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Microeconomics: Introduction and basic concepts 1.

Introduction to Micro and Macro EconomicsThe whole economic theory is broadly divided into two parts –Micro economics and Macro economics Best websites to get college microeconomics presentation Academic Undergraduate Should i get a custom writing services microeconomics presentation .

 These two terms were at first used by Ragner Frisch in1933.

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The term ‘micro’ and ‘macro’ were derived from Greek words‘Mikros’ and ‘Makros’ meaning ‘small’ and ‘large’ respectively. So micro economics deals with the analysis of an individualunit and macro economics with economy as a whole.

 For example, in micro economics we study how price ofgoods or factors of production are determined. In macroeconomics we study what are the causes of high or low level ofemployment.

 So, according to Edwin Mansfield – “Micro economics dealswith the economic behaviour of individual units such asconsumers, firms, and resource owners; while macroeconomics deals with behaviour of economic aggregatessuch as gross national product and the level of employment.

But macro economics wasdeveloped and popularized only after Keynes in 1936.

Meaning of Micro - economicsThe term micro was originated from Greek word‘Mikros’ which means small.  Hence, microeconomics is concerned on smalleconomic units like as individual consumer,households, firms, industry etc.

 Microeconomics may be defined as the branch ofeconomic analysis which studies about the economicbehaviour of individual economic unit may be a person,a particular households, a particular firm and anindustry.

 The main objective of micro – economics is to explainthe principles, problems and policies related to theoptimum allocation of resources. Boulding, “Microeconomics is thestudy of particular firm, particular households, individualprice, wage, income of the industry and particularcommodity.

Connel –” In micro economics weexamine the trees not the forests.

Lerner – “ Micro economicsconsists of looking at the economy through amicroscope. It is the study of individual tree not a whole forest. Hence, microeconomics tries to explain how anindividual allocates his money income among variousneeds as well as how an individual maximizesatisfaction level from the consumption of availablelimited resources.

 Microeconomics also explains about the process ofdetermination of individual price with interaction ofdemand and supply.  It helps to determine the price of the product andfactor inputs.

Therefore, it is also called as price theory or demandand supply theory.  Simply microeconomics is microscopic study of theeconomy.

Use or Importance of Micro – EconomicsThe importance of micro – economics can be analyzed onthe basis of following headings:1) Efficient allocation of resources: Microeconomics also concern about how a consumerand producers allocate available limited resources in variousaspects so that the consumer will be able to maximize thelevel of satisfaction and the producers will be able to maximizeoutput.

 As for example, the consumer will be able to maximizesatisfaction.  When, MUx/Px = MUy/Py Or, MUx/MUy = Px/Py Similarly, the process will be also to maximize outputwhen, MUx/Px = MPL/PL Or, MUx/MPL = Px/PL 6.

Where,MUx = Marginal utility of commodity xMUy = Marginal utility of commodity yPx = Price of commodity x, Py = price of commodity yMPx = Marginal productivity of capitalMPL = Marginal productivity of laborPx = price of capital(interest rate), PL = Price of labor(wage)2. To understand the working of market economy: We know that in case of market economy there is very lessrole of the government and the market forces i.

demand andsupply are responsible for determining every economic variable.

 Micro economics also believe that in market economy demandand supply play vital role.  Hence, with the study of microeconomics, we will be able tounderstand how an economy without the role of government willrun.

To provide tools for economic policies: Microeconomics is highly helpful in the formulation ofeconomic policies that will promote the welfare of thesociety.

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 The economic policy directly affects the economy andwhich leads to change in allocation of resources Buy PowerPoint presentation of superior quality made by professional presentation makers online. Buy custom presentations from our company and you will get .

 Thus, the policy related to tax, loans, price, demand andproduction etc.

 The price theory provides analytical tools for economicpolicies affecting price and production.

 In this way, microeconomics assists private sectors aswell as government to make best use of scare resources. 4) To examine the condition of social and economic welfare: The normative price theory is called welfare economics. Welfareeconomic studies welfare of the people as producers and consumers.

 It suggests possible ways of improving welfare of people. It helps toavoid waste and bring more social welfare .

 It defines and analysis the rules of economic efficiency or microeconomics help in suggesting ways and means of eliminating wastages inorder to bring maximum social welfare. 5) Helpful in international trade : Every economy depends on the economy either for goods, services,technical knowledge or marginal skills.

 Micro economics tells us how two or more than two economy can gainfrom international trade.  It is the relative elasticity's of demand and supply between the twocountries which are the basis of determining trade .

 More over, the exchange rate determination between the twocountries also depends upon the micro economic instruments of demandand supply. 6) Useful in Business Decision –Making: It helps business executives in the attainment of maximumproduction by the given amount of resources.  With the help of microeconomics, business firm can makedecisions in demand analysis, cost analysis and methods ofcalculating prices.

 The main areas in which microeconomics is helpful in businessdecision making are:a)Pricing Policy: Microeconomics examines the basic economic policies.  It analyze the condition of demand, supply, elasticity of demand,consumer behaviour etc.

which are the main variables of pricedetermination. Thus, with the help of these variables businessman determine theprice of product.

b) Optimal allocation of resources: Microeconomics studies about the optimum allocation of scarceresources and which helps to the business firm to select efficient andleast cost production technique.

 Similarly, it helps to determine what to produced, how toproduced and for whom to produced. c) Optimal production decision: Business firm use the various methods and technique ofproduction.

 However, they have continuously faced the problem ofappropriate technique and method of production.  Because, the resources like, labor, capital is limited.

 Microeconomics provides powerful tool for managerial decisionmaking in the solution of such problems and maximization of outputin the production process. d) Demand analysis and forecasting: Demand analysis theory can be a source of many useful insightsfor business decision making.  The fundamental objective of demand theory is to identify andanalyze the basic determinants of consumer needs or wants.

 On the basis of this analysis a businessman forecast a futuresales or demand which is essential before making productionschedules of employing resources.  The forecast helps the manager to expand the market and raiseprofits.

e) Analysis of cost of production: Microeconomics analyzes the different types of cost, factorsdetermining cost and way of minimizing the cost of production 12.  On the basis of these analyses business men estimate the costof production before making the production decision.

Macro –Economics ( meaning and definition The term macro- economics is derived from Greek word “Makros”, which means “ big”.  Hence, macro- economics studies not individual units but allthe units combined together or the economy as a whole.

It studiesnational income, national output, general price level, totalemployment, total savings, total investment and so on.

 It is also called “aggregate economics” or the “incometheory”. Boulding –” Macro- economics deals notwith individual quantities but with aggregate of thesequantities, not with individual incomes, but with nationalincome, not with individual prices but with price level, not withindividual output but with national output. ” According to Gardner Ackley – “ Macro –economics dealswith the economic affairs in the large.

It concerns the overalldimensions of economic life. It studies the character of theforest independently of trees which compose it.

” Since the main objective of macro –economics is to studythe principles, problems and policies related to full employmentand growth of resources.

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Difference between microeconomics and macroeconomicsMicro and macroeconomics differ as follows1) Nature of the study of Economic Units: Microeconomics studies the individual or small economic variablesof the economy such as individuals consumption, saving investmentand income, but macroeconomics deals with aggregates like nationalincome, full employment and price level. 2) Objectives: Microeconomics studies principles, problems and policiesconcerning the optimum allocation of resources whereasmacroeconomics studies the problems, policies and principles relatingto full employment and growth of resources.

3) Subject Matter: The subject matter of microeconomics deals with the determinationof price, consumer’s equilibrium, distribution and welfare, etc,whereas the subject matter of macroeconomics studies fullemployment, price level, national income, trade cycles, etc. 4) Methodology: Laws of microeconomics are formulated on assumptions such as,full employment, constant production and income, ceteris paribus( other things being equal ).  With the help of these assumptions, micro laws establishrelationship between the causes and effects of economic variables.

 In other words, micro laws such as the law of demand and the lawof supply become valid on assumptions i. This method of study is also known as the ‘ partial equilibriumanalysis’.

 Macroeconomics assumes how the factors of production aredistributed. On the basis of the assumption of the factorsdistribution, it explains how full employment can be achieved.

 In macroeconomics, economic variables are categorized intoaggregate units like aggregate demand, aggregate supply, totalconsumption, price level, total saving, etc.  The total effect of an economic factor on the economy is taken into account in macroeconomic analysis. This method of study is called‘ general equilibrium analysis’.

5) Components of Equilibrium: Microeconomics studies the equilibrium between the forces ofmarket demand and supply. Hence, the basis of microeconomics isthe price mechanism.

 On the other hand, macroeconomic analysis deals with thenational income output, employment, etc, an such economicvariables are determined at the point of equilibrium establishedbetween the forces of the whole economy ( i. 6) Static and Dynamic Analysis: Microeconomics studies the equilibrium at a particular point oftime.

Hence, microeconomics isregarded as the static analysis.

 On the other hand, macroeconomics is based on time lag, rate ofchange, past and expected value of variables.

Hence,macroeconomics is regarded as the dynamic analysis.  In microeconomics, the economic basis is explained under theassumption of ‘ ceteris paribus’ to ignore the time lag.

Macroeconomics does not make such unrealistic assumptions. 7) Solution of Current Issues and Problems: The study of microeconomics does not help to solve theimportant current issues and problems such as decline in nationalincome, hyper inflation, widespread unemployment and so on.

 On the other hand, macroeconomics studies the causes, effectsand possible measures for the solution of these issues andproblems. Thus, macroeconomics helps to solve these problems.

Difference between Micro and Macro Economicsi)Derive from Greek word ‘Mikros’, i) Derived from the Greek word’s which meanssmall ‘Makros’ which means largeii) Based on principles, problems and ii) Based on achievement of full policies relatedto allocation ofresources employmentiii) Subject matter based on individual iii) Subject matter based on aggregateunits of an economy.

iv) Laws and principles based on iv) Laws and principles far fromassumptions and propositions.

v)Assumes full employment of all v) Considers how the factors offactors of production in an economy production are allocated to achievefull employment.

vi) Market equilibrium in microeconomics vi) Market equilibrium in macrois determine by individual market economics is determined bydemand and supply. Basic Microeconomic Issues: Scarcity and Choice: Scarcity and choice are the basic problems in economics.

Lionel Robins, a Britisheconomist in the decade of 1930s.

Scarcity The common meaning of scarcity refers to unavailability( i. not easily found) in the market of a certain commodity.  The conceptual meaning of scarcity, in economics, ishowever different.

 We have to pay for any goods and services we want toconsume. In addition, the resources that we have are alsoalways limited.

 A commodity is scarce, in economic sense, not because it is rare orunavailable in the market, but because the means to have it arelimited.

 We have limited resources at our disposal, so there is a problemof scarcity.  Human wants are unlimited, but the means or resources to satisfythem are always limited.

 Scarcity explains this relationship between limited resources andunlimited wants and the problem therein. Economic problems arise because the goods we need are scarce.

 Again, these uses are tempting and competing with each other.

There is a problem of choice- choice between alternative uses.  Therefore, scarcity and choice guide the whole course of economicactivities.

Let us have a clear concept of these two important terms;It is not just an individual problem.

Its dimension changes when it isapplied to national economy.

In other words, scarcity ofresources gives birth to national economic problems. Scarcity brings broad human problems in to our notice.

There is a poverty and human misery because of scarcity ofresources.  A poor man is poor because the resources accessible tohim are scarce.

A country is poor because there is scarcity ofresources.  Scarcity, in deeper sense, tells the story of human miseryand unhappiness around the earth.

 To understand and analyze the problem of poverty ofa man and a country, and to eradicate it, properunderstanding of the problem of scarcity is of utmostimportance.

 Scarcity tells us about the importance of a commodity aswell. It tells us how valuable a good is because a lot of scarceresources is being spent to get it.

 If the resources were not used for the specificpurpose, these could be used elsewhere.  The resources are not only scarce but they have alsoalternative uses.

These uses produce different results –some use result into high values and others low. The resources is better used if it results intohigher return.  For an individual consumer, it means higherlevel of satisfaction and for producers it meanshigher level of profits.  In other words, all the economic units will aim atoptimization of their objectives.

 By using available resources the aim of theconsumers, producers and government will be tooptimize satisfaction, profit and welfare of thepeople. Choice: The optimization objectives of the economic actorsnecessitates making knowledgeable choice in the use ofavailable resources.  Choice is involved in economic activities at bothconsumption and production level.

The problem ofchoice begins with an individual’s liking of how much timehe would allot for work and how much for leisure.

 The more time he assigns for work, lesser time isavailable for leisure. At the same time the more he works,the more he earns.

On the income earned, the choice is between how muchto consume now and how much to save for the future.

Choice in consumption means what to buy – food orclothes, sweets or toys, or a combination of both in limitedquantity, etc.  Similarly, choice in the income saved is between whereto deposit the saving – in bank or hold idle cash at home.

The bank too make choices about where to invest thedeposits it receives.  It invests, of course, in such sectors where it is moreprofitable.

That is the chain of choice goes on deeper anddeeper referring to the profitable use of resources at thehand of economic actors.  The meaning of scarcity is in relation to the nature of goodsthat always command value and the relatively limitedavailability of resources.

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The problems which arise due to the scarcity of resources andthe areas where the choice is needed are as follows:1)Problem of Production: The availability of the factors of production is less incomparison to their needs for production 4 Mar 2016 - We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. Introduction to Micro and Macro Economics The whole economic Hence, with the study of microeconomics, we will be able to of eliminating wastages in order to bring maximum social welfare..

This creates theproblem that what and how much is to be produced by usingthese resources.

 In such cases, choice is needed to use the factors in highyielding sector. 2) Problem of choosing production method: After the determination of the commodity to be produced, theproblem arises to choose the appropriate method of its production.  Any of the methods between labor intensive and capital intensivetechniques can be used in the production process.

 But the choice is needed to determine the economic and usefulmethod for the available condition of resources in the economy. 3)Problem of distribution:The production of goods and services is the return of the factors ofproduction.

So, the income derived from the sell of these commoditiesdistributes among these factors. When the problem of determiningthe remuneration of the factors of production is created, then theeconomic problem arises.

 The choice is needed to solve this problem by providingremuneration according to their contribution.

 Except this, the choice is needed to choose the sector ofdistribution of income to decrease inequality for social welfare. 4)Problem of economic efficiency: Economic efficiency is the process of utilizing the resources in sucha way that the satisfaction or utility can be maximized.

The choice is needed to determine how the limited resourcesshould be used in efficient sector among different areas of its use. 5)Problem of full utilization of resources: The availability of the factors of production is limited and itsalternative use is possible.

Thus, choice is necessary to determinehow and in which sector these scarce resources must be used so thatthey are fully employed. 6) Problem of economic growth: In developing countries, the level of economicdevelopment is very low. The necessity of these countriesis to reach in high level by increasing the level ofdevelopment.

 But due to the scarcity of resources for developmentworks, the economic problem arises.  To employ these limited resources in more returnproviding sector, the choice is needed.

In this way, the problem of scarcity of resources forevery sector of economic activities and to choose themfor optimum utilization is the basic economic problem. Efficient Allocation of Resources( Efficiency and Alternative Uses of Resources) The productive resources ( like land, labor, raw materials,machinery equipments etc.  Because these resources are scarce, their use must be carefullythought out.  Besides, they have alternative uses; that is, only one use can bechosen and all other uses have to satisfied.

 The pressure on appropriate use of such important factor isnaturally high. The allocation of resources discusses principles of rightsharing of resources among competing sectors.

 Allocation is related to the choice of how much of resources to beallocated in what sector. The whole body of planning, programming, and even budgeting arenothing, but statements of allocation of resources.

 The objective is the achievement of optimal use of scarce resource.

 Resource allocation occupies central position in economics.

Sometimes economics is defined in terms of resource allocation, too. Stigler, “economics is the study of principlesgoverning the allocation of scarce means among competing ends.  The key issues in economic problems are the issues of allocation ofresources.

 Not all of them can be satisfied simultaneously.

“ The allocation is best if it satisfy themost “ is its guiding principles.

It is, therefore, closely related witheconomic functions like production, exchange, etc.  Where the demand for more resources never ceases(stopped).

1) What to produce: The first concern is related with “ what to produce ? How much toproduce? “ because resources are scarce, production of all goodsand services needed by a society are beyond its capacity.

 It is simple not possible for any economy no matter howdeveloped it might be.

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However, production is guided by profit andprofit knows no social justice.  An economy should follow social efficiency while reallocationresources.

The social norms and values should guide to maximizesocial satisfaction.  So, allocation is best which satisfies the most.

The problem ofwhat to produce and how much to produce depends on thenecessity of the citizens of the country. 2) How to produce : The second question is concerned with the method ofproduction.  Labor intensive method creates more job favoring moreemployment.

 Capital –intensive production goes for large volume ofproduction.

 The right decision depends on the current state of theeconomy.

3) For whom to produce :Production for masses or productions for profit are two majorchoices that every economy has to decide.  As the development level goes higher, production of superior goodsproceeds towards super profit.  This issue is also related with maintaining social justice.

Meeting thebasic requirements of all segments of population is the main criterion ofresource allocation. 4)Promotion of efficiency in economy ;“ How to run an economy efficiently” is the first concern of resourceallocation.

Economic efficiency is measured in additional welfare achievedwithout worsening any result. It means that new reallocation ofresource must not only be able to maintain the existing level but alsoachieving new heights.

Alternatively, reallocation may be profitable somewhere but incurringlosses elsewhere.  The main objective is to increase aggregate profitability of theeconomy.

 Beside needs of common people can not be ignored.

Ofcourse, the priority goes to wage goods production. 5) Balance in the economy: Another purpose of resource allocation is themaintenance of balance among different sectors of theeconomy.

 The balance between rural and urban sectors, betweenhome consumption and export promotion, betweenconsumer goods and capital goods production and regionalbalance are the healthy signs of any economy.  Investment in these different sectors are very important.

How much to invest in what sector? This is the majorquestion, which is studied in this topic. Opportunity Cost The opportunity cost of an item is what you give up to get that item orthe second best alternative forsaken to produce or consume a commodity isknown as opportunity cost.  Limited resources and unlimited wants lead to the compulsion of choice.

So, to produce or consume a commodity a numbers of others has to beforsaken.  The ability to fulfill desire is limited by scarcity of resources, stage oftechnology, techniques of production, limited income, and so on.

 The resources available can be used to produce or consume somecommodities at the cost of some others.  Opportunity cost arises due to the presence of alternative use ofresources.

 If resources had limited uses, opportunity cost would be out of questionor if there were infinite resources, these could be used to produceeverything and nothing had to be given up to produce a commodity.  Though there may be a number of alternative uses of theresources, only the best option forsaken is the opportunity cost.  The value of the second best commodity forsaken for theproduction or consumption of some other is opportunity cost andthis arises due to the scarcity of resources and their possiblealternative uses.

 For example, in a plot of land, various crops can be planted.  If millet and wheat are planted the yield per month is Rs.

 In this case, the opportunity cost of planting rice is the yield ofwheat. This is because wheat is the best option forsaken forplanting rice in that plot of land.

 Similarly the opportunity cost of planting wheat or millet isplanting rice. Concept of positive and normative science All the economist have accepted the economics is ascience.  Here, the views given for economics as positive scienceand normative science are explained.  In order to the meaning and implication of thesesciences, they are explained in the following heading:1) Positive science: The science which shows the cause and effectrelationship by explaining the actual condition of an eventor situation is known as positive science.

 It formulates the law on the basis of cause and effectrelationship.  The function of the positive science is to deal the things asthey are. It remains neutral about its end and refuses to passmoral judgment.

 It is not related to the rightness or wrongness of things. Itswork is not to provide idealism or to give message aboutmorality but to explain the reality.

 According to Keynes- “ A positive science may be defined asa body of systemized knowledge concerning what is”.  Economics also establishes the relationship between causeand effect of economic activities of human beings.

For example, in theexplanation of the law of demand, it says that utility goes ondecreasing when additional units of consumption goods areincreased.

 Similarly, the law of demand says that the demanddecreases when the price of a commodity increases.

 In the explanation of these laws, the cause and effectrelationship are established.  In the opinion of Robbins, Economics is not concernedwith the aspects like right or wrong and good or bad.  Instead, it is neutral about the problems concerningrightness or wrongness.

For example,economics does not say that it is harmful to smoke.

But itexplains how it provides maximum satisfaction to theconsumers. In the words of Robbins –”The function of economics is merely to explore and explain: not toadvocate and condemn.

” It means, the laws of moral science will not be applicable in it. Ithas propounded different theories on the basis of cause and effectrelationship which are based on reality.

Thus, it describes thereality and it is a positive science. 2) Normative science: It is concerned with the ideals of humans life.

The aspects likeright or wrong, good or bad are studied in it.  It explains the situation of ‘ what ought to be’.

It means, it givesjudgment about rightness or wrongness.  According to Keynes –”A normative science is a body ofsystematized knowledge relation to the criteria of what ought tobe”.

 It formulates the policy to eradicate unnecessary and undesirableaspects contained in situation to analyze it.

 For example, if smoking is harmful to health then it says that it isnot good to smoke and we do not have to smoke.  Welfare economist have assumed economics as a normativescience and said that it has to make right decision considering thebehavioral aspects of the propounded theories.

 Therefore, economics can not be neutral about its objective. Instead, to make right decision is its objective.

 For example, after the explanation of poverty and unemploymentcontained in a country, economics must teach the method of theirsolution.  In the opinion of Marshall, economics is a normative science.

Therefore, he says, it has to make the decision in favor of reality afterthe study of rightness or wrongness and must suggest for what oughtto be.  He says- chewing of tobacco is injurious to health. Thus, it mustsuggest that capital should be transferred to other usefulindustries by discouraging the investment in tobacco.

 It clears that normative science presents the fact of goods andevents and separates the thing is right or wrong Now Purchase Custom PowerPoint Presentation Online On Any Subject. Just Inquire: Can Anyone Do My PowerPoint Presentation Or Can I Pay Someone Buy Communication Assignment · Buy High School Assignment · Buy Economics are very well familiarized with the customization process of the presentations..

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 In reality, the laws and theories of economics are concernedwith cause and effect relationship.

 It also finds conclusions about what the proper is and whatought to be in the sector of economic policy, economic activities,economic programs etc.  Hence, economics is both positive and normative science.

Economic Models ( Meaning and definition ) The economic model is a simplified framework designed toillustrate complex processes.

 Economic theory aims at the construction of models whichdescribe the economic behavior of individual units ( consumers,firms, government agencies) and their interactions which createthe economic system of a region, a country or the world as awhole.  A model is a simplified representation of a real situation.

Itincludes the main features of the real situation which itrepresents.  A model implies abstraction from reality which is achieved bya set of meaningful and consistent assumptions, which aim atthe simplification of the phenomenon or behavioral patternthat the model is designed to study.

 The degree of abstraction from reality depends on the purposefor which the model is constructed.

 The series of assumptions in any particular case are chosencarefully so as to be consistent, to retain as much realism aspossible and attain a ‘ reasonable’ degree of generality.  However, abstraction does not imply unrealism, but is asimplification of reality.

It is the beginning of understanding thegreat complexity of the real economic world.  A model can be constructed at different levels of aggregation,detail and sophistication depending on its purpose.

 There are two main purposes for which a model is built –analysis and prediction.  Analysis implies the explanation of the behavior of economicunits, consumers or producers.

 Prediction implies the possibility of forecasting theeffects of changes in some magnitudes in the economy.

 For example, a model of supply might be used to predictthe effects of imposition of a tax on the sales of firms.  The validity of model may be judged on several criteria.

Its predictive power, the consistency and realism of itsassumptions, the extent of information it provides, itsgenerality ( that is, the range of cases to which it applies)and its simplicity.  Model should be constructed in such a way so as to betestable, that is, to be capable of being verified whencompared with the true economic facts, 47.

Use of Economic Models Forecasting economic activity in a way in which conclusions arelogically related to assumptions: Proposing economic policy to modify future economic activity.  Presenting reasoned arguments to politically justify economic policy at thenational level, to explain and influence company strategy at the level of thefirm, or to provide intelligent advise for household economic decisions as thelevel of households.

 Planning and allocation, in the case of centrally plannedeconomies, and on a smaller scale in logistics and management ofbusinesses.  A model establishes an argumentative framework for applyinglogic and mathematics that can be independently discussed andtested and that can be applied in various instances.

Policies andarguments that rely on economic models have a clear basis forsoundness, namely the validity of the supporting model. Questions:1) Distinguish between micro and macro economics. Explain the importance of microeconomics in business decision.

4) How does a consumer make choice with scarce resources.

5) Distinguish between positive and normative science. 7) What is positive and normative science? Economics is a positivescience why?8) Scarcity of the resources brings the need of choice, explain.

9) Explain the basic economic problem and causes of need of choice. 12) What do you mean by economic model? What are its uses?