Introduction to Microeconomics Meaning of Microeconomics Microeconomics is

Introduction to Microeconomics

Meaning of Microeconomics � Microeconomics is the study of the economic actions of individuals and small group of individuals � Household , Investor, Firms, Industries, etc � How and why these units makes decisions? � It is also called price theory � “Microeconomics studies the economic decisions making of firms and individuals in a market setting: it is the study of the economy in a small” – Roy J Ruffin � Microeconomic studies how business firms operate under different competitive conditions, and how the combined actions of buyers and sellers determine prices in a specific market.

�According to Prof. K. E. Boulding, "Micro Economics is the study of particular firm, particular household, individual prices, wages, incomes, individual industries and particular commodities. "

Subject Matter or Scope of Microeconomics �Commodity Pricing – Demand Theory and Supply Theory �Factor Pricing – Rent, Wages, Interest, Profit �Welfare theory – What to produce? How to produce? When to produce? For whom it is to be produced?

Importance of Microeconomics �To understand the working of economy �Price determination and allocation of resources �Helpful in analyzing and framing economic policy �Optimum utilization of factors of production �Linear programming �Predicting �Helpful to managerial decision making �Basis of welfare economics �Field of international trade

Limitations of Microeconomics �Assumption of full employment �Free enterprise economy �Complex economic activity �Inadequate and misleading

Free Goods and Economic Goods �The free good is a term used in economics to describe a good that is not scarce. Free good is available in as great a quantity as desired with zero opportunity cost to society �A consumable items that is useful to people but scarce in relation to its demand so that human efforts is required to obtain it.

Price and Value �Price is the amount you pay. Value is what the product or service pays you �This value could be measured in financial terms, emotional terms, physical terms, or in any number of other ways. If you enjoy working out at a gym, the fulfillment you receive back from the $50 per month you spend on your membership makes the expense worth it. If some software you purchase costs $99, but saves you $250 per month and four hours of work per week, it’s value is demonstrated in more free time and greater cash flow.

Characteristic of Human Wants � Wants are unlimited � A particular want is satiable � Wants are complementary � Wants are competitive � Wants are alternative � Wants vary with time, place and person � Wants vary in urgency and intensity � Wants multiply with civilization � Wants are recurring � Wants changes with habits � Wants are influenced by income, salesmanship and advertisement � Wants are the result of customer convention � Present wants are more important than future wants

Classification of Wants �Necessaries �Comforts �Luxuries

Production Possibility Curve �Prof. Samuelson �Problem of choosing and allocating scarce resources among alternative uses �Production Possibility Curve shows the menu of choice among which a society can choose to substitute one good for another assuming a given state of technology and given total resources �Production possibility curve illustrate three concepts : Scarcity, choice and opportunity cost

�Assumptions: �Two goods �Full employment �Fixed resources which can be re-allocated �Given state of technology �Short time period

�Uses of Production Possibility Curve � 1. The notion of scarcity � 2. The problem of choice � 3. Solution of central problems

Economic System �An economics system consists of those institutions which a given people or nations or group of nations has chosen or accepted as the means through their resources are utilized for the satisfaction of human wants

The Functions of Economic System �It as to decide what things should be produced �It has to decide how things are to be produced �It should make optimum use of available resources �It has to distribute the total product properly �It should maintain economic progress and growth

Free Market Economy �Buyers and sellers are solely responsible for choices they make �Absolute power to prices to determine the allocation and distribution of good and services �Prices fixed by forces of demand supply �Free trade without any tariff or subsidies by government �Role of government is limited to controlling of law and order �No role of government in price determination �Capitalist economy

Planned Economy �No private property �Nationalization of means of production �Planning for economic development �Socialist �More equitable distribution of income and wealth �Central authority to make economic decisions

Mixed Economy �Combinations of advantages of capitalism and socialism �Social ownership of factors of production along with private ownership �Privately owned means of production are effectively regulated by state through the various instruments like fiscal, monetary and trade policies

India as Mixed Economy �Dominant private sector �Decisive role of the market mechanism �Presence of large public sector �Economic Planning �Failed to prevent concentration of economic power and opportunities �Duplicity and Multiplicity among public and private sector �Regulatory mechanism has failed to allocate the resources

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