Principles of Microeconomics

1. Principles of Microeconomics

2. Definition • Economics is the study of how people and societies use their scares resources to produce valuable goods and services and distribute them among different section of society.

3. Economics Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

4. Scarcity • means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Just as a household cannot give every member everything he or she wants, a society cannot give every individual the highest standard of living to which he or she might aspire.

5. Scarcity • Scarcity is situation in which goods are limited relative to desire. • Goods are offered is less than its required • Shortage – Demand greater than supply

6. MicroeconomicsMicroeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments.MacroeconomicsMacroeconomics is the study of the performance of the national and global economies.

7. Production Possibility Frontier-PPF • Production Possibility Frontier shows the maximum amounts of production that can be obtain by an economy, given its technological knowledge and quantity of inputs available.

8. Production Possibilities and Opportunity Cost • The production possibilities frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that cannot. • To illustrate the PPF, we focus on two goods at a time and hold the quantities of all other goods and services constant. • That is, we look at a model economy in which everything remains the same (ceteris paribus) except the two goods we’re considering.

9. Production Possibilities and Opportunity Cost • Production Possibilities Frontier • Figure 2.1 shows the PPF for two goods: CDs and pizza. • Any point on the frontier such as E and any point inside the PPF such as Z are attainable. • Points outside the PPF are unattainable.

10. Economic system • Market Economy • In market economy individuals and firms make major decisions about production and consumption. In market economy a system of price mechanism prevails. Firm adopt low cost of production techniques and fix prices in order to maximize their profit. In market economy price Mechanism plays an important role. In market economy what, how and for whom are three important elements.

11. Command Economy • In Command economy Govt. makes decisions about what to produce and how to distribute goods and services. All economic resources, such as land; capital and are owned by Govt. All workers are Govt. employees and are paid by Govt. for their services. All lands and factories controlled and managed by the Govt.

12. Mixed Economy • In mixed economy some sectors of economy are operated by Govt. while others are being managed by private sector. Govt. has an important role in proper functioning of market economy; Govt. enforces certain rules and regulations. Govt. focuses more attention on peace and order through police, better education and health services for the masses.

13. Two Big Economic Questions Two big questions summarize the scope of economics: • How do choices end up determining what, how, and for whom goods and services get produced? • When do choices made in the pursuit of self-interest also promote the social interest?

14. Two Big Economic Questions What, How, and For Whom? Goods and services are the objects that people value and produce to satisfy human wants. What? What we produce changes over time. Seventy years ago, almost 25 percent of Americans worked on farms. Today that number is 3 percent. Seventy years ago, 45 percent of Americans produced services. Today, almost 80 percent of Americans have service jobs.

15. Two Big Economic Questions Figure 1.1 shows the trends in what the U.S. economy has produced over the past 70 years. It shows the decline of employment in agriculture and in mining, construction, and manufacturing, and the expansion in services. Economics explains these trends.

16. Two Big Economic Questions How? Goods and services are produced by using productive resources that economists call factors of production. Factors of production are grouped into four categories: • Land • Labor • Capital • Entrepreneurship

17. Two Big Economic Questions The “gifts of nature” that we use to produce goods and services are land. The work time and work effort that people devote to producing goods and services is labor. The quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience. The tools, instruments, machines, buildings, and other constructions that are used to produce goods and services are capital. The human resource that organizes land, labor, and capital is entrepreneurship.

18. Two Big Economic Questions For Whom? Who gets the goods and services depends on the incomes that people earn. • Land earns rent. • Labor earns wages. • Capital earns interest. • Entrepreneurship earns profit.

19. Economic Coordination • To make coordination work, four complimentary social institutions have evolved over the centuries: • Firms • Markets • Property rights • Money

20. Economic Coordination • A firm is an economic unit that hires factors of production and organizes those factors to produce and sell goods and services. • A market is any arrangement that enables buyers and sellers to get information and do business with each other. • Property rights are the social arrangements that govern ownership, use, and disposal of resources, goods or services. • Money is any commodity or token that is generally acceptable as a means of payment.

21. Economic Coordination • Circular Flows Through Markets • A circular flow diagram, like Figure 2.8 on the next slide, illustrates how households and firms interact in the market economy.

22. Economic Coordination • Coordinating Decisions • Markets coordinate individual decisions through price adjustments.