MICROECONOMICS

ECN 1013
1 YEAR 1
ST ST

SEMESTER
45 Hours
 This course is designed to help the students
to understand basic concepts and theories
in Microeconomics. On completion of this
course unit, students should be able to
identify and analyze the nature of
economics and the role of economic
systems, the nature of demand and supply
for a product or service, the nature of
production and cost and the outcome of
price and output in different market
structures.
 describe the nature of economics in dealing with the issue
of scarcity
 identify the key elements of the demand and supply model
and use the model to critically analyze real world examples
 define and apply the concept of elasticity
 analyze the behavior of consumers in terms of the demand
for products
 explain the economic behavior of individual firms in the
short run and long run
 evaluate the factors affecting firm behavior, such as
production and costs
 use microeconomic models to illustrate how prices and
output are determined in various market structures (perfect
competition, monopoly, imperfect competition)
 Introducing Economics
 Demand, supply, Equilibrium and

Government Intervention
 Theory of Consumer Behaviour
 Theory of Production
 Cost of Production and Profit Maximization

Principle
 Perfect competition and Monopoly
 Monopolistic competition and Oligopoly
 Ahuja H. L. Modern Micro Economic: Theory
and Application Revised Edition, 2006, S.
Chand & Company LTD.
 Salvatore Dominick, Micro Economic: Theory

and Application, 4th edition, Oxford Indian

Edition.
 Dwivedi D. N, Micro Economic: Theory and

Application, 2003, Pearson Edition

 Jeffray MPerloff, Micro Economics, 2nd

edition, Micro Economic, Pearson Edition

Asia.
 Teaching- Face to Face Lectures
Interactive Questions and Answers
Library sessions

 Evaluation- Continuous Assessment

Presentation
MCQ Exam
Mid- Semester
Final exam
Assessment:
Maximum Marks
1. Continuous Assessment
1. Tutorial, Presentation, and Quiz
Examinations and Assignments 20%
2 Mid Exam 15% 35%
2. Final Examination 65%
Total Marks 100%
 What is economics?
 Who is the father of economics?
 What is microeconomics?
 What are the three fundamental economic
problems?
 What is opportunity cost?
 What do you understand about market in
economics?
 What is elasticity of demand?
 What is great depression?
 What is the current economic growth of Sri
Lanka?
 What are the three major sectors which are
contributing GDP?
 Ms. J. Suresh
Senior Lecturer
Department of Economics
Why we want to study economics?
 Nowadays, understanding of economic
issues has become quite crucial for all
sections in the society.
 Everyone wants to get rich; wants to

increase their wealth holding; wants to have

hold over productive resources; wants to
expand their business activities; want to
earn more and more profits, etc… etc….
 People want to update their knowledge and

understanding of economic issues and take

advantage of that.
 Such understandings might be developed
through formal and informal methods of
learning.
 Most of the people learn informally in the

society through their experiences as they

get exposed to certain real life situations.
 However, those who want to make a career

in different dimensions, they need to learn

it formally. For this, they need to learn it
properly, that is possible through pursuing a
formal course structure. This gives them a
proper understanding of economics.
 It is very difficult to define economics because
economics is very dynamic subject.
 Its scope keeps on changing rather expanding.
 The word Economics is derived from the Greek
words “Oikonomia” meaning household
management .
 What wikipedia says?
“Economics is the social science that is
concerned with the production, distribution,
trade and consumption of goods and
services.
 “Economics aims to explain how economies work and how
economic agents interact. Economic analysis is applied
throughout society, in business, finance and government,
but also in crime, education, the family, health, law,
politics, religion, social institutions, war and science.
 Wealth Definition. Adam Smith
 Welfare Definition. Alfred Marshall
 Scarcity Definition. Lionel Robbins
 Father of Economics Adam Smith in his
book “ Wealth of Nations 1776” defined
economics is the study of wealth.
 J.B Say, J.S Mill, Walker, [Link] all agreed

that Economics is concerned with wealth.

 In this definition wealth is given first place,

man has given second place

 Walras in his book Elements of pure
economics “wealth definition is unscientific
one.”
 Economics is science of ills and not wealth.

 The definition of economics becomes quite

narrow. Such limited definition of economics
focusing around the wealth seems to
restrict the scope of economics as such.
 Alfred Marshall in his book “Principles of
Economic Science-1890” defined
Economics is the study of man kind in the
ordinary business of life.
 “Economics is one side a study of wealth;

and on the other side more important side

a part of study of man.
 He made economics is a science of human

welfare.
 Another economist A.C. Pigou has also

defined economics in terms of human

welfare.
 Restricted scope of economics –considered only
material goods.
 Robbins objected the word material and the
idea ‘welfare’. There are some goods which do
not promote human welfare. Ex. Liquors,
cigarettes.
 Welfare is subjective, it cannot be measured.
 Economics is neutral between ends. No way
concerned what is good and what is bad.
 Economics is not a social science. Robbins
regards as a human science.
 Lionel Robbins in his book ‘Nature and Significance of Economic Science -
1932 given scarcity definition.

 “Economic is the science which studies human behavior as a relationship

between ends and scarce means which have alternative uses.” ‘ends’
refer to human wants.

◦ Scarcity refers to our limited resources and our unlimited wants and
needs.
◦ For an individual, resources include time, money and skill.
◦ For a country, limited resources include natural resources, capital,
labour force and technology.
• Human wants are unlimited.
• We live in a world of limited resources. The above leads to scarcity.
• People try to balance needs and wants.
1. Unlimited wants.
2. Scarce means.
3. Means have alternative uses.
 Robbins included material and non

material goods, widens the scope of

economics.

 He made economics a positive science.

 His definition is universal.

 Scope means range or field of study.

(i)Economics – A Science and an Art

(ii)Economics - Positive and Normative

(a) Economics is a science:
By applying the characteristics of science,
we find that economics is a branch of
knowledge where the various facts relevant
to it have been systematically collected,
classified and analyzed.
(b) Economics is an art:
An Art is a system of rules for the
attainment of a given end.
“A science teaches us to know; an art
teaches us to do”.
Science and art are complementary to
each other and economics is both a science
and an art.
(a) Positive science:
it only describes what it is and normative science
prescribes what it should be.
positive science does not indicate what is good or
what is bad to the society.
it will simply provide results of economic analysis
of a problem.
 What are positive statements?
 Positive statements are objective
statements that can be tested, amended or
rejected by referring to the available evidence.
For Example.
 Higher interest rates will reduce house prices
 Cut-price alcohol has increased the demand for alcohol among
teenagers
(b) Normative science :
What are Normative Statements?
A value judgement is a subjective statement of opinion
rather than a fact that can be tested by looking at the
available evidence.
Normative statements are subjective statements – i.e. they
carry value judgements. For example:

• Pollution is the most serious economic

problem
• Unemployment is more harmful than
inflation
It prescribes what should be done to promote
human welfare and it also suggest how it can
be rectified. Therefore, economics is a
 Economics can be studied through:
(A) Traditional approach
(B) Modern approach
Economics is studied under five major divisions:
1. Consumption: Extracting utility from goods and services.
2. Production: Production of goods and services which
posses utility.
3. Exchange: means buying and selling of goods and
services. It is link between consumer and producer.
4. Distribution: Sharing of income by the four factors of
production.
5. Public finance : it studies how the government gets money
and how it spends it. Thus in public finance, we study
about public revenue and public expenditure.
 It divided into :
(i) Micro-economics
(ii) Macro-economics
The terms micro and macro derived from Greek.
 Mikros (small) and makros (large).
Micro means individualistic and macro

aggregative.
 Microeconomics is the study of particular
firms, households, individual prices and
particular commodity.
 Microeconomics is based on the assumption

of full employment and ‘ceteris paribus’

(other things remain constant).
 Microeconomics was popularized by David

Ricardo, Marshall, J.B Say and J.S Mill.

 Macroeconomics is the study of economic system as a
whole.
 Macroeconomics studies aggregates values like National
Income, National output, general price level, total
consumption, saving and investment of a country.
 J.M Keynes popularized macroeconomics
 Where microeconomics explain a tree in the forest, macro
economics explains all the trees in the forest.
 To study economics, two methods are there.
[Link] method
2. Inductive method.
 Deduction proceeds from general to
particular while induction proceeds from
particular to general.
1. This method deduces conclusions from the
truths established by other methods.
2. It involves the process of reasoning from certain
laws or principles which are assumed to be true,
to analysis of facts.
3. “Deduction as a descending process” in which
we proceed from a general to principle to
particular.
4. It as ‘a priori’ method and also called it abstract
and analytical method
5. Ricardo regarded as the first economist who
applied this method.
6. Ex; the law of diminishing returns.
 It is intellectual method, near to reality.
 This method is simple.
 The use of mathematics brings exactness.
 Universal validity.
1. This method based on assumptions.
2. Inadequate data.
3. Lerner criticised this method is simply
armchair analysis.
 This method involves the process of
reasoning from particular to general.
 It as an ‘ascending process’.
 This method involves four stages:

[Link]; 2. formation of hypothesis

[Link]; 4. verification.
 This method was introduced by German
historical school Roscher, Hillbrand, and
Fedric List.
1. This method proceeds from particular to
general, it is thus realistic.
2. Helps in future enquiries.
3. Statistical method.
4. Dynamic.
1. Statistical numbers can be misused and
misinterpreted.
2. Probable.
3. Time consuming and costly method.
4. Differ from investigator to investigator for
the same problem.