MICROECONOMICS

Introduction to MICROECONOMICS
 WHAT IS ECONOMICS?

• Let it be noted at the outset there is no universally accepted definition of

economics. The eminent economists of different generations –right from ADAM
SMITH, the father of economics, down to modern economics – have define
economics differently as per their own perception of the central theme of
economics.
• Robinson defined economics more precisely. ‘Economics is the science which
studies human behavior as relationship between ends and scarce means which
have alternative uses.
 ECONOMICS IS A SOCIAL SCIENCE
Economic
(Economizing) Economizing behavior means a Economics is, fundamentally, the study of how people
behavior of the conscious effort of the people to allocate their limited resources to their alternative uses to
people derive maximum gains from the produce and consume goods and services to satisfy their
use of their limited resources endless wants and maximize their gains.
&
(Land, Labor, Capital, time etc.)
Economic and opportunities available to
Problems of the them
society
In other words , economics is the study of how
people try to make optimum utilization of their
People Includes resources
(individuals, households,
firms, and government) Optimum utilization of resources means
maximizing gains given the cost or minimizing
cost given the gains
A systematic study of the
optimizing or economizing In their efforts to optimize the use of their
behavior of human beings is limited resources , people as producers and
the central theme of consumers have to make a number of choices
economic science regarding the use of their resources and
spending their earnings
 WHY ECONOMIZING BEHAVIOUR?

The reason of economizing or optimizing behavior of the people lies in certain basic economics facts
of human life. Briefly speaking, some basic economic facts of human life are as follows.
• Human wants and desires are endless
• Resources available to satisfy human wants are scarce and limited
• People by nature want to maximize their gains or their economic welfare from their resources
 HUMAN WANTS ARE ENDLESS:

• Human wants, desires, and needs are endless. Wants are endless in the sense that they
go on increasing with increase in people’s ability to satisfy their needs. Why?
• People have insatiable desire to raise their standard of living, comforts, and efficiency.
• Human tendency to is to accumulate things beyond their present need
• Human wants increase with increase in knowledge, invention and innovations
• Satisfying one's wants creates want for many other things.
• Biological needs are repetitive.
• The end of wants of an individual comes only with the end of his or her life. Another equally
important feature of human wants is that they are not equally urgent and equally important .
Satisfying some wants gives more pleasure than satisfying some other wants. Therefore,
gain maximizing consumers have to make a choice between wants.
 RESOURCES ARE LIMITED

• While human needs are unlimited, resources available to satisfy human wants are limited.
Resources can be classified as
• Natural resources( Land, Space, water, air, minerals, forests, climate, jointly called Land.)
• Human resources ( including manpower, its energy talent, professional skills, and
innovative ability and organizational skills, jointly called Labor)
• Manmade resources (including machinery, equipments, tools, technology, and building,
jointly called capital)
• Entrepreneurship ( Those who organize the resources and assume risk in business).
• Time and information are also other resources which have economic benefits.
 ECONOMIC PROBLEM
• Unlimited wants and limited resources create economic problem.
• All these resources have alternative use yielding different benefits. The resources available
to person, society and country – how so ever rich- at any point of time are limited.
• Resource scarcity is a relative term. It implies that resources are scarce in relation to their
demand.
• The scarcity of resources is in fact is the mother of all economic problems. Had resources
been unlimited , like human wants , their would be no economic problem and no
economics.
• It is the scarcity of resources in relation to unlimited wants which forces people to derive
maximum benefits from the available resources.
 PEOPLE ARE GAIN MAXIMISER BY NATURE

• In order to maximize their gains from limited resources , people have to make numerous
choices. The need of making choices arises basically due to two reasons.
• Although wants are unlimited , all are not equally important or necessary. While some
wants can be deferred, some cannot be. So the people have to make a choice between
their wants
• The need for choice arises also bcz resources have alternative uses and alternative uses
yield different earnings and returns.
 CONCLUSION

• It may this be concluded that economics as a science studies economizing behavior of the
people and its consequences ;it brings out cause-effect relationships between economic
events; provides the tools and techniques of analyzing economic phenomenon and for
predicting the consequences of economic decisions and economic events.
• Economist studies economic phenomenon systematically and methodically. This approach
to economic inquiry imparts economics the status of a “social science”.
• Two major branches of economics
• MICROECONOMICS
• MACROECONOMICS
 MICROECONOMICS

• It analyses the economic behavior of the people at micro level, i.e., at the individual level of
consumers, firms, and resource owners.
• In effect, microeconomics analyses how individual consumers and producers make their
decisions
• How their decisions and choices affect the demand and supply conditions
• How consumers and producers interact to settle the prices of goods and services in the
market
• How prices are determined in different market settings; and how total output is distributed
among those who contribute to production.
 CONTINUE…..

• Briefly speaking , the subject matter of microeconomics consists the theory of consumer
behavior , theories of production and cost, theory of commodity pricing, theory of factor
production, and the most efficient allocation of output and factors of production called
welfare economics.
• It makes a microscopic study of the various elements of an economic system , not the
system as a whole.
• A systematic study of economizing behavior of consumers, producers, and resource
owners, and determination of the prices of the goods and services, make the central theme
of microeconomics.
 MICROECONOMICS AS POSITIVE AND
NORMATIVE SCIENCE
• It deals with both positive and normative science; ‘what is’ and ‘what ought to be’.
• As a positive science it seeks to analyze and explain economic phenomenon, economic
aspect, issues , as they are. It seeks to answer the questions “what is,” “why it is”, and
“what will be”…
• It studies individual economizing behavior under given conditions; their response to change
in economic conditions.
• As a normative science it seeks to answer the normative question ‘what ought to be’ the
basis of certain predetermined norm and social values.
• Is production of alcohol and harmful goods desirable for the society even it gives large
profit?
 CONTINUE……

• Microeconomics as a social science examines this question from the angle of social
desirability of production and sale of such goods. It examines the social cost and benefits
of production of goods like alcohol and cigarettes and answer the questions whether
production and sales of such goods is socially desirable .
• It involves value judgement on ‘ what is good’ and ‘what is bad’ for the society. The values
are drawn from the moral , ethical, social, and political aspirations of the society. Since, it
prescribes methods to correct undesirable economic happenings , it is also called a
perspective science.
• However, it is important to note that microeconomics is, fundamentally , a positive science.
It acquire its normative character from the application of microeconomic theories to
examine the economic phenomenon from their social desirability point of view.