek word ‘ Mikros’ meaning small.
 Microeconomics is the study of individuals,
households, and firms’ behavior in decision
making and allocation of resources.

Chapter 1: Preliminaries Slide 10

Micro Economics
 Micro Economics studies how the individual parts of the
economy make decisions to allocate limited resources
 • Microeconomics studies:
– how individuals use limited resources to meet unlimited
needs
– the consequences of their decisions
– the behavior of individual components like industries, firms
and households.
– how individual prices are set
– what determines the price of land, labor and capital
– inquire into the strengths and weaknesses of the market
mechanism.
Scope of Microeconomics
1. Theory of demand
2. Theory of supply
3. Theory of price determination
4. Theory of factor pricing
5. Optimum allocation of resources
6. Theory of economics welfare
7. Welfare economics

Chapter 1: Preliminaries Slide 12

Importance of the study of economics
lies in the following:
 Operation of an economy
 Prediction
 Economic policies
 Economic welfare
 Managerial decision

Chapter 1: Preliminaries Slide 13

Limitations of Microeconomics

1. Static
2. Wrong conclusions
3. Unrealistic assumptions
4. Limited Scope

Chapter 1: Preliminaries Slide 15

Macroeconomics

 The term ‘Macro’ originates from the Greek

word “Makros” which means Large.
 The branch of economics that studies the
behavior and performance of an economy as
a whole.

Chapter 1: Preliminaries Slide 17

 Macro Economics

 • Macro economics studies about the functioning of the economy as a whole

 • It examines the economy through wide-lens.
 • Macro economics studies about
 • the total output of a nation
 • the way the nation allocates its limited resources of land, labor and capital
 • the ways to maximize production levels
 • the techniques to promote trade
 • After observing the society as a whole, Adam Smith noted that there was an "invisible
hand" turning the wheels of the economy: a market force that keeps the economy
functioning.
Relation between Micro & Macro
Economics

 Micro economics analysis depends on macro

economic analysis
 Study of Micro Economic analysis is
necessary for macro Economic analysis

Chapter 1: Preliminaries Slide 19

Nature of economics

Nature of
Economics

Science Art

Positive Normative
Limitations of Economics

I. Study of Human Activities only

II. Study of Real Man
III. Study of Average Man
IV. Study of Social Man
V. Study of Economic Activities
VI. Science and Art
VII.Economics Laws
Principal Reasons behind Economic
Problems

 Unlimited Wants

 Scarcity of Resources

 Resources have alternative uses

 Central Economics Problems
 The problem of scarcity of resources which arises before an individual consumer
also arises collectively before an economy.
 On account of this problem and economy has to choose between the following:

 What to produce?
 How to produce?
 For whom to produce?
What to produce?
 What to produce?

 There are two aspects of this problem

 Firstly , which goods should be produced
 Secondly, what should be the quantities of the goods that are to be produced.

 An economy wants many things but all these cannot be produced with the
available resources.
How to produce?
 Which technique should be used for the production of given commodities
 This problem arises because there are various techniques available for the
production of a commodity such as, for the production of wheat we may use
other Both of labour and less of capital or less of labour or more of capital.

 With the help of both this techniques we can produce equal amount of
wheat. Such possibilities exist relating to the production of other
commodities also.
 Therefore, every economy faces the problem as to how resources should be
combined for the production of a given commodity. The goods would be
produced employing those methods of techniques whereby the output may
be the maximum and cost of production be the minimum.
 For Whom to produce?
 The main objective of producing a community in a country is its
consumption by the people of the country.
 However, even after employing all the resources of a country, it is not
possible to produce all the commodities which are required by the people.
 therefore, an economy has to decide as to for whom goods should be
produced.
 This problem is the problem of distribution of produced goods and services.
 Therefore, what goods should be consumed and by whom depends on how
national product is distributed among various people.
 Production Possibility Curve
 Production possibility curve is a curve which depicts all possible combinations of
two goods which an economy can produce with available technology and with full
and efficient use of its given resources.

 Modern economist explains Central problems of an economic system with the help
of production possibility schedule and production possibility curve.
 1. Production Possibility Schedule
 That schedule which shows alternative production possibilities of two sets
of goods with the given resources and technique of production. A
production possibility schedule taking example of apple and orange are
given below.
Possibility Goods A Goods B

A 0 70

B 1 69

C 2 68

D 3 65

E 4 60

F 5 55

G 6 48

H 7 39

I 8 24

J 9 0
 Production Possibility Curve
 A PP Curve shows the relationship between output levels of two goods in an
economy. It assumes the specified economy can only produce these two goods.
 In the words of Lipsey, “The production possibility curve is the curve which shows
the possible combinations of two goods that can be produced buy an economy,
given available resources and technology.
 An example of a PP curve based on above schedule is shown below: These
combinations can also be shown graphically, the result being a production
possibility Frontier. The production possibility Frontier (PPF) for goods A and B is
shown here.
 Observe that any point in the quadrant above, we are producing a specific amount
of one good and a specific amount of the other good.
 The curved line in the graph represents the economy at maximum capacity (the
economy is working at ‘full employment’ for the time.
 the curve stems from different production levels of each good based on
Technologies and efficiency of the workers producing the specific good.
 The space inside the curve represents an economy that is not operating at
maximum capacity ( one in a recession) and the space outside the curve is an
unattainable point at the given time (economic growth is needed to achieve the
point).
Properties and Assumption of Production
Possibility Curve

 The four key assumptions underlying production possibilities analysis

are:
 (1) resources are used to produce one or both of only two goods,
 (2) the quantities of the resources do not change,
 (3) technology and production techniques do not change, and
 (4) resources are used in a technically efficient way.
 Determinants of the PP Curve
 Size of the labor force
 Quantity/ quality of capital
 Quantity/ quality of resources
 Technology
 Health
 Education
 Solution of Economic Problems by PPF
 These three problems are known as the central problems or the basic problems of an
economy
 1. what to produce?
 2. How to produce?
 3. For whom to produce?

 These central problems are solved both by price-mechanism and central directions.
By using the concept of production curve we can solve the basic problems of an
economy, as under:
 (1) What to produce? : owing to the scarcity of resources we have to choose across
the production of various possible goods and services.
 For the sake of simplicity, we assume the production of wheat (representing consumer
goods) and machines (representing capital goods.)
 In this figure PP is the production possibility
curve. Given the resources and the possible
technology. It is representing alternative
combinations a1, a2, a3,a4…. of wheat and
machines. The various possibilities of
production reveal 2 basic facts;
 Greater production of Machines is possible
only when less of wheat is produced. So that
resources are to be withdrawn from the
production of wheat for greater production of
machines.
 Even; time we plan to produce more of
machines, production of wheat is to be
sacrificed at the increasing rate.
 So that, there is increasing marginal rate of
transformation between the production of
wheat and machines. It also means that the
opportunity cost of producing machines tin
terms of the loss of production of wheat tends
to rise as more of machines are produced.
 How to produce? This problem relates to
the choice of technique of production. If an
economy does not choose an appropriate
technique than the actual output of the
economy will be less then the potential
output.
 The figure shows how an economy chooses
a technique that makes optimum use of the
available factors of production.
 As is evident, point E very much inside the
production possibility curve PR. It shows
the use of inefficient technique.
 If efficient technique is made use of then
there will be more production of one of the
two commodities without sacrificing the
production of the other, as shown by points
A and C or there will be more production of
both the commodities as shown by point B.
 An efficient technique of production is the
technique which uses that combination of
resources which maximizes output or
minimizes cost for a given output.
 For whom to produce? Decision regarding for whom to produce or how to
distribute production is also taken by the government in a socialist economy.
All factors are owned by the government. People work only as laborers and so
get wages as their income.
 How much wages be paid to different categories of laborers are determined by
the government.
 Central planning authority determines the same on the basis of work principle.
 Everybody gets remuneration according to the work done by him or her.
 Quantitative and qualitative aspects of the work performed are taken into
consideration. A skilled worker gets higher wage than an ordinary worker.
 the entire national income is not distributed among the people under socialist
economy.
 Some part of it is kept in the form of social consumption fund. This fund is used
to execute social welfare activities like health, education etc.
Economies of Scale

 Economies of scale are cost advantages reaped by companies when

production becomes efficient.
 Companies can achieve economies of scale by increasing production and
lowering costs.
 This happens because costs are spread over a larger number of goods. Costs
can be both fixed and variable.
Basic Concept of Economics
Goods

 In economics, goods are items that satisfy human wants and provide utility,
for example, to a consumer making a purchase of a satisfying product. A
common distinction is made between goods which are transferable, and
services, which are not transferable.
 1. Consumers goods
 2. Producers goods : i) perishable goods (vegetables, fish, music etc.)
ii) durable goods ( house, car, radio etc.)
 Commodity : In economics, a commodity is an economic good that has
full or substantial fungibility: that is, the market treats instances of the good
as equivalent or nearly so with no regard to who produced them.[1][2][3]
 The price of a commodity good is typically determined as a function of its
market as a whole: well-established physical commodities have actively
traded spot and derivative markets. The wide availability of commodities
typically leads to smaller profit margins and diminishes the importance of
factors (such as brand name) other than price.
 Most commodities are raw materials, basic resources, agricultural, or mining
 products, such as iron ore, sugar, or grains like rice and wheat.
Commodities can also be mass-produced unspecialized products such as 
chemicals and computer memory.
Difference between Desire, Want and Demand
 Factors affecting the classification of wants

 Income
 Occupation
 Social status
 Habits
 Individual outlook
 Taste, fashion and customs
 Time
 place
Meaning of Utility

  Utilities are used when the decision criteria must be based on more than
just expected monetary values.
  Utility is a measure of the total worth of a particular outcome, reflecting
the decision maker’s attitude towards a collection of factors.
  Some of these factors may be profit, loss, and risk.
  This analysis is particularly appropriate in cases where payoffs can
assume extremely high or extremely low values.
 Features of Utility
 Utility is subjective
 Utility is relative
 Utility is not essential useful
 Utility is independent of morality
 Utility is different from satisfaction
 Importance of Consumption

 Modern economists emphasize much on it-

  Beginning of all economic activities: Consumption is the beginning of all human
activities consumption also means the satisfaction of human wants.
  End of all economic activities: Consumption is not only the beginning of all
economic activities it is also the end of all economic activities.
  Index of standard of living: The consumption pattern of a person; i.e. what he
eats, what he wears etc. give us the knowledge of the standard of living of the
person.
  Consumption is the source of production: Production increase with the
consumption.
 It is consumption of goods that necessities their production.
  Importance in economic theory: The study of consumption has contributed
much in the formulation of certain economic principles.
  Importance for the government: The government formulates its economic
policies on the basis of the consumption habits of the people.
  Importance in income and employment: Consumption plays an important role
in the determination of income, output and employment in a country.
 *Effect in PPF by Increasing Opportunity Cost?
Or, How the Shape of Production Possibility Frontier
is Affected by Increasing Opportunity Cost?
Or, Describe Opportunity Cost by using Production
Possibility Frontier/ Curve?

 Opportunity cost can be thought of in terms of how decisions to increase the

production of an extra, marginal, unit of one good leads to a decrease in the
production of another good.
 According to economic theory, successive increases in the production of one good
will lead to an increasing sacrifice in terms of a reduction in the other good. 
 Continue…

 For example, as an economy tries to increase the

production of good X , such as cameras, it must
sacrifice more of the other good, Y, such as mobile
phones.
 This explains why the PPF is concave to the origin,
meaning its is bowed outwards. 
 Continue…

 For example, if an economy initially produces at

A, with 8m phones and 10m cameras (to 20m), and
then increases output of cameras by 10m, it must
sacrifice 1m phones, and it moves to point B.
 If it now wishes to increase output of cameras by a
further 10m (to 30m) it must sacrifice 2m phones,
rather than 1m, and it moves to point C; hence,
opportunity cost increases the more a good is
produced.
 The gradient of the PPF gets steeper as more
cameras are produced, indicating a greater
sacrifice in terms of mobile phones foregone.
Alternative Economic System

 Capitalism
 Socialism
 Mixed Economy
 Islamic Economics
Allah hafez
Slide 63