INTRODUCTION TO MICROECONOMICS

BY

TIRIMBA IBRAHIM

REFERENCE BOOK

1. Economics by David Begg, Giantluigi Vernasca, Stanley Fischer, Rudiger Dornbische,10th edition

2. Principles of Microeconomics by N. Gregory Mankiw, 3rd Edition

OPENING QUOTE

• “Microeconomics is about money you don't have, and macroeconomics is about money the government is out of.” P.J. O’ROURKE

• "Economics is the science of choice.

• It began with Aristotle but got mixed up with ethics in the Middle Ages.

• Adam Smith separated it from ethics, and

• Leon Walrus mathematized it.

• Alfred Marshall tried to narrow it, and

• Keynes made is fashionable.

• Robbins widened it, and

• Samuelson dynamized it, but modern science made it statistical and tried to confine it again.

• There is an economics of money and trade, of production and consumption, of distribution and development.

• There is also an economics of welfare, manners, language, industry, music, and art.

• There is an economics of war and an economics of power.

• There is even an economics of love.

Why Economics Exist...• Economics is concerned with scarcity. If

something is not scarce, there is no economic problem.

• Scarcity means there is a shortage, and hence there must be a choice from amongst the few

• However, despite scarcity being a reality, consumers are rational and out of the minimum supply they want maximum satisfaction

• Economics uses theory to explain actions and predict future actions. For example if: the Bulls are in the playoffs, then there will be a larger number of people wanting tickets than if they have a poor season. If there is high unemployment, then at the university more students enroll in business courses because their opportunity costs (pay loss due to being in class) are less.

TYPES OF ECONOMICS

• Normative Economics => What should be done. “The governement should increase interest rates to decrease inflation rate."

• Positive Economics => What will happen, not what should be done. "An increase in the property tax in the area of Jig Jiga will tend to lower the price of apartments, everything else equal."

NOTE

• In economics we shall mostly be refering to the principle of CETERIS PARIBUS which means...’everything else equal’ or ‘all factors held constant,” so take note!

BRANCHES OF ECONOMICS

• We have 2 main branches of Economics namely:

1.Microeconomics

2.Macroeconomics

Micro versus Macro

• Macroeconomics -- The branch of economics that studies decision-making for the economy as a whole

• Microeconomics -- The branch of economics that studies decision-making by a single individual, household, firm, industry, or level of government

• In this unit, we shall concentrate our study on Microeconomics

Focus on Microeconomics

Markets

Price

What is a market?

• A market is the collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products. A market includes more than an industry (a collection of firms that sell the same or closely related products).

What is Price?• Price is the amount of money that has to be

paid to acquire a given product

• Price for any specific good/service is the relationship between the forces of supply and demand.

• Price mechanism is the outcome of the free play of market forces of demand and supply. However, sometimes the government controls the price mechanism to make commodities affordable for the poor people too.

MEASURING PRICE• The CPI measures price changes by buying a

market basket of goods at different times.

• CPI means CONSUMER PRICE INDEX

• CPI is a comprehensive measure used for estimation of price changes in a basket of goods and services representative of consumption expenditure in an economy

MEASURING CPI

• CPI can be measured by use of 2 approaches:

1.Laaspye Formula

2.Paachae Formula

3.Fisher Ideal Index formulae

-Lets have a look unto the formulas

We start the mathematics of

Leon Walrus now….

Your calculators ready

THE END