Introduction to Microeconomics Lecture Notes PDF

Introduction to Microeconomics Content List What is Economics? Microeconomics vs Macroeconomics Importance of Microeconomics Basic Economics Concepts Principles of Microeconomics Economics Models Positive vs Normative Economics What is Economics? “Efficiently allo...

Introduction to Microeconomics Content List What is Economics? Microeconomics vs Macroeconomics Importance of Microeconomics Basic Economics Concepts Principles of Microeconomics Economics Models Positive vs Normative Economics What is Economics? “Efficiently allocation of scarce resources to meet unlimited needs and wants” OR “Economics is the social science that studies how individuals, businesses, governments, and societies allocate their scarce resources to satisfy their unlimited wants and needs” Microeconomics vs. Macroeconomics Economics can be divided into two broad fields of study. 1) MICROECONOMICS 2) MACROECONOMICS Cont. Cont. Microeconomics: Microeconomics deals with the study of individual economic agents, such as households, firms, and markets for specific goods and services. It examines how these entities make decisions regarding resource allocation, production, consumption, and pricing. Macroeconomics: Macroeconomics, on the other hand, looks at the economy as a whole and studies aggregate economic phenomena. It deals with issues like overall economic output (Gross Domestic Product or GDP), inflation, unemployment, national income, and government policies that affect the entire economy. Importance of Microeconomics ▪ Allocation of Resources: Microeconomics examines how resources are allocated at the individual or firm level. ▪ Price Determination: It explains how prices are determined in markets through the interaction of supply and demand. ▪ Efficiency: Microeconomics identifies optimal resource allocation and analyzes market failures or inefficiencies. ▪ Policy Analysis: It helps policymakers design and evaluate economic policies related to taxation, regulation, and social welfare. ▪ Business Decision-Making: Microeconomics provides insights for firms to make decisions about production, pricing, and resource allocation. ▪ Income Distribution: Microeconomics studies the distribution of income and wealth, exploring factors such as wages and government transfers to address inequality and poverty. Basic Concepts Related to Economics Economic Problem: The economic problem refers to the fundamental challenge of satisfying unlimited human wants and needs with limited resources. Needs: Needs are the basic requirements for human survival and well-being, such as food, shelter, clothing, and healthcare. They are essential for maintaining a minimum standard of living. Wants: Wants are desires that go beyond basic needs and are shaped by culture, social factors, and individual preferences. While needs are essential, wants are more diverse and can include non-essential goods and services. Scarcity: Scarcity is the condition in which resources are limited relative to the demand for them. Choice: Choice refers to the act of selecting one option from a set of alternatives. In economics, individuals and organizations face numerous options and must make decisions based on their preferences, needs, and constraints. Cont. Productivity: Productivity refers to the measure of how efficiently resources(labor, capital and time) are used to produce goods and services. Factors of Production: Resources like land, labor, capital and entrepreneurship are the inputs used in production of goods and services. Opportunity Cost: Opportunity cost refers to the potential benefits or value that an individual, business, or society forgoes when choosing one alternative over another. Trade-off: A trade-off is the situation in which one thing must sacrificed for another and it involves the concept of opportunity cost. Principles of Economics Divide these ten principles into three different parts: How people make decisions? How people interact? How the economy as whole works? How people make decisions? People face trade-off (choices). The cost of something is what you give up to get it. Rational people think at the margin(Compare MR and MC). People reported to incentives/ benefits. How people interact? Trade can make everyone better-off. Markets are usually a good way to organize economic activity. Government can something improve market outcomes. How the economy as whole works? A country standard of living depends on its ability to produce goods and services. Prices rises when government print too much money. Society faces a short-term trade-off between inflation and unemployment. Economic Models Circular Flow Diagram A visual model of the economy that shows how dollars flow through markets among households and firms. Here's how it works: Households provide factors of production (labor, land, capital) to businesses in the factor market. Businesses use these factors to produce goods and services, which they then sell to households in the product market. Households purchase goods and services from businesses, and businesses receive revenue. The income received by households in the form of wages, rent, and profits is used to buy goods and services. This cycle continues, creating a continuous flow of goods, services, and money between households and businesses. Production Possibilities Frontier: The production possibilities frontier is a graph that shows all possible combinations of the output that the economy can produce within a given available factor of production and the technology. Changes in technology, resources, or the level of education and skill of the workforce can lead to shifts in the production possibility curve. Production Possibilities Frontier(PPF) Positive vs. Normative Economics Positive Economics Positive economics focuses on describing and explaining economic phenomena as they are, without making value judgments or expressing opinions about whether they are good or bad. It involves the use of empirical evidence, data, and scientific methods to analyze economic behavior and outcomes. Example: A positive economic statement could be "An increase in the minimum wage will lead to a decrease in employment among low- skilled workers." This statement is based on economic data and analysis, without expressing whether it is desirable or undesirable. Normative Economics Normative economics, on the other hand, involves making value judgments and expressing opinions about what ought to be or what is desirable in the economy. Example: A normative economic statement could be "The government should increase spending on education to improve overall societal welfare." This statement goes beyond describing facts and involves expressing a particular view on what should be done to enhance the well-being of society. Inspirational Saying