Prepared by : A . A . Abougabal

Course Title : Fundamental of microeconomics Course code and

number: ECON 260

To provide undergraduates with • a wide knowledge of the most basic economic

concepts and different models of microeconomics;

• To introduce the students to consumer and firm behavior; to explain most basic demand and supply neo-classical theory; and to deliver a solid understanding of markets and the meaning of pricing

• To familiarize the students with the role of government in changing the economy's efficiency and to present basic concepts in mathematical formulae and graphs in a systematic manner; and to describe recent data and real-world examples

Aims of the course:

HISTORY OF ECONOMIC THOUGHT

PREPERED BY : A.A.ABOUGABAL

A 1638 painting of a French seaport during the heyday of mercantilism

1 .Origin of Economics

Our activities to generate income are termed as economic activities, which are responsible for the origin and development of Economics as a subject.

The word economy comes from a Greek word for “one who manages a household.”

In fact, households andeconomies have much in common

Economy is concerned with the production, consumption, distribution and investment of goods and services.

A household faces many decisions Who cooks dinner? Who does the laundry? Who gets the extra

dessert at dinner? WHO AND WHO AND ………..

Like a household, a society faces many decisions. A society must decide what

jobs will be done and who will do them.

WH0 grow food, make clothing, and still others to design computer software

The management of society’s resources is important because resources are scarce.

Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have.

In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms.

How the story begin

Science evolution

Classical political economy

Modern economic

New classical economics

Kenisian ,post and new

History of economic thought

Economic writings date from earlier Greek, Roman, Indian, Chinese, and Arab civilizations .

Notable writers from antiquity through to the 14th century include

Aristotle ,Xenophon ,

Chanakya( also known as Kautilya,) Qin Shi Huang ,

Thomas Aquinas ,and Ibn Khaldun.

Classical political economy

The period from 14th to 17th centuries

The works of Aristotle had a profound influence on Aquinas, who in turn influenced the late scholastics of the 14th to 17th centuries and coming nearer than any other group to being the 'founders' of scientific economics”

Then

"mercantilists" and "physiocrats",

were associated with the rise of

economic nationalism and modern capitalism

Later, In EuropeTwo groups, called

Mercantilists" Versus Physiocrats ,"

Mercantilism 16th to 18th centuryEconomic

nationalism

•It held that a nation's wealth depended on its accumulation of gold and silver•The doctrine called for importing cheap raw materials to be used in manufacturing goods, which could be exported•for state regulation to impose protective tariffs on foreign manufactured goods and prohibit manufacturing in the colonies

Physiocrats18th century French

thinkers

Modern Capitalism

• Physiocrats believed that only agricultural production generated a clear surplus over cost, so that agriculture was the basis of all wealth

• Physiocrats advocated replacing administratively costly tax collections with a single tax on income of land owners.

• the physiocrats advocated a policy of laissez- faire, which called for minimal government intervention in the economy

Neoclasical economic analysis

Adam Smith (1723–1790) he was harshly critical of the mercantilists but described the physiocratic system "with all its imperfections”

Modern economic analysis begun with Smith, he is a Scottish political economist and moral philosopher “

Modern economic analysis

The publication of Adam Smith's The Wealth of Nations in 1776, is considered to be the first formalisation of economic thought and has been described as "the effective birth of economics as a separate discipline.

The book identified land, labor, and capital as the three factors of production and the major contributors to a nation's wealth.

"Smith theorem "Smith discusses potential benefits of specialization by

division of labour, including increased labour productivity and gains from trade, whether between town and country or across countries

His "theorem" that "the division of labor is limited by the extent of the market" has been described as the "core of a theory of the function of the firm and industry " and a "fundamental principle of economic organization.

To Smith has also been ascribed "the most important substantive proposition in all of economics" and foundation of resource allocation theory – that, under competition, resource owners (of labour, land, and capital) seek their most profitable uses, resulting in an equal rate of return for all uses in equilibrium (adjusted for apparent differences arising from such factors as training and unemployment).

Smith represents every individual as trying to

employ any

capital they

might command for

positively

related to the

value of produce

their own

advantage,

not that of the society

for the sake of profit, which is

necessary for

employing capital

in domestic industry“Invisible Hand”

Smith's invisible-hand concept

Smith assumed that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship, society as a whole is better off.

Furthermore, any government intervention in the economy isn't needed because the invisible hand is the best guide for the economy.

He said that if the government doesn’t do anything, there’s a controlling factor of people themselves who can guide markets.

I believe that the government should be responsible in defining the property rights, to set up honest courts, to impose minor taxes and to compensate for well defined “market failures”

Example- If I sell candies for 1 pound each and - other siller sells them for 2 pounds for 3

pieces,- he will get all the business making me lose

mine- so in order to compensate for my loss I

should be forced to lower my price as to stay alive in the business.

- I am guided by an invisible hand which is my self interest to gain profit or as Adam Smith would say everyman for himself.

Thomas Robert Malthus( 1798)Human population, tended to increase

geometrically, while the production of food, increased arithmetically.

The force of a rapidly growing population against a limited amount of land meant diminishing returns to labour.

The result, he claimed, was chronically low wages,

which prevented the standard of living for most of the population from rising above the subsistence level.[123]

Malthus also blamed unemployment upon the economy's tendency to limit its spending by saving too much,

David Ricardo( 1817)focused on the distribution of income among

landowners, workers, and capitalists.

Ricardo was the first to state and prove the principle of comparative advantage, according to which each country should specialize in producing and exporting goods in that it has a lower relative cost of production, rather relying only on its own production.

It has been termed a "fundamental analytical explanation" for gains from trade .

John Stuart Mill( 1848)Mill pointed to a distinct difference between the

market's two roles: - allocation of resources - and distribution of income.

The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene.

MarxismThe first volume of Marx's major

work, Das Kapital, was published in

German in 1867. Marx focused on the - labour theory of value held that the value of an

exchanged commodity was determined by the labour that went into its production .

- theory of surplus value.demonstrated how the

workers only got paid a proportion of the value their work had created.

II- Modern economics- Economitrics - game theory - market frailer

I- Neoclassical economics -Economics, the term “instead of political economy - Micro economics- Macro economics

III – Keynesian , - post Kynesian - new kynesian

Alfered Marshall 1870 to 1910. Marginalism “

Neoclassical economics

The term “Economics" was popularized by such neoclassical economists as Alfered Marshall l as a concise synonym for 'economic science' and a substitute for the earlier “ political economy ".[2]

Neoclassical economics systematized Supply and demand as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income.

It dispensed with the labour theory of value inherited from classical economics in favor of a marginal utility theory of value on the demand side and a more general theory of costs on the supply side.[132]

In the 20th century, neoclassical theorists moved away from an earlier notion suggesting that total utility for a society could be measured in favor of ordinal utility, which hypothesizes merely behavior-based relations across persons.

Micro economi

cs

• represents incentives and costs as playing a pervasive role in shaping and dicision making

• the study of the choices of individual

Macro economi

cs

• it is reflected in an early and lasting neoclassical synthesis with Keynesian macroeconomics

• study of the national economy and the global economy as a whole.

In neoclassical economics

Modern economics Modern economics builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as •econometrics, •game theory,•market failure and imperfect competition,•neoclassical model of economic growth for analyzing long-run variables affecting national income.

Keynesian economics and - Post Keynesian economicsJohn Maynard Keynes

The General Theory of Employment, Interest and Money (1936),

The book focused on determinants of national income in the short run

New-Keynesian economicstend to share with other

economists the emphasis on models -Post

Keynesian economics ,Joan Robinson

concentrates on macroeconomic rigidities

and adjustment processes.

Keynesian economics ,John Maynard Keynes

The General Theory of E, mployment Interest and

Money( 1936 ,)

which ushered in contemporary

macroeconomic as a distinct field .

Keynesian,Post-Keynesian and new Keynesian economics

- Post Keynesian economics

It is generally associated with the University of Cambridge and the work of

Joan Robinson - concentrates on macroeconomic rigidities and adjustment processes.

- Research on micro foundations for their models is represented as based on real-life practices rather than simple optimizing models.

- New Keynesian economics

is also associated with developments in the Keynesian fashion. Within this group researchers tend to share with other economists the emphasis on models

What Economics is all about

2. What Economics is all about?

Stages & Definitions of Economics

Wealth Definition

(Adam Smith)

Welfare Definition

(Ayred Marshall)

Scarcity Definition

(L. Robbins)

Growth Oriented Definition

(Samuelsons)

Need Oriented Definition

(Jacob Viner)

a.Wealth Concept:

Adam Smith, who is generally regarded as father of economics, defined economics as “ a science which enquires into the nature and cause of wealth of nation”. He emphasized the production and growth of wealth as the subject matter of economics.

Characteristics # Takes into account only material goods.

Criticism of Wealth Oriented Definition:# Considered economics as a dismal or selfish science.# Defined wealth in a very narrow and restricted sense which considers only material and tangible goods.# Have given emphasis only to wealth and reduced man to secondary place in the study of economics.

Wealth Concept:

b. Welfare Concept :

According to A. Marshall “Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of material requisites of well being. Thus, it is on one side a study of wealth; and on other; and more important side, a part of the study of man. Characteristics : - It is primarily the study of mankind. - Takes into account ordinary business of life – It is not concerned with social, religious and political aspects of man’s life. - Emphasize on material welfare as the primary concern of economics i.e., that part of human welfare which is related to wealth.

Welfare Concept

Criticisms: - treating economics as a social science rather than a human science, thus welfare definition restricts the scope of economics to the study of persons living in organized communities only. - Criticized because of the distinction made between economic and non-economic.

- Welfare in itself has a wide meaning which is not made clear in definition.

C. According to Lionel Robbins: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternate uses”

Characteristics - Economics is a positive science.- Unlimited ends ( wants ).- Scarce means.- Alternative use of means.- Choice – study of human behavior.

Scarcity Concept

Superiority over Welfare Definition :

- Tried to bring the economic problem which forms the foundation of economics as a social science.

- The scarcity definition of economics is most universal in nature.

- Has taken both sciences in account i.e. Social and Human.

- It takes into account all human activities.

- Consideration of neutral science was considered much logical.

.

Criticism:

- His definition does not focus on many important economic issues of cyclical instability, unemployment, income determination and economic growth and development.

- Does not take into account the possibility of increase in resources over time.

- Has treated economics as a science only. But in fact it is both a science and an art

D According to Prof. Samuelson “Economics is the study of how men and society choose with or without the use of money, to employ the scarce productive resources which have alternative uses, to produce various commodities over time and distribute them for consumption now and in future among various people and groups of society.

.

D. Growth/Development Concept

Characteristics - The definition is not merely concerned with the allocation of given resources but also with the expansion of resources, tries to analyze how the expansion and growth of resources to be used to cope with increasing human wants.

- More dynamic approach.

- According to him problem of resource allocation is a universal problem whether it is a better economy or an exchange economy.

Criticism: Definition is comprehensive in nature as it isboth growth oriented as well as future oriented

E. Need Oriented DefinitionsAccording to Jacob Viner

“Economics is what economists do”

A good definition of economicsStudy of choice under conditions of scarcity

ScarcitySituation in which the amount of

something available is insufficient to satisfy the desire for it

Need Oriented

Growth Oriented

Scarcity Welfare Wealth Definition

Jacob Viner

Samuelsons Robbins) Ayred Marshall

Adam Smith

Scientist

Economics is a study of

Economics is a study of

science which enquires into the nature and cause of wealth of nation”

Wealth

mankind in the ordinary business of life; it is on one side a study of wealth; and on other; side, a part of the study of man.

Welfare

science which studies human behavior as a relationship between ends and scarce means which have alternate uses

Scarcity

study of how men and society choose the use of money, to employ the scarce productive resources which have alternative uses, to produce various commodities over time and distribute them for consumption now and in future among various people and groups of society.

Growth oriented

Economics is what economists do” Need Oriented

Criticism Characteristic s

-Considered economics as a selfish science.-Defined wealth narrow sense which considers only material and tangible goods.- emphasis only to wealth and reduced man to secondary place in the study of economics.

Takes into account only material goods Wealth

- restricts the scope of economics to the study of persons living in organized communities only.- distinction made between economic and non-economic.- Welfare in itself has a wide meaning which is not made clear in definition.

- the study of mankind-Takes into account ordinary business of life - concerned with social, religious and political aspects of man’s life. - Emphasize on material welfare as., that part of human welfare which is related to wealth.

Welfare

Criticism Characteristic s

-does not focus on important i.e , issues of unemployment, income determination economic growth and development.-Does not take into account the possibility of increase in resources over time.- Has treated economics as a science only. But in fact it is both a science and an art

Economics is a positive science.- Unlimited ends ( wants ).-Scarce means.- Alternative use of means.- Choice , study of human behavior.

Scarcity

- comprehensive in nature as it is both growth oriented as well as future oriented

- not merely concerned with the allocation of given resources but also with the expansion of resources.-More dynamic approach-problem of resource allocation is a universal problem

Growth Oriented

A good definition of economics Study of choice under conditions of scarcity

Need Oriented

Notes

Remember- What is the Smith's invisible-hand concept- the difference between the 5 definition of economics

Study well the main characteristics' and criticism of each

Make a comparison between Keynesian post and new approaches

GOOGLE Gregory Mankiw microeconomics ppt

Select , FIRST CHOICE , Mankiw 3e micro power point

Ashgan Abou Gabal , room # G 27

That IS THE END