Microeconomics

Course Code EC210

Fall 2020
What is Economics?

Economics is the social science that studies how

people interact with things of value; in particular,
the production, distribution, and consumption of 
goods and services in Effective and Efficient way.
The Economic Perspective
Economists view things from a unique perspective. This
economic perspective or economic way of thinking has several
critical and closely interrelated feature.

1. Scarcity and Choice

2. Purpose full behavior
3. Marginal Analysis: Comparing Benefits and Costs
4. Theories Principles and Models
What is a Theory
 Observe real world

 Cause and Effect (Hypothesis)

 Testing hypothesis

 Generalization

 Other Things being equal (Ceteris Paribus)

 Graphical and Mathematical Expressions

Microeconomics
The economics that deal with the decision making
by individual customer, worker, household, and business firm.

Macroeconomics
Macroeconomics examine the economy as a whole
or its basic subdivision or aggregates, such as the government,
households and business sector.
Positive Economics (What is?)
it focuses on fact and cause and effect relation ship and
avoid the value judgment. It tries to establish scientific statements about
economic behavior and deals with what the economy is actually like.
Such scientific analysis may be critical to good policy design.

Normative Economics (What ought to be)

It focusses on value judgment about the economy should
be like and what type of policy actions should be recommended to achieve
the desirable goals.
Individuals Economizing Problem
There is need to tackle with economizing problem by
making right choices, otherwise our economic wants
may exceed the economic means.

• Individuals have limited income

• Individuals have unlimited wants
A Budget Line
To clarify the economizing problem there is need to visualize a
Budget Line (Budget Constraint)

Definition:
It is a schedule or curve that shows various combinations of two
products a consumer can purchase with a specific money income.
Budget Line
• Attainable and Unattainable
Combinations

• Trade-Offs and Opportunity Cost

• Choice

• Income Changes
Society’s Economizing Problem
Scarce Resources

Resources Categories
1. Land
2.Labor
3. Capital
4. Entrepreneurial Ability
Production Possibilities (PPF)
Model
Assumptions:
1. Full employment

2. Fixed Technology

3. Two Goods
 Production Possibility Curve (PPC)

A to B = 1000
B to C = 2000
C to D = 3000
D to E = 4000
1. Law of Increasing Opportunity Cost

a. Shape of the Curve

b. Economic Rational
Economic Systems
Every economy needs to develop an economic system
Economic system is particular set of institutional
arrangements and coordination mechanism to solve
economizing problem.

 Traditional Economic System

 The Command System
 The Market system
 Mixed economic system
Demand, Supply and Market Equilibrium
Markets
 Markets bring together buyer (Demander) and Seller (Suppliers).
 Few markets are local, others are national or international
 Few markets are highly personal involve face to face contact
between demander and suppliers
 Others are face less means buyers and sellers never seeing or
knowing each other.
Demand:
It shows various amount of a product that consumers are
wiling to purchase at specific price during a specific period of time.

Demand Curve shows the quantities of a product that will be

purchased at various possible prices, other things being equal.
Law of Demand
When the prices falls, the quantity demand rises, if all other things
remain equal.
As the price rises the quantity demand falls. In short, there is a
negative or revers relationship between Price (P) and Quantity
demand (Qd).

If P then Qd

If P then Qd
An individual buyer’s Demand Curve
 Law of Demand Consistent with Common Sense

 The Diminishing Marginal Utility

 The Income Effect

 Substitution Effect
 Market Demand Curve
Market demand curve is the horizontal summation of Individual demand curves
Market Demand Schedule
Graphical Presentation of Market Demand Curve
Change in Demand
A change in demand schedule or shift in demand curve called
change in demand

Factors that can change or shift demand curve are as follows:

1. Taste
2. Number of Buyers
3. Income
4. Price of Related Goods
5. Consumer Expectations
Graphical representation of Change in Demand
 Change in Demand & Change in Quantity Demand

P P D
D

O Qd O Qd
 SUPPLY

Shows various amounts of a product that producer are

willing to make available for sale.
Law of Supply:

Positive relationship between Price and

Quantity Supplied

Qs directly proportion P
Market Supply :

Market supply curve is summation of

Individual Supply Curve.

Qs1+Qs2+…+Qsn = Market Supply

Determinants of Supply

1- Resource Prices
2- Technology
3- Taxes and Subsidies
4- Price of Other Goods
5- Producer Expectations
6- Number of Sellers
1- Resource Prices (RP)

The prices of resources used in

production process (helps to determine
the cost of production)
S3
If RP then Supply P
S1
S2

If RP then Supply S3

S1 S2
O Qs
2- Technology (Tech.)

Improvement in Technology enable

firm to produce more and reduce the
production cost
S3
If Tech then Supply P
S1
S2
p2

If Tech then Supply p1 S3

S1 S2
O Qs
3- Taxes (Tax) and Subsidies (Sub.)

A. Taxes

The taxes are considered as cost of

production by the firms (helps to
determine the cost of production).
S3
P
If Tax then Supply S1
S2

S3
If Tax then Supply
S1 S2
O Qs
B. Subsidies (Sub.)

If govt. subsidies the prices, the cost of

production will reduce.

If Sub. then Supply

S3
P
S1
S2
If Sub. then Supply
S3

S1 S2
O Qs
4- Prices of other Goods (PG)

If a firm producing Footballs and the prices of

Basketballs increases then firm will reduce the
production of Footballs and switch to the
Basketballs.
S3
If PG (basket ball) then Supply Football P
S1
S2

If PG (basket ball) then Supply Football

S3

S1 S2
O Qs
5- Producer Expectations (PE)

The producer expectation about the

future prices encourage him to
produce more goods to earn more in
the future.

S3
If PE (high) then Supply P
S1
S2

If PE (low) then Supply S3

S1 S2
O Qs
6- Number of Sellers (NS)

The large number of sellers the greater

the supply.

If NS (high) then Supply

S3
P
S1
If NS (low) then Supply S2

S3

S1 S2
O Qs
 Changes in Supply and Changes in Quantity Supply

a. Changes in Quantity Supply b. Changes in Supply

S3
S1
P P
S2
C

B
S3
A

O Qs
P change then Qs changes
S1 S2
O Qs
When Resource Prices; Technology; Taxes;
producer expectations; Number of Sellers
change then Supply Curve changes
 Market Equilibrium

D S
P
Qs > Qd
P2
E
P*

P1
Qs < Qd
S D

O
Qs = Qd

Qs, Qd

When Quantity Demand = Quantity Supply

 Chang in Demand D increase; D curve shif right
D1 and upward; P increase; Qs & Qd
increase; Eq level right and
D S upward
P
E1
P1
E
P*

D1

S D

O
Qs1 = Qd1
Qs, Qd
Qs = Qd

When Demand Increase then Price Increase

 Chang in Demand
D decline; Eq.P decline; Eq
D S Qs and Qd decline; Eq level
P decline
D1

E
P*

P1 E1

S D
D1
O
Qs = Qd
Qs1 = Qd1

Qs, Qd

When Demand decrease then Price Decreases

 Chang in Supply
S decline; P increase; Qs&Qd
S1 decrease; E moves to left and
D upward
P S
E1
P1
E
P*

S1
D
S

O
Qs = Qd
Qs1= Qd1

Qs, Qd

When Supply Decreases then Price Decreases

 Chang in Supply S increase; S curve left and
downward; P decrease; Qs &Qd
increase
D
P S
S1

E
P*
E1
P1

D
S S1
O
Qs = Qd

Qs1 = Qd1 Qs, Qd

When Supply Increases then Price Decreases