Introduction to Microeconomics

Microeconomics: The study of how resources are

allocated to various uses in society.
Each society must answer the following three
questions:
Q1: What to produce?
Q2: How to produce it?
Q3: For whom do we produce it?

The concept of microeconomics shows how and why different

commodities have different values, how individuals make more
practical or efficient decisions, and how individuals organise and
cooperate with each other.
 Who is the Father of
Microeconomics?
Adam Smith is considered the father of microeconomics,
who is also the father of economics. According to Smith’s
philosophy of free markets, there should be minimum
government intervention and taxation in free markets.

Smith’s opinions on the economy predominated for the

next two centuries; however, in the late 19th and early 20th
centuries, the views of Alfred Marshall (1842–1924), a
London-born economist, had a significant influence on the
economic theory.
 Examples of Microeconomics
Demand: This is how the demand for commodities is
determined by income, choices, cost prices, and other
circumstances, such as expectations.
Supply: This is to ascertain how manufacturers determine to
enter markets, scale production, and exit markets.
Opportunity cost: It is the compromises or the trade-offs that
the individuals and enterprises make to accomplish restrained
resources such as money, time, land, and capital. For instance,
an individual who decides to go to an academy and begin a
company may not have enough time or money for both.
 Examples of Microeconomics
Consumer choice: This is to determine how the needs,
assumptions, and data influence shape the customer
choices. The notion that customers maximise their
anticipated utility of purchases implies that they purchase
the things they assume to be most useful to them.

Welfare economics: It refers to creating the influence of

social programs on economic choices such as labour
participation or risk-taking.
 Economic Efficiency
An economy, or economic process, is operating efficiently
if it cannot make more of one good without making less
of another.
 Economic Models
Models are simplified representations of reality, used
to study and understand relationships in the real world.

Models are, by nature, abstractions. The trick is choosing

the correct level of abstraction.

Most economic models are built with mathematics; graphs

and equations.
Production Possibilities Curve (PPC):
A graph of all economically efficient combinations of goods the society
is able to produce.

The changes in slope in the diagram tell us how the rate of exchange, or
rater of transformation of goods, between fish and berries changes as
we continue to transfer resources from one product to the other.

The Rate of Transformation on the PPC is the rate of economically

efficient exchange; it tells us the Opportunity Cost of one good in
terms of another.
 The PPC will shift outward:
• If additional productive resources are made
available.
• If current available resources become more
productive.
• If more productive ways of combining
resources are found.