1. Introduction to
Microeconomics
Unit 1 – Class 2

2. What is Micro economics?
 Study of the behavior of individual economic
units
 E.g. Households, Firms, Industry, Individual
consumers etc.
 2 central questions it addresses:
 How and why these units make economic
decisions?
 How economic units interact to form larger units –
like markets and industries?

3. Themes of Microeconomics (Scope)
 The allocation of resources
 The trade offs people make while allocating
these resources
 What kind of trade offs optimize value? –
Determined by price
 Units we study:
 Consumer behavior
 Workers behavior
 Firms behavior

4. Why study Micro economics? (Purpose)
 To understand how we as consumers react to
changes in the market place and how we
make our decisions
 For firms to be able to decide how much to
produce such that their profits are maximized
 To understand what the optimal size of labor
force is for a firm and how laborers choose
between work and leisure
 To frame public policy based on the
projections and estimations

5. Economic Theories
 Theories are the basis of explanation and
prediction in economics
 E.g. Theory of the firm in economics explains
how firms make decisions on how much raw
materials to use to optimize profit
 Assumptions are used because:
 the reality is too complicated to study at once
 There are some obvious things that need not
necessarily be analyzed. E.g. Business make
profit

6. Economic Models
 Models are mathematical representation of
reality based on economic theory
 Used for simulation, prediction and estimation
of any phenomenon
 It helps us to explain reactions of economic
units when some change occurs
 E.g. If price of Wood goes down by 10%, by
how much will the Wooden furniture
production change?

7. Markets
 Collection of buyers and sellers
 Interact and transact with each other
 Fix prices through actual or potential
interaction amongst each other
 Can be both competitive and non competitive
 Competitive – if firms are free to trade
 Non competitive – if the government decides
the prices and makes all the economic
decisions

8. Simulation
 Assume that we are a government with non
competitive market
 We are fixing the tax rate for our people for
getting benefits from us (Say education tax)
 Let’s say the categories of people in our
nation are 110. Each category gets different
benefit from the service (education). But no
one gets more than 50% benefit.
 How much should we tax people?

9. Simulation
 Say this is a free education market
 Sellers
 Think of a cost of production
 Write it down on a piece of paper along with your
name
 Make sure no one sees it
 Anything you get more than this amount in the
market is your profit

10. Simulation
 Buyers
 Write down the maximum benefit you could get
from education in terms of money
 This is the optimum level you will spend for
education
 Write it down on a piece of paper along with your
name
 Any price you get less than the benefit you have
mentioned is your surplus

11. Simulation
 Trading rules
 Buyers and sellers must find each other and
negotiate based on their cost of production
and maximum benefit.
 If you make a deal come to the front of the
class and get it certified by me
 The person who makes the maximum
amount of profit or surplus wins and will get
rewarded!

12. Reflections
 What kind of economic decisions were you
making as individual units in a market?
 Does micro economic theory work in a
command economy?
 What is the central ‘issue’ that drives the
market?
 Does everyone win in a market system?
 Which one do you think is fair?

13. Questions from exam papers
 Instead of class notes, we will practice exam
questions
 Please get a copy of the past questions from
photocopy
 Following are the questions that you need to do:
 2007 – Section ‘B’ – 1
 2005 – Section ‘A’ – 1
 2004 – Section ‘A’ – 1
 2003 – Section ‘A’ – 1
 2002 – Section ‘A’ – 1

14. Reference
 Please use reference books from KCM library to
answer the questions
 Please list down the names of at least 2 books that
you have used as reference besides textbook.
 Writers Name, Book’s name, Year of publication,
Publishers Name
 E.g. Pindyck R. S., Rubinfeld D. L., Microeconomics, 5th
edition, 2005, Peasron Education Pte Ltd.
 The due date is 28 August 2007
 Please contact Ms. Nirjala regarding the format of
submitting your answers

15. Thank you for your patience!