An Introduction to Microeconomics

By Hassan Aftab

Introduction

• Microeconomics is a branch of economics that deals with the study of economic behavior of unit.

• A unit can be: – an individual – a firm

Basics

• Basically microeconomics is the study of Consumer and Producer.

• Consumer and Producer are the two basic components of microeconomics.

• The consumer demands for goods, producer supply goods.

Human Behavior

• The most important question of microeconomics is not how demand and supply meet. It is how human behavior affects them. – If demand increases, it is because of certain human

behavior, if demand decreases, it is because of certain human behavior

– If supply increases, it is because of certain human behavior, if supply decreases, it is because of certain human behavior

Human Behavior

• Human behavior depends upon ideology of humans.

• There are basically two ideologies in the world.1. Muslim Ideology2. Materialistic / Capitalistic Ideology

Materialistic / Capitalistic Ideology• In Materialistic / Capitalistic ideology, a person claims to be

the owner of what he earns.• People try to surpass others in terms of showing off.• In such society, some people suffer from superiority complex,

some suffer from inferiority complex.• In such society producers try to make more and more

revenue. So they raise the prices of goods and poor people suffer.

• The reason of them raising prices is simple. Increase in demand. As the demand from consumer increases. The prices are bound to increase.

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• In such societies rich become richer, while poor become poorer.

• Today we see a lot of demand of pork meat or alcoholic drinks.

• Billions of dollars are being spent on these goods nowadays. People do not care that these are injurious to health.– Pig meat causes “Swine flu” and is loaded with toxins– Alcoholic drinks can cause cancer, anemia and many

other diseases

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• Despite of all the issues these goods cause to health, they are being used heavily. Their demand is increasing. So their supply is increasing. People are buying themselves serious some serious diseases.

• If the demand of these goods reduces, then supply will reduce itself.

• The billions of dollars that are being spent on these items can be spent on basic needs of human beings.

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• If the money that is being spent on the items that are injurious to health, is spent on basic needs then the world will become a better place to live.

• This can be done by the consumer side. If the demand will reduce, the supply will reduce.

Islamic Ideology

• In islamic ideology, we believe that Allah is the owner of all that is present in this universe. So we donot spend money on things that are prohibited in Islam.

• The items like alcohol, pork meat are prohibited in Islam, so the money which was first being spent to these goods can now be used to make things that are good for human beings.

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• In the islamic ideology, it is clearly stated what is right and what is wrong, what is halal(allowed) and what is haram(forbidden). Science also proves that, the things which are prohibited in islam are harmful for humans, and the things that are allowed in Islam are beneficial for humans.

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• True islamic ideology means good governance.• Umar’s law which is implimented in

scandinavian counteries is an implimented example of islamic ideology.

• Well that is concerned with macroeconomics.

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• Dealing with microeconomics, as we know we have consumer and producer.

• In the views of Islamic ideology, let’s first discuss consumer.

• Here consumer can be of two types.1. Moderate Consumers2. Immoderate Consumers

Moderate Consumers

• Moderate consumers are the consumers who demand only the part they need.

• They do not buy extra• They do not show off• Because of them the demand remains at equilibrium.• When demand remains constant, the prices of goods

remain constant.• Goods are available for everyone.• There is low risk of black marketing.

Immoderate Consumers

• Immoderate consumers buy more than they need.– Income = Saving + Consumption– Saving = Income – Consumption

• So when consumption increases saving decreses. • Low saving causes Conspicuous consumption• For any country to progress, good saving is very

improtant. Globally acceptable saving is minimum 20%– Pakistan’s current saving is around 14%– India around 20%– China around 40%

Immoderate Consumers

• Low saving causes– Low investment– Low productivity– Low Income

Low income causes Poverty– Unemployment

• When consumption increases – Import > Export

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• This also causes– Deficit in BOP– Deficit in Budget

• Also called dual deficit• Another effect is Profiteering– Π = R – C– To increase profit they need maximum revenue

and minimum cost of manufacturing

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• With increase in demand– Prices increase– Wages decrease– These two are called exploitation

• Some more effects include– Corruption and crimes– Demonstration effect– Frustration