Micro Economics

[MNG 609]
Trupti Mishra
Shailesh J Mehta School Of
Management
IIT Bombay

Session Outline
1. What is Economics
2. Evolution of Economics
3. Review of Economic Terms

What is Economics ???

Derived from oikonomikos - "skilled in
household management
Deals with acquisition, control and
distribution of Resources within members
of a society

Session Outline
1. What is Economics
2. Evolution of Economics
3. Review of Economic Terms

Evolution of Economics From early Caveman

to now
Tools, 2,600,000BC
Fire, 590,000BC
Bow and arrow, 30,000 BC
Weighing scales, 5000BC
Wheel, 3500BC
Plough, AD100
Printing press, 1454
Telescope, 1608
Stock Exchange, 1611
Electricity, 1646
Steam Engine, 1794
Battery, 1800
Stethoscope, 1819
Sewing machine, 1830
Fax machine, 1843
Pneumatic tyre, 1845
Light bulb, 1848
IC engine, 1859
Qwerty keyboard, 1868
Dynamite, 1867
Telephone, 1876
Paper clip, 1892
Radio, 1895

Robot, 1921
Television, 1925
Pencilin, 1928
Nylon, 1934
Mobile phone, 1947
Credit card, 1950
Microchip, 1958
Fibre optic cable, 1966
The internet, 1969
Barcode, 1973
Personal Computer, 1977
GPS, 1978
iPod, 2001
Social media, 2001

A Short History of the Economy

Hunter-gatherer societies

No surplus
Very flat social structure

Slavery

Permanent agriculture allowed for a surplus to exist

This opened a social conflict over who controls it
Class divisions appear within society

Feudalism

A more sophisticated, subtle class structure

Peasants did the work, landlords collected surplus

Capitalism

Social structures evolved to match the needs of

new technology that produced much larger surplus

Surplus Aiding evolution of

Economics

Every economy must produce enough to keep

its participants alive, and to allow production to
continue next year.

Subsistence for the people.

Replace inputs to production (eg. seeds for next years
crop).

Production above and beyond this is the

economic surplus.

It can be consumed, invested, or wasted.

Control & use of the surplus is a key dimension of
economic organization.
Different economic systems do it differently.

Surplus Aiding evolution of

Economics (Contd)

Surplus Trade/Barter Exploring Foreign

land Ship Building Future Market
Tendency to conquer / safeguard the
resources e.g., Introduction to Army to
protect resources,

Colonization by British, Gulf War, South China

Sea

Historically, all conquests have been for

acquisition of resources in some form or
the other

Economics Example of POW !!!

Even if no currency, if there is a group of
people, Economy may have started. E.g
POW
Economic system develops from Peoples
drive to improve their welfare.

Various forms of Economic Systems

Ancient Economic thoughts (Aristotle,

Plato, Socrates)
Middles Ages
Mercantilists
Physiocrats
Market / Capitalist Economy
Command / Socialist Economy
Mixed Economy
Confederation

Common Aspects Irrespective of Type

of Economy

Work is the source of all value added, no

matter what the economic system
Humans learn by doing: as we work, we learn
how to work better (technology)
Social relationships and the organization of
our work change with technology
Every society which produces a surplus, must
decide who gets it, and what they do with it
Nothing in the economy is permanent
Attempts to portray capitalism as natural or
ever-lasting are ideological

The Economic Resources

Resources are Scarce !

Resources give us the means to produce and
distribute goods and services that satisfy
human needs and wants
The world is more or less fixed in size and
limited in it resources limits on what we
accomplish with the resources at our disposal.

The Economic Resources

Human wants are unlimited !

Contrast to Worlds physical limitation
Scarcity
Scarcity foundation to Economics
Economics is the way thinking about how
people individually and collectively in various
organization(including firms ) cope with
scarcity.

Key considerations in Economics

The key economic questions / problems ???

How do we decide what to produce (given
limited resources)
How we produce it (technology/process)
Our relationships to other people
How do we ensure stable prices and full
employment of our resources?
How do we provide a rising standard of living
both for ourselves and for future generations?

Economics is also in constant flux,

changing alongside the economy

Session Outline
1. What is Economics
2. Evolution of Economics
3. Review of Economic Terms

Economic Decisions for the Firm

What:
The product decision begin or stop providing
goods and/or services.

How:
The hiring, staffing, procurement, and capital
budgeting decisions.

For whom:
The market segmentation decision targeting
the customers most likely to purchase.

Three Processes

Three processes to answer what, how, and

for whom
Market Process:
use of supply, demand, and material incentives
Command Process:
use of government or central authority, usually
indirect

Traditional Process:
use of customs and traditions

Market/Capitalist Economy

In a pure market economy there is no government

involvement in economic decisions.
The government lets the market answer the following
three basic economic questions.
What? Consumers decide what should be produced in a
market economy through the purchases they make.
How? Production is left entirely up to businesses. Businesses
must be competitive in such an economy and produce quality
products at lower prices than their competitors.
For whom? In a market economy, the people who have more
money are able to buy more goods and services.

Based on Adam Smiths invisible hand principle

Examples: USA / European

Command / Socialist Economy

In a command economy the government

answers the three basic economic questions.
What? A dictator or a central planning
committee decides what products are needed.
How? Since the government owns all means of
production in a command economy, it decides
how goods and services will be produced.
For whom? The government decides who will
get what is produced in a command economy.
For e.g.: China, Mexico and former USSR

Mixed Economy
Private sector is allowed to use free
market within the broader political and
economic policy framework, public sector
reserves certain trade / industry /
services / activities
Example: The United States government is
involved in the economy through laws and
regulations governing businesses, and
provides socialistic programs, such as
welfare, Medicaid, and Medicare.

Confederation

Because of globalization
Example: European Union