MICRO ECONOMIC

THEORY -
INTRODUCTION
CONTENTS

• Introduction to Economics
• Central Problems of economy
• Concept & Definition of Micro economics & Macro economics
• Scope of micro Economics
• Types of micro economic analysis
• Role of Micro and macro economic analysis in Formulation of business
policy
• Difference and interdependence of micro and macro economics
• Is there a problem to be addressed?
• Is there a solution or solutions to the problem, in terms of strategies or
courses of action that can be taken?
• What objective or objectives can be defined for these strategies?
• What constraints exist in terms of operating any strategies?
• How can we identify strategies as solutions to the problem?

QUESTIONS TO BE ADDRESSED….

6
WHY WE STUDY
ECONOMICS?

• The knowledge of Economics will make

you good at problem solving because you
will learn about problem identification,
their possible solutions, use of relevant
information and finally taking up
decisions.
ECONOMIC
S
• Economics is the study of how society manages its scarce
resources.
• Economics is the study of how individuals make economic decisions like
how much you work? How much you earn? What you want to buy? How
much you save? And how you invest your savings? Etc.
SCARCITY .
..
• The resources available in any country to produce goods and
services are scarce.
• Scarcity means that country has limited resources and
therefore can not produce all commodities people wish to
have.
SCARCIT
Y
• Scarcity exists because individuals want more than can be produced
• Scarcity means the goods available are too few to
satisfy individuals’ desires
• The degree of scarcity is constantly changing

• The quantity of goods, services and usable resources

depends on technology and human action
SOCIETY AND SCARCE
RESOURCES:
• The management of society’s resources is
important
because resources are scarce.
• Scarcity implies choice and choice implies
cost.
WHAT IS
ECONOMICS?
Economics is
the study of how we can best increase a country’s wealth (economy)with the
resources that we have available to us.
 Economic
s
Economics is a Economics is
Economics is the fundamentally the
social science science of the human study of how
and as a social behaviour which is people allocate
science it concerned with the their limited
studies the allocation of scarce resources to their
economic resources in such a alternative as to
manner that consumer produce consume
behavior of the can maximise their goods and service
people and satisfaction,producer to satisfy their
economic can maximise their endless wants to
phenomenon profits and society can maximise their
maximise its welfare gains.
DEFINITION OF
ECONOMICS
• Economics is the study of those activities of human beings which are concerned with the
satisfaction of unlimited wants by utilizing limited resources.
• Economics derived by greek language- Oikos(Household) and Nemein( to manage)
meaning therby Household Management.
• The term economics was first used by Dr. Marshall in 1890 in his famous
work “
Principles of Economics” .
• Father of Economics – Adam Smith published a book “ An enquiry into the
nature
and Causes of wealth of Nations” was published in 1776.
DEFINITION OF
ECONOMICS
• Broadly the definitions of Economics have been divided into four
parts:
Wealth
definitio Adam
n Smith
Welfare Marshall
Economic definitio
s n
Scarcity Robbins
definitio
n
Growth
WEALTH
DEFINITION
• According to classical economists like Adam Smith, J.B. Say,Walker, J.S. Mill etc.
• Economics is a subject that studies nature of wealth and its production, consumption,
exchange and distribution etc.
• Adam Smith, “ Economics is an enquiry into the nature and causes of wealth of
nations.”
• Features:
 Economics is a study of wealth only
 Nature or meaning of wealth
 Causes of wealth
 Economic Man
 MATERIAL WELFARE
• According to Neo-classicalDEFINITION
economists like Marshall, J.S. Mill, Pigou, Cannan etc.
• They have included in the scope of economics those activities of man which are undertaken to acquire material goods which promote the
welfare of mankind.
• Marshall,“ Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely
connected with
attainment the the use of material requisites of well
and with
being.”
• Features:
 Importance to the study of man
 Study of Social man
 Ordinary business of life
 Study of Real Man
 Material Requisites
 Welfare
 Science and Art
 Classificatory
 Money is the measure of material welfare
SCARCITY
DEFINITION
• According to economist Menger, Petter,Stigler, Prof. Robbins
• Prof, Robbins “ An essay on the Nature and significance of Economic Science” published in
1932.
• Robbins,” Economics is a science that studies human behavior as a relationship between ends and
scarce means which have alternative uses.”
• Features:
 Unlimited wants or ends
 Limited or scarce Means
 Alternative Uses of Means
 Wants differ in Urgency
 Economic Problem
 Opportunity cost
GROWTH ORIENTED
DEFINITION
• According to the modern scientists Prof Samulson, Benham, Lipssey , Steiner, Ferguson etc.
• In terms of growth oriented definition, Economics is concerned with the efficient use and
allocation of scarce resources so as to accelerate the rate of economic growth and promote
social welfare.
• Acc.To Prof. Samuelson,” Economics is the study of how people and society end up closing with
or without the use of money , to employ scarce production resources that could have alternative
uses, it produces various commodities over time and distributes them for consumption, now or in
the future, among various persons and groups in society. It analyses costs and benefits of
improving patterns of resource allocation.”
• Features:
 Economic Resources
 Efficient allocation of resources
 Full Utilisation of Resources
 Incease in Resources
ECONOM
Y
• Economy is the sum total of all economic activities. An economy is a system that
provides people with the means to work and earn a living in the process of production.
• It refers to the whole collection of production units in an area by which people get
their living.
• All production units located within a geographical area are collectively called an
economy.
• Basic activities are production, consumption, exchange, distribution,capital
formation(investment) etc.
PRODUCTION POSSIBILITY CURVE
(PPC)
• Production Possibility Curve(PPC) shows all possible combinations of two goods which an
economy can produce with full and efficient use of its given resources and available
technology.
• Assumptions-
1) The resources are given and remain constant.
2) The technology is given and remains constant.
3) The resources are fully and efficiently employed.
4) The resources are not equally efficient in production of all goods.Thus, if
resources are transferred from production of one good to another, the cost increases.
 Production Possibility Schedule
Production Possibilities (combinations) Pizza Sugar
A 9 1
B 7 2
C 4 3

Two Factors which effect PPC:

 Change in the Volume of
available resources.
 Change in the given technology.
CENTRAL PROBLEMS OF AN ECONOMY(ECONOMIC PROBLEMS)

• Meaning:

It is the problem of making choices in the use of scarce resources for
satisfaction of unlimited wants.
Economic problems (central Problems) are the problems of
resource allocation or making choices in the use of scarce resources
having alternative uses.
SCARCITY –THE ROOT OF CENTRAL PROBLEMS

• The problem of choices which give rise to various central problems of our
economy is also defined as the problem of economizing resources.
• By scarcity we mean the non-availability of a required resource in the desired
volume.
• A commodity or a resource is said to be scarce if its supply falls short of its
demand,
WHY DOES AN ECONOMIC PROBLEM
ARISE?

• Economic problem arises because human wants are unlimited and means (resources)
having alternative uses to satisfy them are limited(scarce).
• In Short, reasons for Economic Problem-
 Unlimited Human wants
 Limited Resources
 Resources can be put to alternative uses
 Economi
c
Problem

Allocation Ful Growth of

Utilisation
l
of resources
of
Resources Resources

Full Efficiency in
What to How to For whom to employment production
produce? produce? produce? of Resources &
distribution

Personal Functional
distribution
distribution
ALLOCATION OF
RESOURCES
• It is the basic problem related to utilization of resources for the production of different goods
and services .
• Basically an economy has to face the problem of the production of commodities (what to
produce), utilization of resources(how to produce)and distribution of produced
commodities(for whom to produce).
• It has three aspects-
 What to produce and in what quantity?
 How to produce?(The problem of Choice of Technique)
 For whom to produce?
WHAT TO PRODUCE AND IN WHAT
QUANTITY?
• Which of the possible commodities should be produced?
• How much of each of these commodities should be produced?
 Each economy has to make choice as to which wants it should
satisfy and which ones it should forgo.
 To make choices from the following alternatives:
Choice between Consumer goods and capital goods

Wheat cloth, sugar ,tea Machines, tools, seeds,

tractors
Choice between civil/ Peace time goods or War time goods

Cloth, watches, radio, mobile Rifles, guns, fighting

aircrafts
Choice between Necessary goods or Luxury goods

Bread , clothes, house Car, gold, ornament

Choice between Private Goods and Public Goods

Private house, factories, radio, mobile Public parks, roads,

WHAT TO PRODUCE AND IN WHAT
QUANTITY?
• This problem arises due to scarcity of resources. It is on the basis of these choices that a
country decides about the allocation of scarce resources for the production of various
commodities.
• Example: Steel can be used in the manufacturing of cars, scooters, refrigerators,
furniture, bicycle etc. If an economy decides that the available steel should be used in
the automobile industry then use of steel for other purpose should be reduced.
 HOW TO PRODUCE? (THE PROBLEM OF CHOICE OF
TECHNIQUE)

• It is the problem of Choice of technique or method of production.

• The problem is how to determine an optimum combination of inputs( labour and capital) to
be used in production of goods/services.
• This problem arises because resources are scarce and therefore there is more than one
possible way in which goods and services can be produced.
• Example:Agricultural goods can be produced through extensive cultivation or intensive
cultivation.)
• The alternative technique of production involves different costs. Therefore which should be
regarded as the most efficient technique of production(capital intensive/labour intensive-which
uses the least amount of scarce resources.)
 FOR WHOM TO
PRODUCE?
• It is the problem of Distribution of Income among different factors of production.
• How should the produce of the economy(Income) be distributed among the individuals in the economy?
• It means that who will buy/consume the goods and services produced.
• Goods and services are produced especially for the people who can purchase them and purchasing power
depends mainly on distribution of income from output among factors of production.
• It has two aspects- Personal distribution: How should output(income generated through production)
be distributed among different individuals and households?
• Functional Distribution: How should output(income generated through production) be distributed
among different factors of production?
MICRO ECONOMICS-
DEFINITION
Micro Economics- Acc.To Shapiro, “ Micro
Economics deals with small parts of the economy.”
Acc.To Boulding, “ Micro Economics is the study of
particular firm, particular household, individual
Study of individual price, wage, income, industry and particular
Economic
Variable
commodity.”
Micro Economic analysis studies (i) how resources
Individua Individual Individual
Individu Commodity
are allocated to the production of particular goods
l producer Firm al and services,(ii) how goods and services are
Price
consumer Industry distributed among the people and (iii) how efficiently
they are distributed.
Thus Micro Economic analysis is the study of
price theory.
MACRO ECONOMIC
ANALYSIS
• Macro Economics, economic problems are studied from the point of view of the entire
economy, for example, aggregate, consumption, aggregate employment, national
Income, general Price level etc.
• Acc.To Boulding,“ Macro economic theory is that part of economics which studies the
overall averages and aggregates of the system.”
• Acc to Shapiro,” Macro Economics deals with the functioning of the Economy as
whole.”
SUBJECT MATTER OF
ECONOMICS Micro Macro
Economic Economic
s s
Derived from
Derived from Greek
Greek word word ‘Makros’
‘Mikros’ meaning large.
meaning small

Micro economics is that part

of economic theory which
deals with the economic
behavior of individuals or
individual units of the
economic system, such as
individual households, firms
and industries.
Macro economics studies the
aggregates and averages related
to whole economy, such as
aggregate demand, aggregate
supply, national income,
general price level , total
employment etc.

Study of Individual Economic

units and Individual Study of the
Economic Variables. economy as a
whole.

Economic Activities of small

group. Exp. demand for salt Economic Activities
by all the households, study of very large
of cotton textile industry etc. group.
Exp.
whole economy.
Aggregate
demand of the
SCOPE OF MICRO ECONOMIC
ANALYSIS
• Theory of Demand
• Theory of Production
• Theory of Price Determination
• Theory of Factor Pricing
• Optimum allocation of Resources
• Welfare Economics
• Public Policy-market structure, legal framework,problems to formulation
and implementation of public policy
TYPES OF MICRO ECONOMIC
ANALYSIS
• It is that part of Micro economic analysis in
which an equilibrium point of micro economic
variable( Price & Quantity demanded , Quantity
supplied) is attained at a given point of time.
• E- Micro Static Point/Equilibrium
• OQ- Quantity Demanded/Quantity
Supplied
• EQ-Price
MICRO COMPARATIVE STATIC
ANALYSIS
• It deals with a Comparison of two Micro static
points of two different point of time.
E, E1 - Comparative points
EQ, E1Q1 – Prices
OQ,OQ1 –Quantity
demanded & quantity
Supplied
SS- Supply Curve
DD-Original demand Curve
D1D1- Change in Demand Curve
MICRO DYNAMIC
ANALYSIS
• It explains the process of change between
initial or original equilibrium and new
equilibrium. It also discusses the forces
which have been operative during such
process .
• The change in E to E1 is not a sudden
change but the process of change has been
caused by several variables.
 ROLE OF MICRO ECONOMIC ANALYSIS IN FORMULATION OF BUSINESS
1.
POLICY
Functioning of Economy: Useful in understanding the functioning and mechanism of free market economy. Decisions of
production(what, How and Whom) taken by producers and consumers. It helps Business firms o determine their policies and do
the necessary adjustments when and where is desirable.
2. Prediction: These are made on the theories of Micro eco. C a u s e s - - → result. For eg, DD Price
3. Economic policies: States the relevance of Economic policies of the Govt., Effect of direct and indirect tax on consumption .
production of the commodity, rationale of price and wage policy on the basis of allocation of resources . Rationing is justified or
not in the favour of citizens of the country.
4. Economic welfare: it is related to maximum social welfare, it is used to examine the subjective satisfaction that individual
derive from consumption, Study of welfare economy
5. Demand analysis and forecasting: Business firm forecast the demand of their firm. Study of determinants of the DD, helps in
forecasting the future demand and present sales.
6. Decision Making :it provides tools to attain pre-determined objective of business firm. Objectives related to decision making-
cost minimization, Profit Maximisation, sale optimization, optimal resource utilization., Planning of new projects etc.
7. Cost and production analysis : it helps to attain efficient allocation of productive resources which are scarce. Helpful in
effective project planning, control cost and derive profits, proper product mix considering the cost.
 CONTINUE…
8. Pricing Decisions, policies and Practices: price depends upon cost of production,price
of substitute and nature of competition,
9. Profit management
10. Linear Programming
11. Problems of externalities
12. Impact of taxation
13. Other Roles
ROLE OF MACRO ECONOMIC ANALYSIS IN FORMULATION OF BUSINESS
POLICY1. Functioning of an Economy
2. Formulation of Economic
3. Policy Analysis of Trade Cycles
4. Analysis of Inflation and
Deflation
5. Helpful in economic planning
6. Helpful in International trade
7. Macro economic Paradoxes
8. Helpful in Micro economic
9. analysis Estimation of material
10. Welfare International comparisons
11. Interrelationships among Different sectors
12. Analysis of general unemployment
13. Distribution of National Income
14. Growth economics
LIMITATIONS OF MICRO ECONOMIC
ANALYSIS
• Limited to the study of Micro Activities
• Unrealistic assumptions
• Fails to study the whole Economy
• No use of national level Economic problem
MICRO ECONOMICS VS. MACRO
ECONOMICS
Basis Micro Economics
Unit of Study It studies the economic
behavior of Individual
economic Units.
Focus of study Price determination and
allocation of resources.
Instruments Demand and Supply
Equilibrium It analyzes how equilibrium of
a producer or a consumer or an
industry is attained.
Method of study Partial equilibrium analysis
Importance Less important from growth and
development point of view.
Alternative Name Price theory
Macro Economics
It is concerned with the
behavior of the economy as a
whole .
Determination of level of
national income and
employment.
Aggregate Demand and
aggregate supply.
It is concerned with
determination of economy’s
equilibrium level of
income- employment and
output.
General equilibrium Analysis
More important from growth
and development point of view.
Income-employment Theory.