Brief Introduction to economics

2. 2
Introduction
to
Microeconomics
BY:
CHETAN ACHARYA

3. Its natural, the curiosity of a student who
begins to study economics is to know what is
about it. A student of economics would like to
know ‘what is economics’ and ‘what is its subject
matter’. Similarly some other curiosities like its
nature, scope, implication, need, etc. may arise
in the beginning. Amazingly, a definite and
precise answer to these curiosities cannot be
found. Several attempts have been made by
several economists from history to yet to
define economics. However, a precise and
universally acceptable definition of economics
has not yielded yet.

4. Economists right from Adam Smith who is known as
‘The Father of Economics’ to modern economists
have defined it differently according to their own
perception and circumstances. Smith gave wealth
definition, Marshall focused on material welfare,
Robbins forwarded scarcity and choice concept.
The idea of Robbins is considered as more systematic
and scientific than other. This idea produced a social
science status of economics. Some economists
remarked, economics is an unfinished science and is
still a very young. Nevertheless, it is essential for a
beginner to have a basic understanding of the nature
and subject matter of economics.

5. Economics is a social science which studies
economic activities of humankind. Here, economic
activities refer to those behaviors of people at which
people have conscious effort to derive maximum
benefits from the use of limited resources and
opportunities available to them. People, they have
unlimited needs and limited resources to meet such
needs. Economics primarily concerns with the
behavior of the people that how they allocate their
limited resources and opportunities to their
alternative uses to produce and consume goods or
services to satisfy their unlimited needs. The effort
of the people to maximize their gains from their
limited resources is primarily concerned with to
make choices. The compulsion for making choices
arises due to following basic issues of economic life.

6. The compulsion for making choices arises due to
following basic issues of economic life.
 Unlimited human wants
Limited resources are available to satisfy
human wants
Effort of people to maximize their gains

7.  Human wants are endless and go on
increasing without meeting their end because
 Unquenchable desire to raise living standard,
comforts and efficiency;
 Tendency to accumulate of things beyond their
present needs;
 Increasing human needs and knowledge,
inventions and innovations;
 Satisfying one want creates need for many
other things:
 Wants-meet cycle i.e. one need satisfied, other
comes up and etc.

8. Thus, throughout human life human wants
continue to increase. However, all human wants
are not equally urgent and important. Satisfying
one want gives more pleasure than the others and
therefore for the purpose of gain maximization
people have to make a choice from several wants.

9. • Thus, it can be concluded that “Economics
is a social science which studies the
economic activities and consequences and
brings out cause and effect relationship
between such economic events. It provides
tools and techniques of analyzing economic
phenomena and tools and technique for
predicting the consequences of economic
decisions and events”.

10. 10
economic theories
Every science flows certain methods for the
expiation variables. Since economics is a
science, it also adopts certain methods, laws
or principles or guidelines for the discovery
and identification of the relationship between
its variables. An economic law or theory which
traces out a casual relationship between
economic variables.
An economic theory is well argued and
confirmed statement which explains the cause
and effect relationship between dependent
and independent variables.

11. 11
A theory includes a set of assumptions,
hypothesis and results which provide a clear
way to express the interrelationship between
concerned variables. A well structured or
defined theory has the following elements:
 Definition
 Assumptions
 Predictions
 Tests
 Results

12. Problems of Scarcity and
Choice
Scarcity is a situation of insufficiency or
unavailability or shortage of something. In
economics, it is a situation at which excess of
demand over the supply of goods and services. It
reflects the imbalance between demand for
resources and their supplies. Scarcity lacks the
sufficient resources to satisfy human needs.
Economic resources are available in limited stock
and human needs cannot get fulfilled at once.
Scarcity is not just a problem of an individual.

13. It is a problem of the entire economy of a nation
as well. An economy has to perform number of
activities but it is not possible to carry out all
activities at a time due to scarcity of resources.
Therefore it gives rise to national economic
problems such as: unemployment, poverty,
inequality and low quality of life, low infrastructure
development, etc. Therefore every human society
and hence every economy face a basic economic
problem due the insufficiency of resources to fulfill
their desire.

14. • Choice refers to the act of selecting few from
several. In economics choice is the rational act or
process of selecting few wants from the bundles
of wants. As already discussed, human wants are
unlimited and resources to fulfill such wants are
limited. All human needs cannot be satisfied at
once due to the scarcity of resources. Since an
individual or economy has limited stock of
resources and unlimited wants and so, must
decide which need to be satisfied so that gains
would be maximized. Therefore again, every
human society and hence every economy face
another economic problem ‘choice’ due the
insufficiency of resources to fulfill their endless
desire at once.

15. Basic Economic Problem
Unlimited Wants Limited Resources
Problem of Choice
Unlimited
Wants
Limited
Resources
Problem of
Choice
Basic Economic Problem

16. Allocation of resources is related with the use of
scarce resources to maximize gains. It means
goods and services are produced in such a
manner that the gain derived from them is to be
maximum. As already stated that, human wants
are endless where as resources to meet are
limited. Therefore, it is not possible to satisfy all
wants simultaneously with limited productive
resources. So, limited resources must be used
very carefully and the allocation of resources is
a rational decision for the achievement of
optimal benefits.
Allocation of Resources

17. • Allocation of resources is a basic and key
issue of economics. Scarcity and choice
both are the fundamental economic
problem of every individual or economy.
Choice arises due to insufficiency of
productive economic resources in
comparison to needs to maximize gains.
Due to this fundamental economic
problem, a producer/society/economy
needs to confront some questions and
these questions are:

18.  What to produce?
It is the problem of choice between goods. All
goods and services are not equally valued in
terms of utility derived by the consumers. Some
goods may yield higher level of satisfaction and
some less. Since all goods and services cannot be
produced at once due the insufficiency of
productive resources, this requires valuation or
ranking of goods and services from most valued
to least one. Thus, the problem what to produce
is related to the problem of efficient allocation of
scarce resources to produce that goods or service
which is high valued to the consumers.

19.  How to produce?
It is also related to choice technique. This
problem is related to how to determine an
optimum combination of input resources in
the production of goods and services. Labor
and capital, two inputs are available in
limited stock. So, a given quantity of
commodity can be produced with a number
of alternative combinations and each
alternative combinations of production
involve different cost structure. An efficient
technique of production, whether labor
intensive or capital intensive, is concerned
with this problem.

20. Whom to produce?
Due to the availability of limited productive
resources, the want of all population
cannot be satisfied at once. So, decision is
to be made regarding the how many
people’s need is to be satisfied. It means
targeted consumer group should be
identified. In this direction, basic needs of
the common people cannot be ignored. This
is another norm of the allocation of
resources.

21.  At what quantity and price to produce?
In free market economy, this problem is
solved by the market forces. The
interaction between demand and supply
determines the price quantity of products
and factor inputs. The price normally
represents the relatively scarcity. The
best and efficient technique to produce is
the least cost. The minimization of cost is
the efficient technique of production.

22. How to promote economic efficiency?
Economic efficiency refers to a
situation at which scarce resources
are used in a most efficient way that
the maximum output is produced. The
minimum waste of resources while
producing goods or services promotes
economic efficiency. If unlimited
productive resources are available,
there would not be worry about the
waste of resources.

23. How to maintain welfare?
Production of goods and services only
is not the final solution. Again, another
economic problem is still the efficient
distribution system. Efficient
distribution system assures the
welfare in the economy. Efficient
allocation of resources avoids worsen
of one and better of another.

24. How to balance sectoral development?
While allocating the resources, the governments most
consider the balanced policies. The balance between rural
and urban, consumer goods and capital goods, regional
balance etc must be addressed.
How to address to problem of economic growth?
Economic growth is the increase in producing capacity of an
economy during a certain period of time. The need for
increasing producing capacity of the economy arises due to at
least two reasons. One, most of the economies in the world has
the imbalance between the growth of population and
productive resources. The population growth is much faster
than the productive resources. Therefore, most of the nations
have been experiencing the problem of unemployment and
poverty. Hence, the allocation of resources must consider and
address the problem.

25. How to stabilize economy?
Business cycle is an important feature of
free economy. Such ups and downs are
very common in such capitalist economy.
Hence, these economic fluctuations cause
the wastages and idleness of resources.
Therefore, this problem is another basic
economic issue.

26. The nature, subject matter, scope, need of
economics, as it is known today, has expanded
vastly in post-world war II. Now, in modern era,
the system of economic analysis can be classified
into two major categories:
1. Microeconomics: It deals with the microscopic analysis
of economic variables and system. It studies areas
including issues like production, cost, price, distribution,
welfare etc. The word ‘micro’ is derived from the Greek
word ‘mikro’ which means small and hence
microeconomics studies the individual economic units
such as markets, firms, households. Microeconomics deals
with the choice and decision making behavior of
consumers, producers resource owners etc.
Introduction of Microeconomics
and Macroeconomics

27. Microeconomics is a traditional concept. All the
economic theories in the classical period were
micro analysis. The foundation of the
microeconomics was ‘An Inquiry into the Nature
and Cause of Wealth of Nations’ by Adam Smith
in 1776 AD. Microeconomics fundamentally
concerns with the study of how individuals and
firms find a best solution to the basic economic
problems of maximizing their gains from their
limited resources. To maximize their gains,
individuals have to make a number of choices
between unlimited needs and best alternative use
of their resources.

28. 2. Macroeconomics: The word ‘macro’ is derived
from the Greek word ‘makro’ which means large
and therefore macroeconomics deals with the
economic variables in
aggregate/lumping/big/whole form such as
national income, economic growth, employment,
investment, general price level, aggregate
demand, aggregate supply, balance of payment,
fiscal and monetary policies etc. It is concerned
with the study of various elements of the
economic system as a whole. It deals with the
nature, relationship, and behavior of
macroeconomic variables.

29. Macroeconomics deals with the economic variables in
aggregate/lumping/big/whole form such as national
income, economic growth, employment, investment,
general price level, aggregate demand, aggregate
supply, balance of payment, fiscal and monetary
policies etc. macroeconomics is relatively new and
younger concept in economic literature. With the
publication of ‘The General Theory of Employment,
Interest and Money’ in 1936 AD by John Maynard
Keynes, macroeconomics got a separate existence.
However, the terms ‘microeconomics’ and
‘macroeconomics’ were coined and used first time by
a Norwegian economist, Ragnar Frisch, in his paper
“Proposition Problems and Impulse Problems in
Dynamic Economics” published in Economic Essays in
the Honor of Gustav Cassel in 1933 AD.

30. 1. Simple Micro-statics
Simple micro-statics explains the relationship between
different microeconomic variables at a given period of
time under the situation of equilibrium. It shows the
static functional relational relationship between
different variables at a given time.
Types of Microeconomics

31. 31
O Q
P E
S
D
Quantity
Price

32. 32
2. Comparative Micro-statics
This just compares the different equilibrium
situations at different period of time. with the
change in time, the micro economics variables
change which helps to deviate the initial
equilibrium position. Comparative micro-statics
compares the new equilibrium situation with old
one.
It does not concern with the process of how one
equilibrium situation disturbs and new
equilibrium condition attains.

33. 33
O Q
P E
S
D
Quantity
Price
E’
D’
Q’
P’

34. 34
3. Micro Dynamics
It explains the lagged relationship between the
microeconomic variables. This describes how the
old equilibrium position deviates and new
position attains. It is concerns with the
changeable condition between old equilibrium
position and new equilibrium position.

35. 35
Qe
Pe
Q’e
P’e
E
E'
Q
P

36. It explains the real nature of the economy. The positive
science answers the question of what, when, how etc.
According to J.M. Keynes “a positive science may be
defined as a body of systematized knowledge
concerning what is”. It deals with only what is or how a
society face economic problems and how they are
solved. How economic processes work and how the
economic mechanisms are functioning but does not tell
and suggest how they should function.
Positive economics uses economic models to analyze
economic activities. It is essential for economic policy
makers because it gives the real picture of the economy
without binding in any moral rules or ethics.
Positive Economics

37. It deals with the economic processes bases on ethics or
moral rules. It means normative economics is that
branch of economics which is based on ethics or moral
rules.
According to J.M. Keynes “a normative science may be
defined as a body of systematized knowledge
concerning what ought to be”.
Normative Economics

38. 1. In positive economics, statements can be empirically
verified. It is universal and value does not differ from
person to person where as statements may or may not
be verified in normative economics. Normal economic
is related to personal belief and value judgment and
may be different from person to person.
2. positive economics is free from value judgment and
ethical consideration and it remains neutral over ends
where as normative economics concerns with the value
judgment and ethics.
Distinction Between Positive
and Normative Economics

39. 3. Positive economics depends upon scientific logic and
answers the questions of what is, where as normative
economic depends upon ethical logic and answers the
question of what should be.
4. Positive economics is objective and quantitative in
nature where as normative economics is subjective and
descriptive in nature.
5. The aims of positive economics is to explain how
society makes decision about consumption, production,
distribution, exchange and public finance where as
normative economics makes recommendations to
suggest what should be done for economic betterment.
6. Positive economics establishes principles and
theories where as normative economics formulate
spolicy.

40.  Allocation of Resources
 Theory of Product Pricing
 Theory of Factor Pricing
 Theory of Economic Welfare
 Theory of Demand and Supply
Scope of Microeconomics
Importance/Use of
Microeconomics
 Functioning of an economy
 For efficient allocation of Resources
 Useful in Designing Economic Policies
 Basis for Welfare economics
 Useful in Business decision making
 Resource Allocation
 Production decision
 Pricing Policy
 Cost Analysis
 Demand Analysis
 External Sector Trade

41. Limitation of Microeconomics
Analysis of individual units
 Unrealistic assumptions
 May not be applicable in totality
 Abstract nature
 Wrong conclusion
 Welfare theory opinion
Beyond of other economic subjects
41

42. Chapter Assignment
1. What is microeconomics? Explain the positive and normative
aspect of economics.
2. Differentiate between positive economics and normative
economics.
3. “Scarcity is the root cause of all economic problems” Discuss.
4. Explain the importance of microeconomics in business decision
making.
5. “The study of economics centers upon the problem of scarcity. “
explain what is meant by this statement and assess whether the
use of economics can solve the problem.
6. What do you mean by economic theories? Explain.
7. Explain the types of microeconomics.
8. Point out the limitation of microeconomics.
9. Distinguish between micro-macro economics.
10. What are the functions of microeconomics? 42

43. 43