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Unit 1 Introduction To Microeconomics
Unit 1 Introduction To Microeconomics
Meaning of Microeconomics
Microeconomics is the study of the economic actions of
individuals and small group of individuals
Household , Investor, Firms, Industries, etc
How and why these units makes decisions?
It is also called price theory
“Microeconomics studies the economic decisions making of
firms and individuals in a market setting: it is the study of
the economy in a small” – Roy J Ruffin
Microeconomic studies how business firms operate under
different competitive conditions, and how the combined
actions of buyers and sellers determine prices in a specific
market.
According to Prof. K. E. Boulding, "Micro Economics
is the study of particular firm, particular household,
individual prices, wages, incomes, individual
industries and particular commodities."
Subject Matter or Scope of Microeconomics
Commodity Pricing – Demand Theory and Supply
Theory
Factor Pricing – Rent, Wages, Interest, Profit
Welfare theory – What to produce? How to produce?
When to produce? For whom it is to be produced?
Importance of Microeconomics
To understand the working of economy
Price determination and allocation of resources
Helpful in analyzing and framing economic policy
Optimum utilization of factors of production
Linear programming
Predicting
Helpful to managerial decision making
Basis of welfare economics
Field of international trade
Limitations of Microeconomics
Assumption of full employment
Free enterprise economy
Complex economic activity
Inadequate and misleading
Free Goods and Economic Goods
The free good is a term used in economics
to describe a good that is not scarce. Free
good is available in as great a quantity as
desired with zero opportunity cost to
society
A consumable items that is useful to
people but scarce in relation to its demand
so that human efforts is required to obtain
it.
Price and Value
Price is the amount you pay. Value is what the product
or service pays you
This value could be measured in financial terms,
emotional terms, physical terms, or in any number of
other ways. If you enjoy working out at a gym, the
fulfillment you receive back from the $50 per month
you spend on your membership makes the
expense worth it. If some software you purchase costs
$99, but saves you $250 per month and four hours of
work per week, it’s value is demonstrated in more free
time and greater cash flow.
Characteristic of Human Wants
Wants are unlimited
A particular want is satiable
Wants are complementary
Wants are competitive
Wants are alternative
Wants vary with time, place and person
Wants vary in urgency and intensity
Wants multiply with civilization
Wants are recurring
Wants changes with habits
Wants are influenced by income, salesmanship and
advertisement
Wants are the result of customer convention
Present wants are more important than future wants
Classification of Wants
Necessaries
Comforts
Luxuries
Production Possibility Curve
Prof. Samuelson
Problem of choosing and allocating scarce resources
among alternative uses
Production Possibility Curve shows the menu of
choice among which a society can choose to substitute
one good for another assuming a given state of
technology and given total resources
Production possibility curve illustrate three concepts :
Scarcity, choice and opportunity cost
Assumptions:
Two goods
Full employment
Fixed resources which can be re-allocated
Given state of technology
Short time period
Uses of Production Possibility Curve
1. The notion of scarcity
2. The problem of choice
3. Solution of central problems
Economic System
An economics system consists of
those institutions which a given
people or nations or group of
nations has chosen or accepted as
the means through their resources
are utilized for the satisfaction of
human wants
The Functions of Economic System
It as to decide what things should be produced
It has to decide how things are to be produced
It should make optimum use of available
resources
It has to distribute the total product properly
It should maintain economic progress and
growth
Free Market Economy
Buyers and sellers are solely responsible for choices
they make
Absolute power to prices to determine the allocation
and distribution of good and services
Prices fixed by forces of demand and supply
Free trade without any tariff or subsidies by
government
Role of government is limited to controlling of law
and order
No role of government in price determination
Capitalist economy
Planned Economy
No private property
Nationalization of means of production
Planning for economic development
Socialist
More equitable distribution of income and wealth
Central authority to make economic decisions
Mixed Economy
Combinations of advantages of capitalism and
socialism
Social ownership of factors of production along with
private ownership
Privately owned means of production are effectively
regulated by state through the various instruments like
fiscal, monetary and trade policies
India as Mixed Economy
Dominant private sector
Decisive role of the market mechanism
Presence of large public sector
Economic Planning
Failed to prevent concentration of economic power
and opportunities
Duplicity and Multiplicity among public and private
sector
Regulatory mechanism has failed to allocate the
resources
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