MicroEconomics
By Dr Naeem
What is Economics?
The term economics comes from the Greek for “oikos” means house and “nomos”
means custom or law, hence the term economics means “rules or laws of household”.
Adam Smith’s definition of Economics.
Adam Smith wrote a book in 1776 whose title was “An Enquiry into the Nature and
Causes of Wealth of Nations.”.
Economics is the social science that studies the production, distribution and
consumption of goods and services.
Prof A. Marshall’s definition of
Economics
According to Marshall, “Economics is a study of mankind in
the ordinary business of life and examines that part of
individual and social action which is connected with material
requisites of well being”.
As a result, “ Economics is, on the one side, a study of wealth
and on the other and more important side, a part of study of
man”.
According to Robbins, the main subject-matter of Economics is
how to meet unlimited wants with the limited resources of the
economy.
Robbins' definition of Economics:
Another improved and sophisticated definition as
compared to Marshall’s definition is given by Prof.
Robbins in his famous book ‘ Nature and Significance
of Economic Science’.
According to Robbins “Economics is the science which
studies human behavior as a relationship between ends
and scare means which have alternative uses”.
Scarcity, Goods, and Bads
A good is called scarce if there is not enough of it freely available (zero price) to satisfy human wants.
An economic good is any good (or service) that is scarce.
An economic bad is any good for which we would pay to have less.
Scarcity necessitates making choices.
Economics is the study of how people make choices regarding economic
goods.
As a society:
Which goods do we create? (Which goods do we allocate our scarce resources to the production of?)
How do we produce them at the lowest cost (efficiency)?
How do we decide who gets the goods once they are produced? (distribution)
As individuals:
Which goods do I purchase?
In exchange for what?
How much labor do I sell? (Labor-leisure decision.)
Economic Systems
Capitalism
Capitalism is often thought of as an economic system in which private actors own and
control property in accord with their interests, and demand and supply freely set prices
in markets in a way that can serve the best interests of society.
Socialism
Socialism is an economic and political system under which the means of
production are publicly owned.
Capitalism is based on individual initiative and favors market mechanisms over
government intervention, while socialism is based on government planning and
limitations on private control of resources. Left to themselves, economies tend
to combine elements of both systems.
Capitalism
The essential feature of capitalism is the motive to make a profit. As Adam Smith, the
18th century philosopher and father of modern economics, said: “It is not from the
benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from
their regard to their own interest.” Both parties to a voluntary exchange transaction
have their own interest in the outcome, but neither can obtain what he or she wants
without addressing what the other wants. It is this rational self-interest that can lead to
economic prosperity.
Private Ownership
Profit Motive
Minimal Government Intervention
Competition
Socialism
Socialism is, broadly speaking, a political and economic system in which
property and the means of production are owned in common, typically
controlled by the state or government.
Socialism is based on the idea that common or public ownership of resources
and means of production leads to a more equal society.
• Public or collective ownership of the means of production
• Central planning of the economy
• Emphasis on equality and economic security
• Goal of reducing class distinctions
Scope and Importance of Economics
Microeconomics is the study of the economic choices individuals and firms
make and how these choices create markets.
Examples of economic choices.
Repair a bicycle or buy a new one
Study for one more hour or go to the movies
Invest in stocks or in bonds or both
Go for a Master’s program or start working after graduating
Add another dish to the restaurant’s menu
Cheap and low quality versus expensive and high quality
What do these choices have in common? TRADEOFFS
Differences and Similarities in
Microeconomics and Macroeconomics
The term ‘Micro’ comes from the Greek word ‘Mikros’ means small.
The term ‘Macro’ comes from the Greek word ‘Makros’ means large.
Microeconomics and Macroeconomics are interdependent.
The theories regarding the behavior of some macroeconomic aggregates are
derived from the theories of individual behavior.
For example-the aggregate investment function can be derived from the
individual investment decisions of firms.
Cont…
Even if Macroeconomic aggregates are derived from Micro behavior patterns, a
separate study of Macroeconomics is necessary because whatever is true for individual
economic units considered in isolation, may not be true for the economic units
considered as a whole.
What is true of individual component is not necessarily true of their collective whole.
Not only does Macroeconomics depend upon Microeconomics, while Microeconomics
also depends upon Macroeconomics.
For example-the determination of factor prices like rent, wage, interest and profit is
included in the subject matter of Microeconomics.
But profit cannot be determined without considering the Macroeconomic environment
in which the firms operates.
Cont…
From the above analysis we can conclude that there is considerable amount of
interdependence between Microeconomics and Macroeconomics.
Microeconomics provides the building blocks of Macroeconomic theories.
Macroeconomics may also contribute to microeconomic understanding.
Positive Economics Vs Normative
Economics
Positive economics refers to the matter of the presence of the theory along with the
proven facts and figures that are taken into account before developing a theory. Law of
demand is an example of positive economics.
Normative economics refers to the beliefs that support the valued judgement which is
better for the nation’s economic future and for social welfare. Having a belief that the
income should be distributed evenly in the economy is an example of normative
economics.
Cont…
A normative statement is one that really is a matter of opinion, maybe a matter
of ethics, something that someone thinks is how the world should be.
While a positive statement is something that, it doesn't necessarily have to be
true but it's something that can be tested.
BASIS FOR COMPARISON POSITIVE ECONOMICS NORMATIVE ECONOMICS
Meaning A branch of economics based on data A branch of economics based on values,
and facts is positive economics. opinions and judgement is normative
economics.
Nature Descriptive Prescriptive
What it does? Analyses cause and effect relationship. Passes value judgement.
Perspective Objective Subjective
Study of What actually is What ought to be
Testing Statements can be tested using Statements cannot be tested.
scientific methods.
Economic issues It clearly describes economic issue. It provides solution for the economic
issue, based on value.
