Economics is the study of how societies use scarce resources to produce valuable
commodities and distribute them among different people.
Microeconomics deals with:
• Behavior of individual units
• When Consuming; How we choose what to buy
• When Producing; How we choose what to produce
• Markets: The interaction of consumers and producers
• Analysis of aggregate issues:
yEconomic growth
yInflation
yUnemployment
Microeconomics vs. Macroeconomics
Microeconomics is the foundation of macroeconomic analysis.
Themes of Microeconomics
According to Mick Jagger & the Rolling Stones, “You can’t always get what you want”.
Why Not?
Limited Resources
Unlimited Wants
Allocation of Scarce Resources and Trade-offs
In a planned economy
In a market economy
Microeconomics and Optimal Trade-offs
- Consumer Theory
- Workers
- Theory of the Firm
Microeconomics and Prices
– The role of prices in a market economy
–How prices are determined
Theories and Models
Microeconomic Analysis
– Theories are used to explain observed phenomena in terms of a set of basic
rules and assumptions. For example
– The Theory of the Firm
– The Theory of Consumer Behavior
–Models:
A mathematical representation of a theory used to make a prediction.
–Validating a Theory
The validity of a theory is determined by the quality of its prediction, given
the assumptions.
– Evolving the Theory
Testing and refining theories is central to the development of the science of
economics.
Positive versus Normative Economics
Positive Economics
Positive economics deals with the observations or predictions of the facts of
economic life. For example:
What will be the impact of an increase in wages on the price of a product?
Normative Economics
Normative Economics is the value judgments about how economics should
operate, based on certain moral principles or preferences?” For example:
What wage rate should be paid to the auto workers to make them an active
member of the society?
What is a Market?
Markets
A geographically defined area where buyers and sellers interact to determine the
price of a product or a set of products.
Markets vs. Industries
Industries are the supply side of the market.
Defining the Market
The market parameters must be set before an analysis of the market can take
place.
Arbitrage
Buying a product at a low price in one location and selling at a high price in
another.
Competitive vs. Noncompetitive Markets
–Competitive Markets
Because of the large number of buyers and sellers, no individual buyer
or seller can influence the price.
Example: Most agricultural markets
–Noncompetitive Markets
Markets where individual producers can influence the price.
Example: OPEC
Market Price
– Competitive markets establish one price.
– Noncompetitive markets may set many prices for the same product.
Market Definition - The Extent of a Market
– Market Definition
Which buyers and sellers should be included in a given market?
– Market Extent
Defines the boundaries of the market
Geographic
Range of products
–Examples
–Geographic boundaries
Gold: Lahore vs. Karachi
Housing: Islamabad vs. Rawalpindi
– Range of Products
Gasoline: regular, super, & diesel
Cameras: Polaroid, point & shoot, digital
– Markets for Prescription Drugs
Well-defined markets - therapeutic drugs
Ambiguous markets – painkillers