Introduction micro

1. BNF 1113
Microeconomics
Dr. W.A.I Lakmal
Senior Lecturer
Department of Banking and Finance
Faculty of Business Studies and Finance
WUSL

2. Course Description
 Microeconomics is the study of the choices made by households, firms
and government and how choices affect the market for goods and services.
The course provides an overview of the principles and theories of
microeconomics and their uses in understanding and analyzing of
economic issues.
In this course, students will learn to apply an analytical approach to
the study of how individuals and societies deal with the fundamental
problem of scarcity of resources. This approach is applied to everyday
decisions faced by individuals as they try to maximize their utility, to
business that try to maximize profits and to the whole of society as it
attempts to use its resources efficiently.

3. Course Objectives
The main goal of this course is to show how microeconomic models
can be applied to guide business decisions. Therefore, this module
aims to develop students’ understanding of the microeconomic
concepts and theories in order to enhance their skills in analyzing
business opportunities, market and risk. After successful completion
of this course, students will be able to apply the microeconomic
concepts and theories to analyze the economic issues in the real
business world.

4. Course Outline
Introduction to microeconomics
Demand, supply, elasticity and market equilibrium
Theory of consumer’s behavior – Cardinal utility analysis and Ordinal
utility analysis
The theory of production – Short-run production theory and Long-
run production theory
The theory of cost – Short-run cost theory and Long-run cost theory
Equilibrium of the firm/The theory of the firm: A general analysis
Market structures – Perfect competition, Monopoly, Monopolistic
competition and Oligopoly

5. Evaluation Criteria
Mid-semester examination = 25%
End – semester examination = 75%
Total = 100%

6. Recommended Readings
Ahuja, H.L.,2010, ‘Microeconomics’
Dominick Salvatore., 2003, ‘Microeconomics’
Hal r. Varian., 2003, ‘Intermediate Microeconomics’
Walter Nicholson., 1998, ‘Microeconomic Theory’

7. Introduction to Economics
Nature and Scope of Economics
Definitions of Economics
Historical Development of Economics
The Economic Problem
Scarcity, Choice and Opportunity Cost
Microeconomics and Macroeconomics
Normative and Positive Analysis

8. Nature and Scope of Economics
Adam Smith is generally known as father of economics brought out
his famous book ‘The Nature and Causes of Wealth of Nations’ in the
year 1776.
Economics studies how individuals, firms and other organizations
make choices as to how scarce resources of society are used to satisfy
the wants of the people.

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In economics, we study why sometimes there is unemployment of
resources and also what factors determine level of national income,
employment and general price level.
The subject matter of economics is so vast and wide that it is difficult
to put it in a nutshell of a definition. However, from time to time
economists have tried to define economics.

10. Various Definitions of Economics
Old definitions of economics can be classified into three categories,
1. Wealth Definition
2. Welfare Definition
3. Scarcity Definition

11. Adam Smith’s Definition
According to Adam Smith, economics enquires into the factors that
determine wealth of the country and its growth.
Adam Smith analyses the factors that determine the growth of the
volume of production.
Thus, Adam Smith emphasized the production and expansion of
wealth as the subject matter of economics.
Besides Adam Smith and Ricardo and other classical economists too
regarded economics as the study of wealth.

12. Alfred Marshall’s Definition
Thus Marshall writes ‘Economics on the one side is study of wealth
and on the and more important side, a part of the study of man.’
There are many aspects of man’s life – social, religious, political, etc.
but economics studies man’s life in the ordinary business of life.
The ordinary business of life means how a man gets his living and
how he spends it.
Thus, Marshall says ‘Economics is study of man’s action in the
ordinary business of life’.

13. Robbin’s Definition
Robbins not only criticized Marshall’s definition and other welfare
definitions of economics but also provided a new definition which he
considered to be scientific and correct.
He has given this definition in his famous book, ‘An Essay on the Nature
and Significance of Economic Science’ which he brought out in 1931.
According to Robbins, economics studies the problems which arise because
of the scarcity of resources.
Nature has not provided mankind sufficient recourses to satisfy all its
wants.
Therefore, the people have to choose for which ends or for which wants
the resources are to be utilized.
Thus, accordingly to Robbins, economics is the science of scarcity and it
studies how the scare resources are allocated among their different uses.

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Finally Robbins has given the following definition;
‘Economics is the science which studied human behavior as a
relationship between ends and scarce means which have alternative
uses’
This definition is based upon the following three facts,
1. Unlimited wants
2. Scarce means
3. Alternative uses of means

15. Some Recent Definitions of Economics
According to Prof.Henry Smith, economics is the study of how the
total product of society changes and is determined.
Prof. Samuelson defines economics as the study of how societies use
scare resources to provide valuable commodities and distribute them
among different people.
The subject matter of the science of economics has grown so wide
and vast that it is extremely difficult to put in a ‘nutshell’ of the
definition.
It is because of this fact that modern economists have now stopped
discussing the proper way of defining economics.

16. The Economic Problem
Economic is mainly concerned with the achievement and use of material
requirements to satisfy human wants.
Human wants are unlimited and productive resources such as land and
other natural recourses, labor, raw materials, capital equipment with which
to produce goods and services to satisfy those wants are scarce or limited.
Thus, goods and services which satisfy human wants are scarce because
productive resources with which to produce goods and services are scarce.
Therefore, the economic problem derives from the scarcity of resources
related to human wants.
The scarcity of resources to satisfy human wants gives rise to the basic
economic problem of choice.

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Because of scarcity when we make a selection the other alternatives
have to be sacrificed.
When the value of sacrificed alternatives is measured in terms of
money, it is known as opportunity cost.
The value of the next best alternative that sacrificed to select the
best alternative is the opportunity cost.
In other words, the opportunity cost of the chosen item or the
chosen activity is the benefit expected from the best alternative that
is forgone.

18. Microeconomics and Macroeconomics
The subject matter of economics has been divided into two parts:
1. Microeconomics
2. Macroeconomics
The term microeconomics is derived from the Greek word mikros;
meaning ‘small’ and the term macroeconomics is derived from Greek
word ‘macros’; meaning ‘large’.

19. Introduction to Microeconomics
Microeconomics deals with the analysis of small individual units of
the economy such as individual consumers, individual firms and small
aggregates or groups of individual units such as various industries and
markets.
Microeconomics studies the economic actions and behavior of
individual units and small groups of individual units.
Microeconomics examines the factors that affect individual economic
choices, how changes in these factors affect such choices and how
the choices of various decision makers are coordinated.

20. Continue
In microeconomics, we make a microscopic study of the economy.
But it should be remembered that microeconomics does not study the
economy in its totality/aggregates.
Microeconomic analysis concerns itself with individual industries and
markets since it does not study the totality of behavior of all units in the
economy.
Microeconomic theory is also the basis for most applied fields of
economics such as industrial economics, labor economics, international
economics, environmental economics, public economics and development
economics

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Microeconomic theory studies ‘resource allocation’
It takes the total quantity of resources as given and seeks to explain
how they are allocated to the production of particular goods.
The allocation of resources to the production of various goods in a
free market economy depends upon the prices of the various
resources or factors of production.

22. Microeconomics as a study of Economic
Efficiency
The pricing of products and factors and the allocation of resources
based upon the price mechanism.
Microeconomics also seeks to explain whether the allocation of
resources is efficient.
Efficiency in the allocation of resources is attained when the
resources are allocated that maximizes the satisfaction of the people.
Economic efficiency involves three (03) efficiencies,
- Efficiency in production
- Efficiency in distribution
- Efficiency in allocation

23. Content of Microeconomic Theory
Microeconomic theory can be divided into;
- Product Pricing : Theory of Demand , Theory of
Production and Cost
- Factor Pricing : Theory of Distribution
- Theory of Economic Efficiency or Welfare Economics
-Theory of International Trade

24. Macroeconomics
Macroeconomics analyses the behavior of the whole economic system in
totality.
In other words, macroeconomics studies the behavior of the large
aggregates such as total employment, the national product or income and
the general price level of the economy.
Therefore, macroeconomics is also known as aggregative economics.
Macroeconomics analyses and establishes the functional relationship
between these aggregates.
Macroeconomics deals not with individual quantities as such but with the
aggregates of those quantities. Not with individual incomes, but with
national income. Not with individual prices but with the general price level.

25. Distinguished Microeconomics and
Macroeconomics
Macroeconomics should be carefully distinguished from
microeconomics.
It should be noted that microeconomics also does deals with
‘aggregates’ but not of the type with which macroeconomics is
concerned.
Macroeconomics examines the behavior of the industry in regard to
the determination of its product price, output and employment, and
the industry is an aggregate of the various firms producing the same
or similar product.

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But aggregates with which macroeconomics is concerned are some
different variety.
Macroeconomics concerns itself with these aggregates which relate
to the whole economy.
The subject matter of macroeconomics analysis is to explain what
determines the level of national income and employment.
In other words, macroeconomics examines the determination of the
level, fluctuation and growth in the overall economic activity.

27. Content of Macroeconomics
Macroeconomic theory can be divided into;
1. Theory of Income and Employment
2. Theory of General Price Level and Inflation
3. Theory of Economic Growth
4. Theory of Distribution

28. Importance and Uses of Microeconomics
Microeconomics occupies a vital place in economics and it has both
theoretical and practical importance.
It is highly helpful in the formulation of economic policies that will
promote the welfare of the society.
Until recently, especially before Keynesian Revolution, the body of
economics consisted mainly of microeconomics.

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As Professor Watson says ‘Microeconomic theory explains the
composition or allocation of total production, why more of some
things are produced than of others’.
Understanding of how a free private enterprise economy operates.
How the goods and services are distributed among the various
people for consumption through price or market mechanism.

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Explain the conditions of efficiency in consumption and production.
Suggests suitable policies to promote economic efficiency and
welfare of the economy.
Reveals how a decentralized system of a free private enterprise
economy functions without any central control.
Microeconomic analysis is also usefully applied to the various applied
branches of economics such as Public Finance, International
Economics.
Microeconomic analysis is a very useful and important branch of
modern economic theory.

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