MICROECONOMICS

Microeconomics (from Greek prefix mikro- meaning "small") is the study of the economic
action/behavior of individuals and small group of individuals.
This includes the study of particular households, commodities, firms, individual prices, wages,
incomes and individual industries.
MACROECONOMICS
Macroeconomics is the study of aggregates or averages covering the entire economy.
It focuses on broad issues such as growth of production, economic growth Rate, Inflation, the
number of unemployed people, economic Policy, government deficits, and levels of exports and
imports.
Law of Demand
If other things held constant, a higher price leads to a lower quantity demanded and that a lower
price leads to a higher quantity demanded.

Limitations of the Law of Demand

➢ Change in taste, fashion or preference
➢ Change in income
➢ Change in other commodity prices
➢ Price expectation
➢ Fear of shortage
➢ Giffen good*
*Giffen goods are non-luxury items which generate higher demand when prices rise, Examples
of Giffen goods can include bread, rice and wheat.
Law of Supply
The law of supply is the microeconomic law that states that, all other factors being equal, as the
price of a good or service increases, the quantity of goods or services that suppliers offer will
increase, and vice versa.

Limitations of Law of Supply

▪ Future Prices
▪ Agricultural Output
▪ Subsistence Farmers
▪ Closure of business
▪ Monopoly
▪ Competition
▪ Perishable Goods
Factors of Production
A factor of production may be defined as that goods or service which is required for production.
Four Factors-
• Land
• Labour
• Capital and
• Organization.
Normal goods
Normal goods is a type of a good which experiences an increase in demand due to an increase in
income, for which the opposite is observed. When there is an increase in a person's income, for
example due to a wage rise, a good for which the demand rises due to the wage increase, is
referred as a normal good.
Inferior goods
Inferior goods are those goods the demand for which falls with increase in income of the consumer.
So, there is an inverse relationship between income of the consumer and the demand for inferior
goods.
i.e. cheap cars, public transit options, inexpensive food etc.
Substitute and Complementary Goods
Substitute goods are alternatives for products or services that can be used for the same purpose by
consumers. That is, a consumer perceives both goods as similar or comparable, so that having
more of one good causes the consumer to desire less of the other good.
Complementary goods
Complementary goods are products that are typically used together and influence each other's
demand. They are goods that people tend to buy at the same time because they go well together or
enhance each other's use.
Difference between Substitute and Complementary Goods
What Is a Market Economy?

A market economy is an economic system in which the production of goods and services is
determined by supply and demand. In a market economy, interactions between consumers and
businesses determine what is available and at what price.

A market economy is an economic system in which the decisions regarding investment,

production, and distribution to the consumers are guided by the price signals created by the forces
of supply and demand.
The major characteristic of a market economy is the existence of factor markets that play a
dominant role in the allocation of capital and the factors of production.
Characteristics of Market Economy
• Supply and demand
The prices and quantities of goods and services are determined by supply and demand.
• Limited government intervention
The government's role is to provide stability, security, and basic regulation.
• Private ownership
Individuals and businesses own the factors of production, such as land, labor, and capital.
• Freedom of choice
Consumers can choose from a wide range of products and services at different prices.
• Competition
Firms compete with each other to maximize profits.
• Efficient market
Buyers and sellers have equal access to information about prices, supply, and demand.

What is National Income (NI)?

National income measures the total value of final goods and services produced within the economy
over a period of time.
It can be calculated in three main ways:
• The sum of factor incomes earned in production;
• Aggregate demand for goods and services;
• The sum of value added from each productive sector of the economy.
Why is NI important?
Measuring the level and rate of growth of national income (Y) is important to economists when
they are considering: – Know about economic growth and business cycle;– Changes to average
living standards of the population;– Looking at the distribution of national income.
Gross National Product (GNP)
Gross national product (GNP) is an estimate of the total value of all the final products and services
turned out in a given period by the means of production owned by a country's residents.
GNP is commonly calculated by taking the sum of personal consumption expenditures, private
domestic investment, government expenditure, net exports, and any income earned by residents
from overseas investments, then subtracting income earned by foreign residents.
GNP = GDP + Income earned by residents outside the economic territory - Income earned by non-
residents within the economic territory.
Net National Product (NNP)
• Net national product is the total value of finished goods and services produced by a
country's citizens overseas and domestically less depreciation.
• Gross domestic product is the most popular method to measure national income and
economic prosperity, although NNP is prominently used in environmental economics.
NNP=MVFG+MVFS−Depreciation
where:
MVFG=market value of finished goods
MVFS=market value of finished services
Alternatively, NNP can be calculated as:
NNP=Gross National Product−Depreciation

Cost-benefit (CB) ratio

• Also known as the benefit-cost ratio (BCR) or profitability index
• A financial metric that compares the costs and benefits of a project
• Used to determine if a project is financially viable
• Calculated by dividing the total expected benefits by the total expected costs
• A ratio greater than 1 indicates the project is financially viable
• A ratio less than 1 indicates the project may have financial risks
• Used to make informed financial decisions

Consumer Price Index (CPI)

A consumer price index (CPI) is a statistical estimate of the level of prices of goods and services
bought for consumption purposes by households. It is calculated as the weighted average price of
a market basket of consumer goods and services.
CPI can be performed as –
The "updated cost" (i.e. the price of an item at a given year, e.g.: the price of bread today) is divided
by that of the initial year (the price of bread in 1970), then multiplied by one hundred.
Monetary Policy
Monetary policy is the macroeconomic policy laid down by the Central bank. It involves
management of money supply and interest rate and is the demand side economic policy used by
the government of a country to achieve macroeconomic objectives like inflation, consumption,
growth and liquidity.
What are the objectives of the Monetary Policy?
The objectives are to maintain price stability and ensure adequate flow of credit to the productive
sectors of the economy.
Stability for the national currency (after looking at prevailing economic conditions), growth in
employment and income are also looked into. The monetary policy affects the real sector through
long and variable periods while the financial markets are also impacted through short-term
implications.

What is inflation?
❑ Inflation is the rate of increase in prices over a given period of time. Inflation is typically
a broad measure, such as the overall increase in prices or the increase in the cost of living
in a country.
❑ Inflation measures how much more expensive a set of goods and services has become over
a certain period, usually a year

❑ Inflation is a decrease in the purchasing power of money, reflected in a general increase in

the prices of goods and services in an economy.

❑ Inflation is a measure of how quickly prices for goods and services are rising in an
economy. Inflation can erode purchasing power, devalue currency, and make it harder to
save.

Effects of Inflation (Positive)

❑ Increased investment: When prices increase, businesses can make more money, which can
lead to more investment.
 ❑ Higher profits :Producers can sell their goods at higher prices, which can lead to higher
profits. Companies can increase their prices to match rising costs, which can lead to higher
profit margins.

❑ Increased production :Inflation can boost the production of essential goods. This can lead
to better revenues for producers.

❑ Debt relief : Debtors can pay their debts with money that is less valuable.

❑ Wage flexibility :Inflation allows for more flexibility in wages.

Nominal wages (not adjusted for inflation) can increase, even if real wages (adjusted for inflation)
remain constant. This can boost morale and productivity.

Effects of Inflation (Negative)

❑ Decreased purchasing power

Inflation makes it harder for people to buy goods and services, which can reduce consumer
spending.
❑ Increased cost of living
Inflation can strain households and lower their standard of living.
❑ Income inequality
Inflation can disproportionately affect lower-income individuals, as their wages may not adjust
quickly enough to offset rising prices.
❑ Disrupted investment
Inflation can reduce investment returns to zero, which can leave investors without the funds they
need to meet their financial goals.

Concept of Public Private Partnership (PPP)

PPP is a written long term contact between contracting authority and private party; where-

(a) private parties provides public works or services on behalf of contracting authority taking
appropriate risk allocation; and

(b) public party receives payment for services based on performance.

Key Features of PPP

Benefit of PPP

Limitations of PPP

Not all projects are suitable to be prepared as a PPP

• Complexity and risk allocation and ensure public interest safeguarding

• Relatively more time require for feasibility study
• Long-Term Commitments and political challenges
• Poor project preparation can significantly undermine a project’s VFM proposition
• Long term financing and may not financially viable without government support
Microcredit Vs Microfinance

Microcredit:

- It refers to the practice of providing small loans to individuals or groups who do not have
access to traditional banking services.

- Typically provided by NGOs or specialized microfinance institutions (MFIs).

- The loan size is usually small, and the interest rate is relatively high.

- Targeted towards low-income individuals or groups.

- Providing credit to help people start or grow small businesses.

- The loan repayment period is usually short.

Microfinance:

- It refers to a broader range of financial services, including savings and insurance, in

addition to credit.
 - Microcredit is one component of the overall field of microfinance.

Advantages of Microcredit:

• Access to credit: Microcredit programs provide access to credit for individuals who may
not have access to traditional forms of credit, such as those living in poverty or in
underbanked areas.
• Entrepreneurial opportunities: Microcredit can help individuals start or expand small
businesses, which can lead to increased income and job opportunities in their
communities.
• Empowerment: Microcredit can empower individuals, particularly women, by giving
them control over their own financial resources.
• Financial inclusion: Microcredit can help to increase financial inclusion by providing
financial services to those who may not have access to them otherwise.
Basics of Demography

❑ Demography is the statistical study of human populations. Demographers use census

data, surveys, and statistical models to analyze the size, movement, and structure of
populations.

❑ Demography examines the size, structure, and movements of populations over space and
time.

Does Bangladesh belong to a demography dividend country???

Yes, Bangladesh is currently experiencing a demographic dividend. This refers to the economic
growth potential that arises when a country's working-age population (15-64 years) is larger than
its dependent population (children and elderly).

Why Bangladesh is in the Demographic Dividend Phase:

1. Large Working-Age Population: Over 65% of Bangladesh's total population is in the

working-age group.

2. Declining Fertility Rate: The fertility rate has dropped significantly, reducing the number of
dependents.
3. Growing Labor Force: Millions of young people are entering the workforce every year.

4. Urbanization & Industrialization: The economy is shifting towards industry and services,
creating job opportunities.

5. Investment in Education & Skills: Government and private sectors are investing in human
capital development.

Challenges to Fully Utilize the Demographic Dividend:

Job Creation: Need for more employment opportunities to absorb the growing workforce.
Skill Development: A gap between industry needs and workforce skills.
Healthcare & Social Security: Ensuring a healthy workforce.
Women’s Participation: Increasing female labor force participation.