BASIC CONCEPTS OF MICROECONOMICS

LEC 2

LEARNING FOR TODAY

Problems of the economy and their solution

Microeconomics and macroeconomics

Concepts:

- Rationality
- Marginalism

- opportunity cost
- General and partial equilibrium

Problems of the economy

What to produce?

How to produce?

For whom to produce?

LAND, LABOR, CAPITAL & ENTERPRISE

SELL GOODS AND SERVICES

BUY GOODS AND SERVICES

RENT, WAGES,INTEREST, PROFIT

Economic systems
FREE MARKET SYSTEM

COMMAND OR PLANNED SYSTEM

MIXED ECONOMY

MICROECONOMICS V/S MACROECONOMICS

Micro has been derived from GREEK word MIKROS which mean small . It is a study of the individual units of economic system . In other words a small part of economy & not the whole economy .

Prof.Boulding , micro economics seeks to explain the working of individuals, firms, households, individual prices, wages, particular industries .

 Merits :
A worms eye view of a small specific unit. Formulating economic policies and scarce resources of the country. Achieve maximum output with minimum costs. It is helpful for macro economic studies.

Demerits
It does not give the correct pictures of the working of the economy . It does not provide solution to certain economic problems The area of study covered by it is limited . It cannot be abruptly applied to the study of macro economic problems .

MACROECONOMICS
Macro is been derived from the Greek word MAKROS which means LARGE .

Macro economic is the study of large part of the economy i.e., The
whole economy. The study of economic behavior of the economy as a whole & not the individual economic units of the economy. Prof. Boulding , Marco economics deals not only with individual quantities but with the aggregates of these quantities , not with the individual incomes , but with national income , not with individual prices , but with prices level , not with individual outputs but with the national output .

 Merits :
A birds eye-view of the entire economy . Macro economic is more useful in solution to economy problems. It is quite helpful in formulation of GOVT. Economic policies. Study of macro economic is useful to micro economic studies.

Limitations :
The study of individual units becomes more useful than study of aggregates. It is useful for developed countries for solving their problems but less useful or undeveloped country. It studies the economy in general or in detail .

CONCEPTS
RATIONALITY Rationality is one of the most over-used words in economics.

Behavior can be rational, or irrational. So can decisions, preferences,

beliefs, expectations, decision procedures, and knowledge. Rationality ("wanting more rather than less of a good") is widely used as an assumption of the behavior of individuals in microeconomic models and analysis

"rationality" simply to mean that an individual acts as if balancing

costs against benefits to arrive at action that maximizes personal advantage

MARGINALISM
Marginalism refers to the use of marginal concepts in economic theory Marginalism has been criticized for being extremely abstract, as unobservable, immeasurable and

untestable.
Marginal utility

Marginal utility is subjective, as the value of an

additional unit of consumption is based on the

individual's circumstances

Opportunity cost
Opportunity cost is the cost related to the next-best choice available to someone who has picked between several mutually exclusive choices It is a key concept in economics. It has been described as expressing "the basic relationship between scarcity and choice

The notion of opportunity cost plays a crucial part in ensuring that

scarce resources are used efficiently Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered opportunity costs.

EXAMPLES
A person who has $15 can either buy a CD or a shirt. If he buys the shirt the opportunity cost is the CD and if he buys the CD the

opportunity cost is the shirt. If there are more choices than two, the
opportunity cost is still only one item, never all of them.

A person who decides to quit his or her job and go back to school to increase their future earning potential has an opportunity cost equal to

their lost wages for the period of time they are in school. Conversely,
if they elect to remain employed and not return to school then the opportunity cost of that action is the lost potential wage increase.

GENERAL EQUILIBRIUM
It seeks to explain the behavior of supply, demand and prices in a whole economy with several or many markets, by seeking to prove that equilibrium prices for goods exist and that all prices are at equilibrium, hence general equilibrium,

PARTIAL EQUILIBRIUM
partial equilibrium is a type of economic equilibrium, where the clearance on the market of some specific goods is obtained independently from

prices and quantities demanded and supplied in

other markets. In other words, the prices of all substitutes and complements, as well as income levels of consumers are constant.