INTRODUCTORY

MICROECONOMICS
EC 100
 1. INTRODUCTION TO MICROECONOMICS

• Economics is the study of how economic agents make

choices(decisions) about allocation of scarce resources to
satisfy their unlimited wants or needs.
• Economics studies the production ,distribution and consumption
of goods and services.
• Microeconomics focuses on individual economic units, such as households, firms, and industries. It
studies decision-making processes, resource allocation, and price mechanisms in specific markets.
• Key Concepts:
• Demand and supply
• Elasticity
• Production and cost theories
• Market structures (perfect competition, monopoly, oligopoly)
• Factor markets

• Macroeconomics, on the other hand, examines the economy as a whole. It deals with aggregate
variables and broad economic issues like growth, unemployment, inflation, and monetary and fiscal
policies.
• Key Concepts:
• National income accounting
• Aggregate demand and supply
• Inflation and deflation
• Unemployment
• Economic growth and development
• Fiscal and monetary policy
 STATIC AND DYNAMIC ECONOMICS
• Static Economics analyzes economic phenomena at a particular point in time or under
the assumption of no change. It examines equilibrium conditions without considering time
or change in variables.
• Examples:
• Determining the equilibrium price in a market
• Examining resource allocation in a given market structure
• Analyzing the effects of a tax on supply and demand in a static setup

• Dynamic Economics, in contrast, studies economic phenomena over time, considering

the path and changes of variables. It deals with economic processes, growth, and
fluctuations.
• Examples:
• Economic growth models (e.g., Solow model)
• Business cycle analysis
• Study of inflation and its impact over time
• Dynamic optimization problems (e.g., intertemporal consumption choices)
Interrelations between Microeconomics and
Macroeconomics
• Microeconomics and Macroeconomics often intersect, as
aggregate economic outcomes (macroeconomics) are
influenced by individual decisions (microeconomics). For
instance, household savings behavior (micro) affects national
investment rates (macro).
 1.1 KEY CONCEPTS IN DECISION MAKING

• Scarcity : This is a fundamental concept in economics which

refers to the limited nature of resources available to meet the
wants and needs of people. Resources such as land , labour
capital and time are finite(limited). This is the reason why it is
not possible to produce everything everyone desires, hence the
need for economic agents to make choices on how to allocate
resources efficiently(priorities).
• Scarcity drives the economic system by creating the need to
ascertain the opportunity cost and trade offs.
 OPPORTUNITY COST AND TRADE OFFS

• Opportunity cost : The value of the alternative that must be forgone when
making a choice.
• Examples:
If someone spends an hour watching tv instead of exercising, the
opportunity cost is the health benefits they could have gained from that
exercise.
If an investor decides to invest in stocks rather than real estate, the
opportunity cost is the potential profits that could have been made from the
real estate investment
 QUESTION

• A worker earns ZMW 40 per hour. Rather than work , she

decides to visit a museum for three hours. The visit to the
museum costs a total of ZW 40. What is the opportunity cost of
visiting the museum?
Solution:
The opportunity cost is what this person could have gained/lost
if they had gone for work rather than visiting the museum. ZMW
40*3 hours =ZMW 120 is what they’ld have earned from work in
3 hours, but they also lost ZMW 40 which should be added to
120. Therefore the opportuninity cost of going to the museum is
ZMW 160
• Trade offs: How much of one thing you give up in order to
gain another. For example, the guns vs butter dilemma which
represents the trade off between a country’s allocation of resources
to military spending(gus) versus consumer goods(butter).
• If government allocates more resources to producing weapons, it’ll
have fewer resources to produce consumer goods , which may
reduce the population’s standard of living.
• On the other hand , if government focuses more on the production
of butter or consumer goods, it may not have enough resources to
ensure national security( defense). This illustrates the concept of
opportunity cost where choosing one option means giving up on the
other.
 THE PRODUCTION POSSIBILITY FRONTIER (PPF)
• The PPF is a graphical representation of the maximum possible output
combinations of two goods or services that an economy can produce, given
its resources and technology. Provided there is efficient use of resources.
• The PPF illustrates scarcity by showing the trade offs between two goods,
given limited resources.
• The opportunity cost of producing one good in terms of the other is
equivalent to the slope(gradient) of the PPF. Moving along the PPF shows
how much of one good must be given up in order to produce more of another.
• A shift of the PPF outward indicates economic growth, which can be as a
result of technological advancements or increase in resources.
• Points on the PPF curve represent efficient production where al resources are
fully utilized. Points inside the curve represent inefficient use of resources
and points ouside are unattainable with current resourcse.
Concave and Straight Line PPF Curves
• The PPF curve is concave shape due to diminishing
marginal returns-­all factor inputs are not equally suited to
producing different goods and services.
• A straight line PPF shows that factor inputs are
interchangeable-­‐ they are adapted to produce both goods,
and can switch from one to another. A straight line PPF also
means there is a constant opportunity cost between the two
goods.
THE PPF
• In the PPF curve above, the economy is split between producing wine
and cotton. If it moves from B to C, resources are diverted away from
wine production to cotton production, which results in a fall of wine
produced. This fall is the opportunity cost of moving along the PPF
curve from B to C.
• A common PPF shows the balance between production of capital and
consumer goods. For such cases, remember that capital goods are
key for increasing production, whilst consumer goods are key for
improving quality of life.
• The economy cannot be at point Y with its current resources.
 QUESTIONS
1. The diagram below shows production possibility frontiers for a country that produces
capital goods and consumer goods.
Initially , the economy has a PPF shown by XY, operating at point
V. The PPF then moves to XZ, operating at point U.
Required:
a) Calculate the initial and new opportunity cost of producing 50
units of capital goods.
b) Explain what might have caused a movement of the PPF from
XY to XZ.
c) Explain one characteristic of the economy at W.
2. The PPF for an economy is shown in the table below.

Capital goods output Consumer goods Opportunity cost

(Million units) output (Million units)

0 42

10 40

20 36

30 30

40 22

50 12

60 0
Required:
a) Using the marginal analysis concept, explain the concept of
opportunity cost from the table.(Use column 3 if required).
b) What is the most likely effect of an economy producing more
capital goods
 1.2 BRANCHES OF ECONOMICS

There are two main branches of economics.

1. Microeconomics
Focuses on individual decision making units like households and firms. It
studies how these agents interact in the markets, determine prices and make
decisions about resource allocation. Firms strive to make decisions which
maximize profits and households strive to maximize the level of satisfaction
they derive from consuming a good or a service. Both entities minimize costs.
 1.2 BRANCHES OF ECONOMICS

2. Macroeconomics
Looks at the economy as a whole. I studies large scale economic factors
such as national income ,inflation, unemployment and government policies
to understand how they impact the overall economy.
 1.3 NORMATIVE AND POSITIVE ECONOMICS

Economics can be divided into positive economics and normative

economics, each serving a distinct purpose in analyzing and addressing
economic issues.
• Positive Economics: Provides a scientific and empirical foundation for
economic theories and predictions.
• Normative Economics: Guides policymakers and societies in making
decisions aligned with ethical, social, and political objectives.
• Both approaches are essential: positive economics for understanding
and normative economics for recommending solutions.
 POSITIVE ECONOMICS
• Positive economics deals with objective analysis and facts. It describes and explains
economic phenomena without any judgments or prescriptions about what ought to be
done.
• Key Features:
• Objective and fact-based
• Focuses on "what is" or "what will happen" in the economy
• Can be tested or verified using data
• Does not involve value judgments or opinions

• Examples:
• "A rise in interest rates will reduce consumer spending."
• "Higher taxes on tobacco reduce cigarette consumption."
• "The unemployment rate in the country is currently 12.7%."

• Application: Positive economics is used to predict the effects of policies or events and to
analyze real-world economic behavior.
 NORMATIVE ECONOMICS

• Normative economics involves value judgments and opinions about what should be
done. It prescribes economic policies and outcomes based on subjective preferences or
societal values.
• Key Features:
• Subjective and opinion-based
• Focuses on "what ought to be" or "what should happen"
• Cannot be tested or verified objectively
• Involves ethical considerations and value judgments

• Examples:
• "The government should increase the minimum wage to reduce poverty."
• "Taxes on the wealthy ought to be higher to promote income equality."
• "Healthcare should be free for everyone."

• Application: Normative economics is used in policymaking, where value judgments

about goals like equity, fairness, or social welfare guide decisions.
QUESTIONS
 1.4 INDUCTIVE AND DEDUCTIVE ANALYSIS
• Inductive and deductive analysis are two fundamental methods of
reasoning used in economics to develop theories and analyze economic
phenomena. They differ in their approach to deriving conclusions.
• Inductive analysis is used to identify patterns and propose theories (e.g.,
analyzing historical data on trade to propose a theory of comparative
advantage).
• Deductive analysis applies these theories to specific situations to predict
outcomes or design policies (e.g., using the theory of comparative
advantage to predict the benefits of free trade between two countries).
 Inductive Analysis
• Inductive reasoning involves observing specific facts or data and deriving general principles or theories from
them. It moves from the particular to the general.
• Key Features:
• Empirical and data-driven
• Relies on observation, experimentation, and statistical analysis
• Used to form generalizations or hypotheses based on patterns in the data

• Process:
• Collect data or observe specific instances.
• Identify patterns or trends.
• Formulate a general principle or theory.

• Examples in Economics:
• Observing trends in consumer behavior to develop the theory of demand.
• Analyzing historical data on inflation to propose a relationship between money supply and price levels.
• Studying the effect of tax policies in various countries to conclude that higher taxes reduce investment.

• Advantages:
• Grounded in real-world evidence.
• Helps develop theories that are relevant to practical issues.

• Disadvantages:
• Conclusions may be uncertain or subject to revision if new data contradicts the patterns observed.
 Deductive Analysis
• Deductive reasoning starts with general principles or theories and applies them to specific cases to derive
conclusions. It moves from the general to the particular.
• Key Features:
• Theoretical and logic-driven
• Relies on assumptions, axioms, or established principles
• Used to test hypotheses or predict outcomes in specific scenarios

• Process:
• Begin with a general theory or assumption.
• Use logical reasoning to derive specific predictions or conclusions.
• Test these conclusions with real-world data (optional).

• Examples in Economics:
• Starting with the law of diminishing marginal utility and predicting that a consumer will purchase less of a good as they consume
more of it.
• Applying the theory of supply and demand to predict how a change in price affects market equilibrium.
• Using Keynesian theory to conclude that government spending can reduce unemployment during a recession.

• Advantages:
• Provides clear and logically consistent conclusions.
• Can predict outcomes even without immediate access to data.

• Disadvantages:
• Dependent on the validity of initial assumptions.
 1.5 PARTIAL AND GENERAL EQUILIBRIUM
• Partial Equilibrium and General Equilibrium are two core concepts in economics
used to analyze markets and the broader economy.
• Example
• Partial Equilibrium: Analyzing the effect of a sugar tax on the price and quantity of soft
drinks in isolation.
• General Equilibrium: Evaluating how a sugar tax affects not only the soft drink market
but also related markets (e.g., sugar, alternative sweeteners, consumer incomes).
• Both concepts are vital tools in economics, with partial equilibrium providing practical
simplicity and general equilibrium offering a holistic, interconnected perspective.
 Partial Equilibrium
• Definition: Examines the equilibrium condition in a single market or sector, holding
other markets constant (ceteris paribus).
• Focus: Isolates a specific market to study the relationship between demand, supply, and
price within that market.
• Assumptions:
• Other markets remain unaffected or are irrelevant to the analysis.
• No feedback effects from changes in the studied market to others.

• Application:
• Useful for analyzing price changes, tax impacts, or subsidy effects in one market (e.g., the
market for rice).

• Key Theorist: Alfred Marshall developed the foundational tools of partial equilibrium
analysis.
• Limitations:
• Ignores interdependencies between markets.
• May oversimplify real-world complexities.
COMPARISON
 General Equilibrium
• Definition: Analyzes how equilibrium is achieved simultaneously across all markets in an
economy, considering their interdependencies.
• Focus: Explores how resources are allocated efficiently across the entire economy and how
changes in one market affect others.
• Assumptions:
• Perfect competition.
• Rational behavior by consumers and firms.
• No externalities or market distortions.

• Application:
• Useful for assessing large-scale policy impacts, trade effects, or overall resource allocation.
• Models like Arrow-Debreu General Equilibrium and Walrasian Equilibrium are central frameworks.

• Key Theorist: Léon Walras formalized the concept of general equilibrium.

• Limitations:
• High computational complexity.
• Relies on restrictive assumptions that may not hold in reality (e.g., no market power or transaction
costs).