Micro Economics (ECO402)

ECO402 Lecture No 01
Economics Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people. Microeconomics deals with: Behavior of individual units When Consuming; How we choose what to buy When Producing; How we choose what to produce Markets: The interaction of consumers and producers Analysis of aggregate issues: y Economic growth y Inflation y Unemployment Microeconomics vs. Macroeconomics Microeconomics is the foundation of macroeconomic analysis Themes of Microeconomics According to Mick Jagger & the Rolling Stones, You cant always get what you want. Why Not? Limited Resources Unlimited Wants Allocation of Scarce Resources and Trade-offs In a planned economy In a market economy Microeconomics and Optimal Trade-offs 1. Consumer Theory 2. Workers 3. Theory of the Firm Microeconomics and Prices The role of prices in a market economy How prices are determined

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Micro Economics (ECO402) Theories and Models Microeconomic Analysis Theories are used to explain observed phenomena in terms of a set of basic rules and assumptions. For example The Theory of the Firm The Theory of Consumer Behavior Models: A mathematical representation of a theory used to make a prediction. Validating a Theory The validity of a theory is determined by the quality of its prediction, given the assumptions. Evolving the Theory Testing and refining theories is central to the development of the science of economics Positive versus Normative Economics Positive Economics Positive economics deals with the observations or predictions of the facts of economic life. For example: What will be the impact of an increase in wages on the price of a product? Normative Economics Normative Economics is the value judgments about how economics should operate, based on certain moral principles or preferences? For example: What wage rate should be paid to the auto workers to make them an active member of the society? What is a Market? Markets A geographically defined area where buyers and sellers interact to determine the price of a product or a set of products Markets vs. Industries Industries are the supply side of the market. Defining the Market The market parameters must be set before an analysis of the market can take place. Arbitrage Buying a product at a low price in one location and selling at a high price in another Competitive vs. Noncompetitive Markets Competitive Markets Because of the large number of buyers and sellers, no individual buyer or seller can influence the price. Example: Most agricultural markets Noncompetitive Markets Markets where individual producers can influence the price. Example: OPEC Page 2 of 3
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Micro Economics (ECO402) Market Price Competitive markets establish one price. Noncompetitive markets may set many prices for the same product. Market Definition - The Extent of a Market Market Definition Which buyers and sellers should be included in a given market Market Extent Defines the boundaries of the market Geographic Range of products Examples Geographic boundaries Gold: Lahore vs. Karachi Housing: Islamabad vs. Rawalpindi Range of Products Gasoline: regular, super, & diesel Cameras: Polaroid, point & shoot, digital Markets for Prescription Drugs Well-defined markets - therapeutic drugs Ambiguous markets - painkillers

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