Macro economics introduction, circular flow, resources, ppf, scarcity

1. Microeconomics
Lecture 01
By
Anupama Dissanayake
Senior Lecturer
PhD Reading (USJP), MLRHRM (Col.),
BBA (Hons) (Sheff Hallam), PQHRM (CIPM), AMCIPM, MPASL

2. Introduction to Economics
• After studying this chapter, you will be able to:
• Understand the fundamental economic concepts
• Explain the fundamental economic problem
• Define the production possibility frontier
• Define and calculate opportunity cost
• Explain the conditions in which resources are used
efficiently
• Explain how economic growth expands production
possibilities
• Explain how specialization and trade expand
production possibilities
• Understand the circular flow of income

3. An overview of economics
Economics is a social science
Economic behavior
• Scarcity of resources
• Choice
• Need for making choices
• Human wants
• Alternative uses
What is economics?
3
Additional Reading: Page 3 onwards,
Microeconomics Theory &
Applications by D. N. Dwivedi

4. Economics;
• Economics as a social science analyses how people (individuals and society)
make their choices between the economic goals they want to achieve, between
the goods and services they want to produce, between the alternative uses of
their resources with the objective of maximizing their gains.
• The gain maximizers will have to evaluate the cost and benefit of alternative
options in making their choices.
• Economics studies the process of evaluation of alternatives.
• Economics provides logic and reasoning, tools and techniques and analytical
framework to analyze economic phenomena and to predict the consequences
of change in economic conditions.
4

5. This division crystallized after the Great Depression of 1930s. Until 1936,
there was only one Economics which conformed to what is now called
‘microeconomics’.
These terms were first used by Norwegian economist, Ragnar Frisch in1933.
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The Scope
of
Economics
Two major divisions
of economics
Microeconomics Macroeconomics
• Functioning of individual industries
and the behavior of individual
economic decision-making units: firms
and households.
• Firms' choices about what to produce
and how much to charge and
households' choices about what and
how much to buy help to explain why
the economy produces the goods and
services it does.
• Who gets the goods and services that
are produced.
• Looks at the economy as a whole.
• Examines the factors that determine
national output, or national product.

6. 6

7. Microeconomics
Theories
• A systematic study of choice making
behavior of consumers and producers
(individuals, households, firms and
government), allocate resources (land,
labour and capital) between goods and
services that are produced and consumed,
and determination of their prices make the
central theme of microeconomics.
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The individuals and
households as consumers
make choices between
various goods and services
they want to consume.
The individuals and
individual firms make their
choices about ‘what to
produce’ and ‘how to
produce’ (techniques to be
used).
The study of consumers
behavior makes
•The theory of consumer
behavior
•The theory of
consumption
•The theory of demand
The study of producers
behavior constitutes
•The theory of production
•The theory of supply
•The cost theory
• Theory of demand and theory of supply combined
together from the theory of price determination.
• They study of the behavior of factor owners make the
theory of distribution or the theory of factor price
determination.

8. Microeconomics: a positive or normative science?
8
Microeconomics as a Positive Science Microeconomics as a Normative Science
• Analyze and explain economic phenomena as
they are.
• It seeks to answer the questions ‘what is’,
‘what it is’ and ‘what will be’…
Ex: what will be the demand for cars, if prices go
up?
• Explains the economic behavior of individual
decision makers under given conditions; their
response to change in economic conditions
and brings out the relationship between the
change in economic conditions and economic
decision of the people.
• The word positive means that it has a great
possibility to occur if conditions are fulfilled.
• Involved value judgement on ‘what is good’
and ‘what is bad’ for the society.
• The values are drawn from the moral, ethical,
social and political aspirations of the society.
• Since microeconomics prescribes methods to
correct undesirable economic happenings, it is
also called prescriptive science.
How rice price is determined?
Positive
How should the price of rice be determined?
Normative

9. Resources
Resources can be classified as;
 Natural resources
Including land, space, water, minerals, forest,
climate, jointly called land
 Human resources
Including manpower, its energy, talent,
professional skills and innovative abilities and
organizational skill, jointly called labour
 Man made resources
Including machinery, equipment, tools,
technology and building, jointly called capital.
 To this economists add another category of resources
called entrepreneurship, i.e. those who organize the
resources and assume risk in business.
 Time and information are two other kinds of resources
which have economic value.

10. Production
Decisions
• When allocating scarce resources between
competing ends, several production
decisions need to be made.
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For whom to produce?
What to produce?
How to produce?

11. Economic
Systems
• Free Market economy
• Planned/ Command Economy
• Mixed Economy
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12. Schools of
economic
thought
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• Ancient economic thought
• Scholasticism
• Mercantilism
• Physiocrats
• Classical political economy
• American (National) School
• French liberal school
• German historical school
• English historical school
• French historical school
• Utopian economics
• Georgist economics
• Marxian economics
• Neo-Marxian economics
• State socialism
• Ricardian socialism
• Anarchist economics
• Distributism
• Institutional economics
• New institutional economics
• Neoclassical economics
• Lausanne school
• Austrian school
• Stockholm school
• Keynesian economics
• Chicago school
• Carnegie school
• Neo-Ricardianism
• Modern schools (late 19th and 20th century)
• Heterodox schools (20th and 21st century)
• 20th century schools

13. Other
economic
concepts
• Goods
• Free goods
• Economic goods
• Consumer goods
• Capital goods
• Division of Labour
• Specialization
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14. Production
Possibility
Frontier/
Curve
(PPF/ PPC)
• Societies cannot have all that they want because
resources are scare, and technology is given.
• In reality, both human and non-human resources
available to a country, keep increasing over time
and technology becoming more and more
productive.
• Availability of human resource increase due to
natural process of increase in population and
non-human resources(especially capital and raw
material) increase due to creative nature of
human beings.
• Such factors change production possibilities and
production possibility frontier of an economy.
14

15. Production
Possibility
Frontier/
Curve
(PPF/ PPC)
• What is PPC?
• Assumptions
• Concepts that you can show using PPC
 Scarcity
 Choice
 Opportunity Cost
 Economic Growth
 Unemployment
 Recession
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16. 16
0
1
2
3
4
5
6
7
8
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
Units
of
food
(millions)
Units of food Units of clothing
(millions) (millions)
8m 0.0
7m 2.2m
6m 4.0m
5m 5.0m
4m 5.6m
3m 6.0m
2m 6.4m
1m 6.7m
0 7.0m
A
production
possibility
curve

17. 17

18. Circular-
flow
Diagram
• A visual model of the economy that
shows how dollars flow through
markets among households and firms.
• The economy is simplified to include
only two types of decision makers—
firms and households.
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19. 19

20. Our First
Model: The
Circular-
Flow
Diagram
Firms
Produce and sell goods and services
Hire and use factors of production
Households
Buy and consume goods and services
Own and sell factors of production
Markets for Goods and Services
Firms sell
Households buy
Markets for Factors of Production
Households sell
Firms buy
Factors of Production
Inputs used to produce goods and services
Land, labor, and capital

21. Withdrawals, injections and the size
of income flows
Households Firms
Factor
payments
Consumer
Expenditure
Injections (+)
Withdrawal (-)
Injections (+)
Withdrawals (-)

22. Two Sector
Model with
Savings

23. Uses of
Microeconomics
Theories
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• Microeconomics explains the economic behavior
of individual decision makers.
• Microeconomic theories establish cause and effect
relationship between two or more economic
events and provide the basis for predicting the
future course of economic events.
• Microeconomic theories contribute in formulating
economic policies and in examining the
appropriateness and effectiveness of economic
policies.
• Microeconomic theories can be and are profitable
used in business decision making.
• Microeconomic theories provide the basis for
formulating propositions that maximize social
welfare.

24. Glossary
• Microeconomics & Macroeconomics
• Positive & negative statements
• Scarcity
• Need & want
• Opportunity Cost
• Factors of production
• Free & economic goods
• Consumer & capital goods
• Division of labour & Specialization
• PPC
• Stakeholders
• Free market, planned & mixed
economy

25. Questions