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Introduction to Micro-Economics
Session I
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What is Economics Economics is a science which deals wit h t he unlimited wants
and limited resources. Making choices in t he f ace of scarcity. If t hings were not limited,
t here wou
ld not
have been subject
like economics
Limited resources imply scarcity and unlimited wants lead to t heproblem of choice.
Scarcity implies t hat, at any given point of time, an individual,organisation or a country can not have everyt hing in anyquantity t hat is desired.
So t he problem of economics is to make a choice efficient ly sot hat use of resources is minimised and t he satisf action ismaximised.
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Contd Economic system allocates scarce
resources across t he competing uses,combining and processing t heseresources to produce goods andservices. It determines what to
produce, how much to produce. It arranges for distribution of goods.,provides for future growt h.
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Contd Allocation problems, scarcity, choice
Proper combination
how muc
hforeach category
Distribution who should get?
Growt h
different engines of growt h
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Production Possibility curve
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Production Possibility Curve At any given point of time, t he
resources available to an economy
size of working population, land,building, machinery are all given. So if more resources are used for one sector,less will be available for t he ot hersectors. So a combination of goods andservices has to be decided for aneconomy.
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Production Possibility Frontier It is based on t he
f amous gun-butterparadox
Concepts of scarcity,choice and efficiencycan be well understoodwit h t he help of PPF
In PPF, guns represent milit ary goods andbutter representscivilian goods.
PPF slopes downwardswhich ref lects scarcityof resources. To get more guns, society hasto sacrifice butter
PPF is concave to t heorigin indicating t heincreasing relative cost of transferringresources from onesector to anot her.
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Production Possibility Frontier Wit h given resources,
country can produceeit her more of butter orof guns.(B or C)
Pt. A indicatesinefficiency
Pt. E is unatt ainable
wit h t he givenresources
Movement from ppf0 toppf1 indicatesexpansion of resources
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Application of PPC Central problems of economy what, how, for whom During 2002-03 India produced 23.2 million tonnes of pot ato.
This was part ly inf luenced by how much land is used to raise a particular crop, which is a consequence of govt policy andindividual s choice
What met hod to be used is also a problem of choice. Electricitycan be produced wit h hydro, coal or nuclear power. Agriculturecan be done by labour intensive or capit al intensive met hod.
Who earns how much is also a choice problem for t he economy.Computer engineers earn more t han t he historians, teachers in
US earn more t han t he teachers in India. This is an issue relatedto t he distribution of wealt h and income in t he economy.
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How to solve basic economic
problems?
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Basic economic systems In market economy, 3 fundament al
problems are solved by market. Theforces of demand and supply determinewhat, how much and for whom toproduce
In centrally planned economic system,t hese problems are solved by t he st ateor government.
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Approaches to t he study of
Economics Micro economics refers to t he analysis of
scarcity and choices problem f aced by single
economic unit such as firm, producer,industry. It assumes t he t hings to be const ant ot her t han t he part of a system under study.
Macro economics deals wit h t he behaviour
of aggreg
ates suc
h as Gross DomesticProduct, employment and inf lation rate. It
focuses on t he form and functioning of t heeconomy as an aggregate system
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Distinction between micro and
macro economicsMicroeconomics
Deals wit h choices of
individu
als
Aggregates arising out of individual choices areconsidered Eg. tot al demand for oranges
Relative prices play improle response of consumers & producersto change in relativeprices is considered
Macroeconomics
Deals wit h economicaggreg
ates
Aggregate of heterogeneous goods isconsidered GrossNational Product
Aggregate prices areimport ant like pricelevel which combinesprices of heterogeneousgoods
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Subject matter Microeconomics
product pricing t heoryof demand
f actor pricing t heory
of distribution
economic welf are
Macroeconomics
unemployment inf lation
poverty
depression
underdevelopment
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Why should a manager study
economics? To get a technical help in making optimal and
rational economic decisions
Profit decisions of a
firm can be e
valuated t
hroug
h economic t heory
Profits are functionally related to sales and revenuewhich in turn depend on demand
Demand decisions are followed by production and
supply. Price-supply decisions depend on t he market
structure
Thus,various types of economic decisions t akenby a manager can be evaluated t hrough
microeconomic analysis.
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Contd.. Bot h t he markets work on t he basis of pricing
system. So t he Price t heory is import ant
subject matter of MiE. Role of Govt.- govt affects circular f low by
purchasing and producing t he goods forpublic consumption (education, defence, etc).
Through t axes it can redistribute t he income. Also consumption of some of t he goods canbe inf luenced t hru commodity t ax.
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Exercise IClassify t he following as topics of micro or
macro
A firm s decision
about
how muc
hincome tosave
Effect of govt regulation on auto emission Impact of higher national savings on
economic growt h Firm s policy of hiring and firing workers National policy on Minimum wages Globalization for raising economic growt h rate
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Demand analysis In 1973, OPEC collectively curt ailed t he production of
oil drastically. The supply of oil in t he world fell somuch t hat t he price of oil increased by t hree times.The world economic scenario has changed drasticallysince t hen.
Mr. X was t hinking of selling two 100 yard plots in hishometown to finance his son s education in US(costing 20 lakhs). Suddenly some software f actoriesmoved in and t he govt began to develop t he place as IT Park. The land prices went up. Mr. X had to sell only one plot.
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Contd.. A successful manager underst ands how
market forces create bot h opportunities andconstraints for profit able decision-making. If t hey underst and how t he markets work, t heywill also be able to predict t he prices andproduction levels of goods, resources andservices for t heir business.
Demand supply analysis is a powerful tool foranalysing t he way t he market forcesdetermine prices and production in t hecompetitive market.
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Demand implies 2 t hings
willingness to purc
hase t
hat commodity
ability to pay t he price of commodity
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Determinants of demand Price of a commodity (Px)
Prices of a
rela
ted goods (Py)
Income of a consumer (Y )
Tastes and preferences (T)
Advertising expenditure (A) Expect ations about t he future
movement of price of a commodity (Pe)
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