1. introduction to microeconomics

Economics
 It is study that is concerned with the
allocation of scarce resources to the society
to produce and to distribute valuable goods
and service among different individuals.

Branches of Economics
 Microeconomics
 Macroeconomics

Microeconomics
 Is the branch of Economics that deals with the
economic decisions made at the micro level.
 That is concerned with the behaviour of the
individual entities that plays a role in the functioning
of economy. Consumers, workers, investors,
business firms any individual etc.
 Concerns of individuals, workers, investors and
firms are studies under Microeconomics.

Macroeconomics
 It is the branch of economics that deals with the
aggregate economic quantities. Such as
 level and growth of national output (GDP and GNP)
 Unemployment and inflation rate
 Behaviour of Financial markets-BSE and NSE.
 Price Index – Consumer price index and wholesale
price index
 International causes to financial crisis – recession in
USA have impacted the share market worldwide.

Theme of Microeconomics
1. Limitation :
Society have limited choices in terms of
resources.As a consumer, worker and firm we
have limited number of resources and have to
opt among the given alternatives for the best
output.

Limitations faced by different
segments of society
 Consumers : Limited income spent upon wide
variety of goods. Choice explained by “
ConsumerTheory”.
 Workers have limited choices to work for like :
 Whether and when to enter workforce.
 Choices of Employment
 How many hours per week they wish to work.
 Firms
Kind of products to produce.
Resources available to produce them.

2. Prices and Market
 Price – Determine the choices for consumers,
workers and firms.
 Microeconomics describe how prices are
determined.
 In Command economy Price is determined by ___.
 In Mixed Economy price is determined by :
 Interaction of consumers, workers and firms in mkt.
 Collection of buyers and sellers, that together determine
the price of commodity.
 Competition among the sellers, as inTelecom and Auto
sector.

3. Equilibrium
 It is a stable condition in the market and
generally has no tendency to change.
Microeconomics explain how consumers,
producers and firms attain their equilibrium.
 Consumers attain equilibrium when they
consume bundle of goods that maximize his
satisfaction (utility) at given price of commodity,
preference and income etc.
 Firm : attain equilibrium when it maximize profit
at given cost and revenue condition.

Why study Microeconomics
 That is how to apply Microeconomic
Principles to actual decision making.
 Examples of decision making :
 Corporate decision making
 Government decision making : Public policy
design.

Corporate decision making
 Example of Ford Motors :
 In 1991 : Ford introduced the “ Explorer” which
became the best selling SUV in America.
 In 1997 : Ford introduced the “Expedition” – car
was a big success.
 By 2002 Ford was offering six SUV models.
 In 2005 – 2007 : increase in petroleum prices and
global warming concern, took a toll on SUVs sale
and company’s profit changed into loss.

.
 In response – Ford worked on developing new and smaller
cars, modifying SUV Models and making them lighter and
fuel efficient.
 SUV : new designing and reengineering had series of
concerns for Ford :
 How Public would react to design and performance
 How would demand depend upon price – that Ford charge.
Cost of Manufacturing these cars :
 How high the production cost would be for new cars
 How many units should be produced in a year to meet the cost of
production and to maximize the profit of firm.
 How much and how fast the cost decline as Managers and workers
gained experience with the production process.
 How the prices of Steal and other raw material will impact the cost.

Pricing Strategy and competition
 Ford have to design and consider how competitors
would react to the pricing strategy.
 Such as whether it has to adopt a standard rate for a model
or different rates with facilities inside it. Like : ABS, leather
seats and air bags etc.
Ford has to consider both the risks and possible
outcomes of its decision

Risks concerned
 Uncertainty about future prices of Petrol.Will
reduce the demand of heavy vehicles.
 Uncertainty about wages that Ford would pay to
its workers.
 Problems of organisation : like how managers of
different departments should be rewarded.
Should it manufacture all parts by itself or it
should purchase them from outside vendors.
How should Ford take these uncertainties into
account, when making a decision.

Conclusion
 Finally Ford has to think about its relationship
with Government and the effects of
regulatory policies by the government on
company.
 It is how Microeconomics will help the
company to deal with its strategic as well as
tactical decisions.

Microeconomics and Government
 Govt. In its day to day decision has to face many concerns, like
what will be the impacts if petroleum prices are increased.
 Firms : have to design cars of new models with more fuel efficiency.
There will be an impact on the sale of vehicle, hence this decision
will have the impact on the working mechanism of firms.
 Employment : if turnover of the firms is reduced it will impact the
employment of the concerned staff in these organisations.
 Revenue generated from the extra income from the increased tax
has to utilized for the development of infrastructure and
community.
 What should be the percentage hike in the prices so that it has least
impact on the public.
 Policy for Subsidy etc.

Economy and its types
 Definition of Economy
 These are the activities related to production and
distribution of goods and services in a geographical
area over a period of time.
 Types of Economy
 Market Economy
 Command Economy
 Mixed Economy
Advantages and Disadvantages of each economy is to be discussed.

Positive and Normative Economic Analysis
 While considering economic issues, there are
the questions of fact and questions of fairness.
 Positive Economics describe the facts of an
economy. It establish the relationship between
cause and effect. It is “what is” in economic
matters.
 Normative Economics involves the value
judgment. It is “ what ought to be” in economic
matters.

Difference between Positive and Normative Economics
Positive Economics Normative Economics
 It is the part of economic
analysis in which solutions to the
basic economic problems is
based only upon facts.
 In positive economic analysis we
study how different mechanisms
are associated.
 Analysis describe relationship of
cause and effect.
 For example : revenue
generation by a firm from sales ,
month of month progress,
budgetary analysis, cost of
production and impact of
advertisement on sales.
 It is the part of economic analysis
in which solution to the basic
economic problems is based
upon assumptions and
considerations.
 In normative economic analysis
we try to understand whether
these mechanisms are desirable
or not.
 Analysis examines of concerns –
what ought to be.
 For Example :When to provide
free health and education
services, when to provide the
subsidy by government .

Short Run and Long Run
Short Run Long Run
 A period of time in which
all the factors of
production can not be
changed, it is generally a
smaller duration of the
time period.
 Such as a company can
change the labour quantity
for a smaller duration but
can not change the
machinery and technology
 A time period in which all
the factors of production
are variable and company
and consumers have the
enough time to adopt and
implement the alternatives
 Such as : Computerisation
of all the banks in Public
sector (Skills , new
labourers, technology and
others etc. )

Three Problems of Economic Organisation
 The central problems of an economy
 What to produce in what quantities
 How to produce
 For whom to produce

1. introduction to microeconomics

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