Micro Economics Intro Naure Three main

1. WHAT IS
ECONOMICS?
1CHAPTER
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2. Introduction :
• The study of Economics is divided into two
parts viz Micro Economics and Macro
Economics. The term Micro Economics is
derived from the Greek word 'mikros' which
means a small-a millionth part. Thus in Micro
Economics we analyse the economic behavior
of small individual economic units such as
individual consumer, individual producers etc.
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3. Definition of Economics
•Scarcity
–All economic questions arise because we are
unable to satisfy all our wants.
–Our inability to satisfy all our wants is called
scarcity.
–Economics is the social science that studies the
choices that we make as we cope with scarcity and
the institutions that have evolved to influence and
reconcile our choices.
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4. A Definition of Economics
• 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 study of how scarce
resources are allocated among conflicting
demands.

5. Three Big Microeconomic
Questions
–Goods and services are the objects that people
value and produce to satisfy wants.
–Microeconomics seeks to understand what
determines:
– What goods and services are produced
– How goods and services are produced
– For whom goods and services are produced
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7. Three Big Microeconomic
Questions
•What Goods and
Services are Produced?
It emphasizes the
dominant place of services
in our economy.
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8. Three Big Microeconomic
Questions
•How are Goods and Services Produced?
–Factors of production are the resources that
businesses use to produce goods and services.
–They are grouped into four categories:
 Land
 Labour
 Capital
 Entrepreneurship
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9. Three Big Microeconomic
Questions
–The “gifts of nature” that we use to produce goods
and services are land.
–The work time and effort that people devote to
producing goods and services is labour.
–The quality of labour depends on human capital,
which is the knowledge and skill that people obtain
from education, on-the-job training, and work
experience.
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10. Three Big Microeconomic
Questions
–The tools, instruments, machines, buildings, and
other constructions that are used to produce goods
and services are called capital.
–The human resource that organizes land, labour,
and capital is entrepreneurship.
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11. Three Big Microeconomic
Questions
•For Whom are Goods and Services
Produced?
–Who gets the goods and services depends on the
incomes that people earn.
– Land earns rent.
– Labour earns wages.
– Capital earns interest.
– Entrepreneurship earns profit.
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12. • Scope and subject matter of Micro Economics
Micro Economics basically deals with
i) Theory of product pricing
ii) Theory, of factor pricing (Microtheory of distribution) .
iii) Theory of economic welfare
1. Product Pricing
The theory of product pricing explains how the relative prices of cotton
cloth, rice, car and thousands of other commodities are determined.
Price of a commodity depends upon the forces of demand and supply.
Therefore, analysis of demand and supply side is necessary in order to
explain the process of determination of price.
Study of demand side covers the analysis of consumer's behavior and study
of supply side, covers the analysis of conditions of production, cost and
behaviour of firm & industry.
So, theory of product pricing is subdivided into theory of demand & theory
of production & cost.
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13. 2. Factor Pricing
Theory of factor pricing i.e. Theory of distribution explains how wages
(price for the use of labour) rent (payment for the use of land), interest (Price
for the use of capital), profits (the reward for the entrepreneur are
determined.
3. Theory of welfare
Theory of welfare basically deals with efficiency in the allocaton of
resources. Efficiency in the allocation of resources is attained when it results
in maximizationof satisfaction of people. Economic efficiency involves
three efficiencies :
i) Efficiency m production - Efficiency in production means producing
maximum possible amount of goods, from the given amount of resources.
ii) Efficiency in consumption - Efficiency in consumption means
distribution of produced goods & services among the people for,
consumption, in such away as to maximize total satisfaction of society.
iii) Efficiency in the direction of production i.e. overall economic
efficiency - Efficiency in the direction of production means production of
those goods which are most desired by the people.
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