AF 2405

Principles of Microeconomics
Lecture-1 (Introduction)

Facilitator: Samina Islam

Program: Business of Science Accounting and Finance
 Learning Outcomes
• What is economics and Why study Microeconomics?

• Scarcity and choices, Opportunity cost and trade offs

• Difference between Micro and macroeconomics

• Role of economics and economic theory

 Economics
• The word economy comes from a Greek word for “one who
manages a household.”
• Economics is the study of how society manages its scarce
resources.
• Economics is the study of how individuals and societies
choose to use the scarce resources that nature and previous
generations have provided.
• Economics, is the social science concerned with how
individuals, institutions, and society make optimal (best)
choices under conditions of scarcity (McConnell, Brue and
Flynn, 2012).
 Ten Principles of Economics
• Mankiw classifies all his ten principles of economics into
three broad categories. And these three categories are

1. How people make decisions?

2. How they interact with each other?
3. How the economy as a whole work?

• Let us look at these principles in detail.

Ten Principles of Economics
 The Economic Perspective
The economic perspective is an economic way of thinking
which has several critical and closely interrelated
features.

1. Scarcity and Choice

2. Purposeful Behavior
3. Marginal Analysis: Comparing Benefits and Costs
 1. Scarcity and Choice
• Scarce economic resources mean limited goods and
services.

• Economists call sacrifices opportunity costs: To

obtain more of one thing, society forgoes the
opportunity of getting the next best thing. That
sacrifice is the opportunity cost of the choice.

• In a world of scarcity, choosing one thing means

giving up something else. The opportunity cost of a
decision is the value of the good or service forgone.
 2. Purposeful Behavior
• Purposeful behavior simply means that people
make decisions with some desired outcome in
mind. As Economics assumes that human
behavior reflects “rational self-interest.”

• Individuals look for and pursue opportunities to

increase their utility — the pleasure,
happiness, or satisfaction obtained from
consuming a good or service.
 3. Marginal Analysis:
Comparing Benefits and Costs
• The economic perspective focuses largely on
marginal analysis — comparisons of marginal benefits
and marginal costs, usually for decision making.

• To economists, “marginal” means “extra,” “additional,”

or “a change in.”

• In making choices rationally, the decision maker must

compare marginal benefits and marginal costs.
 Two levels of Economics
1. Microeconomics
• Is focused on analysis of market structures, consumer
behavior and company behavior (production, costs,
prices of input / output, profit, investments).

• Object of interest is a single (or small number of)

household or firm.
 Two levels of Economics
2. Macroeconomics
• Macroeconomics deals with aggregates, problems of
economic growth, money supply, unemployment and
inflation. It also help in understanding monetary and
fiscal policies of state, theory of international market
and balance of payments.

• Object of interest is the entire economy. We care

mostly about:
1. Growth 2. Fluctuations
 Positive and Normative
Economics
•Positive Economics deals
with facts and avoids value
judgements. It basically
describes reality.

•Normative Economics
describes how the reality
should look like.
 Trade-Offs
• In modern market economies,
consumers, workers, and firms
have much more flexibility and
choice when it comes to
allocating scarce resources.

• Microeconomics describes the

trade-offs that consumers,
workers, and firms face, and
shows how these trade-offs are
best made.
 1. Consumers Trade-Offs
• Consumers have limited incomes, which can be
spent on a wide variety of goods and services, or
saved for the future.

• Consumer theory, describes how consumers, based

on their preferences, maximize their well-being by
trading off the purchase of more of some goods for
the purchase of less of others.
 Example

3.5 Ounce-$15.50

200g-$9.19 8.82 Ounce-$11.21

 2. Workers Trade-Offs
• Workers also face constraints and make trade-offs.

• First, people must decide whether and when to enter

the workforce. Because the kinds of jobs—and
corresponding pay scales—available to a worker
depend in part on educational attainment and
accumulated skills, one must trade off working now
(and earning an immediate income) for continued
education (and the hope of earning a higher future
income).

• Second, workers face trade-offs in their choice of

employment.
 Workers Trade-Offs

• Finally, workers must sometimes decide how

many hours per week they wish to work,
thereby trading off labor for leisure.
 3. Firms Trade-Offs
• Firms also face limits in terms of the
kinds of products that they can
produce, and the resources available
to produce them.

• General Motors, for example, is very

good at producing cars and trucks,
but it does not have the ability to
produce airplanes, computers, or
pharmaceuticals.

• It is also constrained in terms of

financial resources and the current
production capacity of its factories.
 The Three Economic Problems
1. What commodities are produced

2. How these goods are made

3. and For Whom they are produced

 1. What commodities are
produced
• What commodities are produced and in what quantities?
A society must determine how much of each of the many
possible goods and services it will make and when they
will be produced.

• Will we use scarce resources to produce many

consumption goods (like pizzas)?

• Or will we produce fewer consumption goods and more

investment goods (like pizza-making machines)?
 2. How are goods produced?
• How are goods produced? A society must determine who
will do the production, with what resources, and what
production techniques they will use. Who farms and who
teaches?

• Is electricity generated from oil, from coal, or from the

sun? Will factories be run by people or robots?
 3. For whom are goods
produced?
• For whom are goods produced?
• Who gets to eat the fruit of economic activity?
• Is the distribution of income and wealth fair and
equitable?
• How is the national product divided among different
households?
 Inputs and Outputs
• Inputs are commodities or services that are used to
produce goods and services. An economy uses its
existing technology to combine inputs to produce
outputs.

• Outputs are the various useful goods or services that

result from the production process and are either
consumed or employed in further production.
Factors of Production
 Economic Efficiency
• Given unlimited wants, it is important that an economy
make the best use of its limited resources. That brings us
to the critical notion of efficiency. Efficiency denotes the
most effective use of a society’s resources in satisfying
people’s wants and needs.

• Economic efficiency requires that an economy produce

the highest combination of quantity and quality of goods
and services given its technology and scarce resources
Thank You!!!