Course Title Fundamental of microeconomics Course code and

Course Title : Fundamental of microeconomics Course code and number: ECON 260 Prepared by : A. A. Abougabal

Aims of the course: To provide undergraduates with • a wide knowledge of the most basic economic concepts and different models of microeconomics; • To introduce the students to consumer and firm behavior; to explain most basic demand supply neoclassical theory; and to deliver a solid understanding of markets and the meaning of pricing • To familiarize the students with the role of government in changing the economy's efficiency and to present basic concepts in mathematical formulae and graphs in a systematic manner; and to describe recent data and real-world examples

HISTORY OF ECONOMIC THOUGHT A 1638 painting of a French seaport during the heyday of mercantilism PREPERED BY : A. A. ABOUGABAL

1. Origin of Economics Our activities to generate income are termed as economic activities, which are responsible for the origin and development of Economics as a subject. The word economy comes from a Greek word for “one who manages a household. ” In fact, households and economies have much in common Economy is concerned with the production, consumption, distribution and investment of goods and services.

A household faces many decisions Who cooks dinner? Who does the laundry? Who gets the extra dessert at dinner? WHO AND ………. . Like a household, a society faces many decisions. A society must decide what jobs will be done and who will do them. WH 0 grow food, make clothing, and still others to design computer software

The management of society’s resources is important because resources are scarce. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms.

How the story begin

Science evolution New classical economics Classical political economy Modern economic Kenisian , post and new

History of economic thought Economic writings date from earlier Greek, Roman, Indian, Chinese, and Arab civilizations. Notable writers from antiquity through to the 14 th century include Aristotle, Xenophon, Chanakya (also known as Kautilya), Qin Shi Huang, Thomas Aquinas, and Ibn Khaldun.

Classical political economy

The period from 14 th to 17 th centuries The works of Aristotle had a profound influence on Aquinas, who in turn influenced the late scholastics of the 14 th to 17 th centuries and coming nearer than any other group to being the 'founders' of scientific economics” Then

Later, In Europe Two groups, called mercantilists" and " "physiocrats", were associated with the rise of economic nationalism and modern capitalism

Mercantilists" Versus Physiocrats", Mercantilism 16 th to 18 th century • It held that a nation's wealth depended on its accumulation of gold and silver Economic nationalism • The doctrine called for importing cheap raw materials to be used in manufacturing goods, which could be exported • for state regulation to impose protective tariffs on foreign manufactured goods and prohibit manufacturing in the colonies Physiocrats 18 th century French thinkers Modern Capitalism • Physiocrats believed that only agricultural production generated a clear surplus over cost, so that agriculture was the basis of all wealth • Physiocrats advocated replacing administratively costly tax collections with a single tax on income of land owners. • the physiocrats advocated a policy of laissez- faire, which called for minimal government intervention in the economy

Neoclasical economic analysis Modern economic analysis begun with Smith, he is a Scottish political economist and moral philosopher “ Adam Smith (1723– 1790) he was harshly critical of the mercantilists but described the physiocratic system "with all its imperfections”

Modern economic analysis The publication of Adam Smith's The Wealth of the first economic Nations in 1776, is considered to be formalisation of thought and has been described as "the effective birth of economics as a separate discipline. The book identified land, labor, and capital as the three factors of production and the major contributors to a nation's wealth.

" Smith theorem" Smith discusses potential benefits of specialization by division of labour, including increased labour productivity and gains from trade, whether between town and country or across countries His "theorem" that "the division of labor is limited by the extent of the market" has been described as the "core of a theory of the function of the firm and industry " and a "fundamental principle of economic organization. To Smith has also been ascribed "the most important substantive proposition in all of economics" and foundation of resource allocation theory – that, under competition, resource owners (of labour, land, and capital) seek their most profitable uses, resulting in an equal rate of return for all uses in equilibrium (adjusted for apparent differences arising from such factors as training and unemployment).

Smith represents every individual as trying to for t pro he sak fi e nec t, whic of emp essar h is y fo loyi n in d g cap r ome it indu stic al stry employ any capital they might command for positively related to the value of produce n w o r ge, i e th anta the adv hat of y t iet t o n soc “Invisible Hand”

Smith's invisible-hand concept Smith assumed that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship, society as a whole is better off. Furthermore, any government intervention in the economy isn't needed because the invisible hand is the best guide for the economy. He said that if the government doesn’t do anything, there’s a controlling factor of people themselves who can guide markets. I believe that the government should be responsible in defining the property rights, to set up honest courts, to impose minor taxes and to compensate for well defined “market failures”

Example - If I sell candies for 1 pound each and - other siller sells them for 2 pounds for 3 pieces, - he will get all the business making me lose mine - so in order to compensate for my loss I should be forced to lower my price as to stay alive in the business. - I am guided by an invisible hand which is my self interest to gain profit or as Adam Smith would say everyman for himself.

Thomas Robert Malthus (1798) Human population, tended to increase geometrically, while the production of food, increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labour. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level. [123] Malthus also blamed unemployment upon the economy's tendency to limit its spending by saving too much,

David Ricardo (1817) focused on the distribution of income among landowners, workers, and capitalists. Ricardo was the first to state and prove the principle of comparative advantage, according to which each country should specialize in producing and exporting goods in that it has a lower relative cost of production, rather relying only on its own production. It has been termed a "fundamental analytical explanation" for gains from trade.

John Stuart Mill (1848) Mill pointed to a distinct difference between the market's two roles: - allocation of resources - and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene.

Marxism The first volume of Marx's major work, Das Kapital, was published in German in 1867. Marx focused on the - labour theory of value held that the value of an exchanged commodity was determined by the labour that went into its production. - theory of surplus value. demonstrated how the workers only got paid a proportion of the value their work had created.

I- Neoclassical economics -Economics, the term “instead of political economy - Micro economics - Macro economics II- Modern economics - Economitrics - game theory - market frailer III – Keynesian , - post Kynesian - new kynesian

Neoclassical economics Alfered Marshall 1870 to 1910. Marginalism “ The term “Economics" was popularized by such neoclassical economists as Alfered Marshall l as a concise synonym for 'economic science' and a substitute for the earlier “ political economy ". [2] Neoclassical economics systematized Supply and demand as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income.

In neoclassical economics Micro economics • represents incentives and costs as playing a pervasive role in shaping and dicision making • the study of the choices of individual Macro economics • it is reflected in an early and lasting neoclassical synthesis with Keynesian macroeconomics • study of the national economy and the global economy as a whole.

Modern economics builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as • econometrics, • game theory, • market failure and imperfect competition, • neoclassical model of economic growth for analyzing long-run variables affecting national income.

Keynesian economics and Post-Keynesian economics John Maynard Keynes The General Theory of Employment, Interest and Money (1936), The book focused on determinants of national income in the short run

Keynesian , Post-Keynesian and new Keynesian economics New-Keynesian economics tend to share with other economists the emphasis on models Post- Keynesian economics, Joan Robinson concentrates on macroeconomic rigidities and adjustment processes. Keynesian economics, John Maynard Keynes The General Theory of Employment, Interest and Money (1936), which ushered in contemporary macroeconomic as a distinct field.

Post-Keynesian economics It is generally associated with the University of Cambridge and the work of Joan Robinson - concentrates on macroeconomic rigidities and adjustment processes. - Research on micro foundations for their models is represented as based on real-life practices rather than simple optimizing models.

New-Keynesian economics is also associated with developments in the Keynesian fashion. Within this group researchers tend to share with other economists the emphasis on models

What Economics is all about

2. What Economics is all about? Stages & Definitions of Economics Wealth Definition (Adam Smith) Welfare Definition (Ayred Marshall) Scarcity Definition (L. Robbins) Growth Oriented Definition (Samuelsons) Need Oriented Definition (Jacob Viner)

Wealth Concept: a. Wealth Concept: Adam Smith, who is generally regarded as father of economics, defined economics as “ a science which enquires into the nature and cause of wealth of nation”. He emphasized the production and growth of wealth as the subject matter of economics. Characteristics # Takes into account only material goods. Criticism of Wealth Oriented Definition: # Considered economics as a dismal or selfish science. # Defined wealth in a very narrow and restricted sense which considers only material and tangible goods. # Have given emphasis only to wealth and reduced man to secondary place in the study of economics.

Welfare Concept b. Welfare Concept : A. Marshall “Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of material requisites of well being. Thus, it is on one side a study of wealth; and on other; and more important side, a part of the study of man. According to Characteristics : - It is primarily the study of mankind. - Takes into account ordinary business of life – It is not concerned with social, religious and political aspects of man’s life. - Emphasize on material welfare as the primary concern of economics i. e. , that part of human welfare which is related to wealth.

Criticisms: - treating economics as a social science rather than a human science, thus welfare definition restricts the scope of economics to the study of persons living in organized communities only. - Criticized because of the distinction made between economic and non-economic. - Welfare in itself has a wide meaning which is not made clear in definition.

Scarcity Concept C. According to Lionel Robbins: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternate uses” Characteristics - Economics is a positive science. - Unlimited ends ( wants ). - Scarce means. - Alternative use of means. - Choice – study of human behavior.

Superiority over Welfare Definition : - Tried to bring the economic problem which forms the foundation of economics as a social science. - The scarcity definition of economics is most universal in nature. - Has taken both sciences in account i. e. Social and Human. - It takes into account all human activities. - Consideration of neutral science was considered much logical. .

Criticism: - His definition does not focus on many important economic issues of cyclical instability, unemployment, income determination and economic growth and development. - Does not take into account the possibility of increase in resources over time. - Has treated economics as a science only. But in fact it is both a science and an art

D. Growth/Development Concept D According to Prof. Samuelson “Economics is the study of how men and society choose with or without the use of money, to employ the scarce productive resources which have alternative uses, to produce various commodities over time and distribute them for consumption now and in future among various people and groups of society. .

Characteristics - The definition is not merely concerned with the allocation of given resources but also with the expansion of resources, tries to analyze how the expansion and growth of resources to be used to cope with increasing human wants. - More dynamic approach. - According to him problem of resource allocation is a universal problem whether it is a better economy or an exchange economy. Criticism: Definition is comprehensive in nature as it is both growth oriented as well as future oriented

E. Need Oriented Definitions According to Jacob Viner “Economics is what economists do” A good definition of economics Study of choice under conditions of scarcity Situation in which the amount of something available is insufficient to satisfy the desire for it

Definition Wealth Welfare Scientist Adam Smith Ayred Marshall Scarcity Growth Oriented Need Oriented Robbins) Samuelsons Jacob Viner Economics is a study of

Economics is a study of Wealth science which enquires into the nature and cause of wealth of nation” Welfare mankind in the ordinary business of life; it is on one side a study of wealth; and on other; side, a part of the study of man. Scarcity science which studies human behavior as a relationship between ends and scarce means which have alternate uses Growth oriented study of how men and society choose the use of money, to employ the scarce productive resources which have alternative uses, to produce various commodities over time and distribute them for consumption now and in future among various people and groups of society. Need Oriented Economics is what economists do”

Characteristic s Criticism Wealth Takes into account only material goods -Considered economics as a selfish science. -Defined wealth narrow sense which considers only material and tangible goods. - emphasis only to wealth and reduced man to secondary place in the study of economics. Welfare - the study of mankind -Takes into account ordinary business of life - concerned with social, religious and political aspects of man’s life. - Emphasize on material welfare as. , that part of human welfare which is related to wealth. - restricts the scope of economics to the study of persons living in organized communities only. - distinction made between economic and non-economic. - Welfare in itself has a wide meaning which is not made clear in definition.

Characteristic s Criticism Scarcity Economics is a positive science. Unlimited ends ( wants ). -Scarce means. Alternative use of means. - Choice , study of human behavior. -does not focus on important i. e , issues of unemployment, income determination economic growth and development. -Does not take into account the possibility of increase in resources ove time. - Has treated economics as a science only. But in fact it is both a science and an art Growth Oriented - not merely concerned with the allocation of given resources but also with the expansion of resources. -More dynamic approach -problem of resource allocation is a universal problem - comprehensive in nature as it is both growth oriented as well as future oriented Study of choice under conditions of scarcity A good definition of economics Need Oriented

Notes Remember - What is the Smith's invisible-hand concept - the difference between the 5 definition of economics Study well the main characteristics' criticism of each and Make a comparison between Keynesian post and new approaches

GOOGLE Gregory Mankiw microeconomics ppt Select , FIRST CHOICE , Mankiw 3 e micro power point Ashgan Abou Gabal , room # G 27

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