Introduction to Microeconomics
Microeconomics COMC 12264
Academic Year - 2022/23
Dr. Tishani Herath
Department of Commerce and Financial Management
University of Kelaniya
Learning Outcomes
ü Define Economics and identify the nature of Economics.
ü Illustrate key concepts of scarcity, opportunity cost and
problems in a society and their applicability in decision-making
process.
ü Outline the methodology of positive economics.
ü Discuss the uses and limitations of microeconomic theories.
ü Discuss how economic principles and analytical tools are
important to the business world.
What is ‘Economics’?
ü Economics is a social science.
⎼ Economics as a social science studies people's economic
behaviour and economic phenomena.
ü Economics is a social science concerned with making optimal
choices under conditions of scarcity.
⎼ Economic wants exceed society’s productive capacity.
What is ‘Economics’?
ü Economics deals with the allocation of scarce resources among
alternative uses to satisfy human wants.
− Resources are scarce
− Resources have alternative uses
− Resources satisfy human wants
ü Economics is, fundamentally, the study of how people allocate their
limited resources to their alternative uses, to produce and consumer
goods and services and to satisfy their endless wants or to maximize
their gains.
Need for Economics
ü Human wants are unlimited
ü Resources available to satisfy human wants are scarce
ü People want to maximize their gains
Money; Is it a resource?
ü Is it a capital?
− Money is not capital because it does not produce
anything.
ü Then what’s its role?
− It simply facilitates the exchange of goods &
services
Scope of Economics
ü The scope refers to the range of subject matters.
ü How do we understand the scope of economics
− Economic theory
− Models
− Analysis
− Policy concerns
− Sub-disciplines in economics
Scope of Economics
Theory Model Policy Analysis
Result of scientific An abstraction from Concerns with Investigation of the
investigation of reality. It represents controlling or component parts of a
economic reality in a simplified influencing whole & their
phenomenon & form economic behaviour relations in making up
involves generalizing chosen for the the wholes
about economic purpose of study
behaviour
Sub-disciplines in economics
Managerial, labour, Institutional, International, Agricultural,
Environmental, Health, education, Public Sports & Business etc.
Is Economics a finished science?
ü “Economics is still a very young science and many problems in it are
almost untouched”
Charles Schultz
ü “Economics is an unfinished science”
Zeuthen
Is Economics a finished science?
ü Boundaries of economic science are not yet precisely marked nor
can it be.
ü Therefore, the subject matter of economics continues to grow and
expand in scope, size and character right from the days of its
founders, Adam Smith, to date.
Microeconomics Vs Macroeconomics
Microeconomics
? Studies economics phenomena at micro level.
? Branch of economics that deals with the behavior of individual
economic units as well as the markets.
Macroeconomics
? Studies economics phenomena at macro level.
? Branch of economics that deals with aggregate economic variables,
such as the level and growth rate of national output, interest rates,
unemployment, and inflation.
Economics: A Positive Science or Normative Science?
Economics: A Positive Science or Normative Science?
ü Microeconomics is both a positive and a normative science.
ü But microeconomics is, fundamentally, a positive science.
Methodology of Positive Economics
? Specifying the problem
– Example: Effect of increase in petrol prices
on the demand for cars
? Formulating hypothesis
? Making assumptions
? Collection of relevant data
? Analysis of data
? Testing the validity of predictions
Economic Principles
ü Generalizations
ü Assumption of ‘Other-things-remains constant’
ü Ceteris Paribus Condition
ü Graphical expression
Partial Equilibrium and General Equilibrium
? General equilibrium analysis, on
the other hand, studies the behavior
of all individual decision-making
units and all individual markets,
simultaneously.
? Partial equilibrium analysis is
the study of the behavior of
individual decision-making units
and the working of individual
markets, viewed in isolation.
Uses of microeconomics theories
ü Explain the economic behaviour of individual decision-makers
ü Establish cause-and-effect relationship
ü Contribute to formulate economic policies
ü Use in business decision making process
ü Provide the basis for formulatingpropositions that maximize
the social welfare.
The Economic Perspective
ü Scarcity & Choice.
ü Opportunity Cost.
ü Purposeful behaviour to increase utility
ü Marginal Analysis.
The Economic Perspectives: Scarcity & Choice
ü Resources are scarce
ü Choices must be made
ü Opportunity Cost
ü “There is no free lunch”
Opportunity Cost
The Economic Perspective: Purposeful Behaviour
ü Rational self-interest
ü Individuals and utility
ü Firms and profits
ü Desired outcome
The Economic Perspectives: Marginal Analysis
ü Marginal benefit
ü Marginal cost
ü Comparison between marginal benefit and marginal cost
The Economic Perspectives: The Economizing Problem
ü Limited income and unlimited wants
ü The budget line
ü Attainable and unattainable combinations
ü Trade-offs and opportunity cost
Themes of Microeconomics: Trade-offs
Consumers
− Consumers have limited incomes, which can be spent on a wide variety
of goods and services or saved for the future.
Workers
− Workers also face constraints and make trade-offs.
− First, people must decide whether and when to enter the
workforce.
− Second, workers face trade-offs in their choice of employment.
− Finally, workers must sometimes decide how many hours per
week they wish to work, thereby trading off labor for leisure.
Themes of Microeconomics : Trade-offs
Firms
− Firms also face limits in terms of the kinds of products that they can produce
and the resources available to produce them.
All the trade-offs are based on prices faced by consumers, workers, or firms.
Microeconomics & Managerial Decisions
ü The Business Firms;
− Combine and organize resources for the purpose of producing
goods and/or services for sale.
− Internalize transactions, reducing transaction costs.
− Primary goal is to maximize the wealth or value of the firm
ü Value of the Firm
− Economic theory assumes that the primary goal of managers is to maximize the
value of the firm.
− The present value of all expected future profits
Microeconomics & Managerial Decisions
? Constraint Optimization
− Resource constrains
− Labour (skilled), raw material etc
− Legal constrains
− Minimum wage laws, health & safety standards, pollution
emission stds etc.
− Purpose of a firm is to maximize wealth or the value of the firm
subject to the constrains it faces i.e. CONSTRAINED
OPTIMIZATION.
Microeconomics & Managerial Decisions
Thank You