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Microeconomics
Microeconomics Six sections
Three faculty members, each teaching
ECON 101 two sections
Prof. Arijit Sen (ARS) - A&C
Prof. Runa Sarkar (RS) - B & F
2017
Prof. Anindya Sen (ANS) - D & E

Microeconomics ECON 101 Microeconomics ECON 101

Minimum course content will remain the
Classes for D & E: same for all three; some extra topics may
E D differ from faculty to faculty
Monday 10.15 11.45 2.30 4.00 Grading will be done on uniform basis
(N-31) (L-32) across sections
Wednesday 10.15 1145 2.30 4.00 Two exams one midterm and one end-
(N-31) (L-32) term
Midterm scores will be raw scores, not
converted into grades

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Reference
B.D. Bernheim and M.D. Whinston
Microeconomics (McGraw Hill)
PDF versions of slides will be uploaded
after each session
Additional reading materials will be
uploaded from time to time NOT
RELATED TO EXAMS
Chapter Sections
1 1.1, 1.3, 1.4
2 All
4 All
5 5.1- 5.5
6 6.1- 6.3
7 7.1-7.4
8 All
9 9.1-9.5
11 11.1 11.2
12 12.1-12.4

Chapter Sections
14 All
15 15.2
17 17.1-17.3, 17.6
Introduction
18 18.1-18.4
19 19.1 19.6
20 All
21 All

McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.

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The Focus of Economics The Focus of Economics

Basic starting point: SCARCITY
Scarcity forces societies to confront three
Human wants refer to all the goods
critical issues:
services and conditions of life that
What to produce (WHAT)
individuals
How to produce goods (HOW)
Human wants always seem to be greater Who gets what (FOR WHOM)
than the goods and services available to
Economics examines how societies
satisfy them
address these three issues: allocation of
Moreover, economic resources usually scarce resources
have alternative uses
1-9

What to produce Production Possibility Frontier

What commodities are to be produced
and in what quantities?
Bread vs. shirts
High quality expensive shirts vs. cheap
shirts
Consumption goods vs. investment
goods
Civilian vs. military goods: guns versus
butter

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The production of energy illustrates very clearly the how choices available to an economy. The
table below gives an idea of how energy has been produced in different ways in India.

How to produce
Energy Generated (gross, in Billion Kwh)
Non- Total
Utilities utilities
Year Hydro+ Thermal+ Nuclear Total
Wind NCES

Who will do the production? 1980-81

2000-01
45.5
74.5
56.3
408.1
2.9
16.9
104.7
499.5
8.2
55.0
112.9
554.5

With what resources? 2008-09 114.1 617.8 14.7 746.6 95.9 842.4

- Usually different combinations of inputs

NCES: Non-conventional energy sources other than wind.
Source: Economic Survey, 2008-09, Table A27

possible: more/less fertilizer + less/more Percentage of Total (excluding nonutilities)

land Hydro+Wind Thermal+NCES Nuclear
Year
Using what production techniques? 1980- 43.4 53.8 2.8
81

- Labor-intensive techniques vs. capital- 2000-

01
14.9 81.7 3.4

intensive techniques 2008-

09
15.3 82.7 2.0

Total installed Power generation Capacity (end of March 2015)[16]

For whom?
Source Utilities Capacity (MW) %

Coal 164,635.88 61.51 Who gets to enjoy the fruits of economic

Hydroelectricity 41,267.43 15.42
activity?
Is the distribution of income and wealth
fair and equitable?
Renewable energy source 31,692.14 11.84

Who gets the high incomes?

Natural Gas 23,062.15 8.61

Will society provide minimum

Nuclear 5,780.00 2.16

Oil 1,199.75 0.44

consumption to the poor?
Total 267,637.35

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World Development Indicators:

India - income distribution (2005) Distribution of income or consumption
Income share held by highest 20% 45.34 India: percentage share of income/consumption
Income share held by second 20% 11.27 Reference year :2009

Lowest 10% 3.5

Income share held by lowest 20% 8.08 Lowest 20% 8.2
Second 20% 11.8
Third 20% 15.2
Income share held by highest 10% 31.13
Fourth 20% 20.5
Income share held by lowest 10% 3.64
Highest 20% 44.2
Highest 10% 30%
Percent of population living on less than $1 a day 44.2%
Percent of population living on less than $2 a day 86.2% Gini Index: 33.9
http://wdi.worldbank.org/table/2.9

Institutions for Allocation of Resources: Institutions for Allocation of Resources:

Decentralization vs. Centralization
Institutions define a societys procedures
for allocating resources
The term "institution" commonly applies
to both informal institutions such as
customs, or behavior patterns important
to a society, and to particular formal
institutions created by entities such as
the government and public services.
Decentralization vs. Centralization
In a communist economy:
Economic decisions are highly centralized
The state owns and controls the means of production
and distribution
Example:
Foreign investors are not allowed to buy land
in China. The land in China belongs to the
state and the collectives.

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Institutions for Allocation of Resources:
Decentralization vs. Centralization
A land user obtains only the land use
right, not the land or any resources in or
below the land.
A land grant contract shall be entered
into between the land user and the land
administration department of the peoples
government at municipal or county level.
Institutions for Allocation of Resources:
Decentralization vs. Centralization
No economy is completely centralized or
decentralized; all economies are a
combination of both.
Examine statistics on the size of
government for a rough measure of
centralization
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Institutions for Allocation of Resources:
Decentralization vs. Centralization
In a capitalist economy:
Means of production are owned and
controlled by and for the benefit of private
individuals
Resources are allocated by voluntary
trading among businesses and consumers
There is decentralization of decision-making
Mixed economies
Almost every society today is a mixed
economy, with elements of market and
command
Even in the capitalist economies,
governments play a very large role in the
economy
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Country Tax burden % GDP Govt. expend. % GDP

Belgium 44.0 53.3
Canada 31.0 41.9
China 19.0 23.9
Denmark 48.1 57.6
France 44.2 56.1
Germany 37.1 45.4
Hungary 35.7 49.4
Iceland 36.0 47.3
India 7.0 27.2
2014 Italy 42.9 49.8
Japan 27.6 42.0
Netherlands 38.7 49.8
New Zealand 31.7 47.5
Norway 43.2 43.9
Singapore 13.8 17.1
South Africa 27.3 32.1
Spain 31.6 45.2
Sweden 44.5 51.2
Switzerland 28.5 33.8
United Kingdom 35.5 48.5
United States 25.1 41.6

Markets What is a Market?

Markets are the most common form of In microeconomics, a market is:

economic decentralization
Markets are economic institutions that
provide people with opportunities and
procedures for buying and selling goods
and services
May be governed by explicit rules (e.g.,
NYSE) or by custom (e.g., open bazaar)
1-27
Associated with a single group of closely
related products
Products belong to the same market
when they are highly interchangeable
Some markets may be worldwide
Some markets may operate over time
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Characteristics of Markets Economic Motives

Markets include buyers and sellers Need to understand individual motives to

Often, but not always, sellers are companies
and buyers are individuals
Trade in modern markets is usually governed
by price, the rate at which someone can swap
money for a good
Markets can function only if a system of
transferable property rights is established and
enforced
determine what choices they will make
Assume people are motivated by self-interest:
Desire for goods and services
Can include possibility that someone might care
about someone elses well-being
Same motivation even if acting as consumer,
firm, or employee

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Positive Economic Analysis Normative Economic Analysis

Positive economic analysis: addresses factual Normative economic analysis: addresses
questions, typically about economic choices or
market outcomes questions that involve value judgments
What did happen? What will happen? What would concerning the allocation of resources
happen?
Historical fact-finding What ought to happen?
Forecasting Turn normative questions into positive
Cause-and-effect analysis of actions and their
consequences questions using the principle of individual
Stick to objective facts and avoid value sovereignty
judgments

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Positive vs normative questions Microeconomics and Macroeconomics

Positivequestions
Howmuchwoulditcosttoprovidefreecheckupsanddrugsfor
everyoneinapopulation?
Microeconomics: concerns individual
Dostrictpatentprotectionsfornewdrugsspurinnovation? decision making and its collective effect
Howmuchwouldconsumerssaveifdoctorswerenotrequiredto
havemedicaldegreesormedicallicenses? on allocation of a societys resources
Wouldataxonsaturatedfatmakeanationhealthier?
Macroeconomics: concerns aggregate
Normativequestions phenomena: booms and busts, the pace
Doeseveryonedeserveaccesstohealthcare,eveniftheycannotpay?
Shouldpeoplebecompelledtopurchaseinsurance?
of economic growth, the rate of
Whenisitethicaltodenycaretoadyingpatient? unemployment.
Shouldthegovernmentbancertainunhealthyfoods?
Much of modern macroeconomics
Economicreasoningcannot answernormativequestions,butitcan
answerpositivequestions,andthatcanhelpusformopinions
involves applications of microeconomics
aboutnormativequestions. 1-34

Scope of Microeconomics

Broad definition of resources, not just about

money (time, for example)
Range of topics is extremely wide:
Marriage
Crime
Addiction
Environment
Many ways decisions by many individuals
combine to produce social outcomes

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