MICROECONOMICS
Nature and Scope of Economics
● We study economics because
Introduction
● Economics is a social
science which deals with
human wants and their
satisfaction.
● It is mainly concerned with Introduction
the way in which a society
chooses to employ its
scare resources which
have alternative uses, for
the production of goods
for present and future
consumption.
● • The early writers used
the term “Political
Economy” for the
management of the state.
● A person who runs a
family is expected to
make the best use of the
income of the household.
● Similarly, the state is
expected to get the
maximum benefit for the
society.
● The existence of “Human
Wants” is the starting
point of all economic
activity in the world.
● Unless we make efforts,
we cannot satisfy wants.
● Hence, wants efforts and
satisfaction from the
circle of economics.
● We may say, economics is
the science of wants.
Importance of Economics
there is scarcity of many goods
we want.
● Time, Money, and Technology
are some of the generic scarce
in life. (TMT)
● These problems (TMT) are
common to the individual as well
as the state.
● That is why we say economics is
the science of scarcity.
● And scarcity is the basic fact of
life.
● “OUR WANTS ARE UNLIMITED BUT
MEANS ARE LIMITED”
● This leads to choice making.
● If there is unlimited supply of
goods which satisfy our wants
the problem of choice will not
arise.
● It is true that we have many
wants.
● But all wants are not of equal
importance.
● So we choose the more
important and the more urgent
wants.
● “CHOICE IS THE ESSENCE OF
ECONOMIC ACTIVITY”
● We may also say that economics
is the science of choice.
● But not all goods we want are
not scarce.
● There are certain things like air
and sunshine which are available
in abundance.
● In the real world, the means
which satisfy our wants are
limited, that is, there is scarcity
 of the means which satisfy our
wants.
● Time and money are limited.
● And land, labor, capital which are
used in production are limited.
Simplifying Economics
● Economics is a social science
which studies about human
wants and their satisfaction.
● Human wants are unlimited.
● So scarcity is the fundamental
fact of life.
● As all wants are not of equal
importance, this leads to choice.
Introduction
● Economics is the science of
choice.
● As there is scarcity of goods, we
have to pay a price for them.
● So, economics studies about
pricing process.
● And, as prices are paid in money,
we study about the production of
wealth, exchange of wealth,
distribution of wealth, and
consumption of wealth.
● As wealth is produced to
promote human welfare, we
study the relationship between
wealth and welfare.
Definition of Economics
● It came from Greek word
OIKONOMIA that means
management of household
expenditure.
● Starting from the simple unit of
society, home the income
generated by the parents up to
the budget it stretches to meet
every need of the member of
the family is already an
economics in action.
Economics
● If we put it to upper bracket of
the society, economics is about
the management or operation of
the entire production and
consumption of the people to be
able to meet everyone’s need.
● The need to study intelligently of
how to allocate the limited
natural resources and non-
natural resources to satisfy the
unlimited wants of the people.
● Therefore, economics is the
study of efficient and effective
allocation of scare resources in
order to satisfy unlimited wants
of the people.
Great Economist Define Economics
Adam Smith - the father of
Economics, states that economics
as an inquiry about the nature and
causes of the wealth of the nations.
● The term “wealth” has a special
meaning in Economics. In the
ordinary language, by wealth, we
mean money, but in economics,
wealth refers to those goods
which satisfy human wants.
● But we should remember all
goods which satisfy human wants
are not wealth.
Adam Smith
● For example, air and sunlight are
essential for us.
● We cannot live without them but
they are not regarded as wealth
because they are available in
abundance and unlimited in
supply.
● We consider only those goods
which are relatively scarce and
have money value as wealth.
● Adam Smith was of the view
economics was concerned with
the problems arising from
 wealth-getting and wealth-using
activities of people.
● He was interested mainly in
studying the ways by which the
wealth of all nations could be
increased.
Paul Samuelson
● Economics is a study of how the
society could possibly use and
share the limited resources into
different items of products and
services for all the sectors of
the society for the present and
future consumption.
● It is the study of how man works,
ooks, for food and find material
needs, economics emphasizes
problem in production of how to
solve or minimize the problem.
Roger Le Roy Miller- the situation that
needs the decision of how, when, and
where the scarce resources be used.
Gerardo Sicat - a specific study that
points out how people and society
decides. People has unlimited needs.
In order to satisfy this, they get
resources that are limited.
Macroeconomics
Macro mean big, it refers to the
study of large unit of society’s:
● Consumption
● Spending
● Production
● Investment
The study of the whole economy of
the country based of its measurement
of its production, income and spending
commonly called GrossNational Product
(GNP).
Micro means small, if refers o the
study of small unit of society’s
consumption, spending, production
and investment. (Family or
individual)
It analyzes the details of economy.
Typically, it deals with the economic
behavior of individual unit such as
the consumer or the goods’
producer.
Positive Economics - as
Asimakopulos puts it, “Positive
economics can be defined as a
body of systematized knowledge
concerning “WHAT IS”, while on the
other hand;
Normative Economics - tries to
develop criteria for “WHAT OUGHT TO
BE”.
Positive economics is mainly concerned
with the description of economic events
and tries to formulate theories to
explain them.
Positive economics, gives more
importance to ethical judgment.
Normative economics is concerned
with the ideal rather the actual
situation.
Basic Tools or Methodology of
Economics
Logic- it is the essence of good and
sound reasoning.
Conclusion must be drawn from
good and logical reasoning.
Mathematics – answers to
economic problems are best solve
with the use of numbers or
quantitative description.
Statistics – some of the theories are
based on observation and
experimentation through the use of
statistics.
It is the tool use in empirical
validation.
Chapter 2
Basic Economic Problems &
The Economic Systems
Introduction
Economics is the science of making
choice under conditions of scarcity.
What are the basic issues about
which choices are to be made?
Any society must make choices
about three important problems.
They are the following Basic Economic
Problems
1. What to produce, & in what
quantities?
2. How shall goods be Produced?
3. For whom the goods be
produced?
What to produce, & how many?
Food or weapons; if so, in what
quantities?
Is it more rice and less sugar or
vice versa?
Prioritize education or
employment?
How to Produce?
- Electricity from the solar power
or from hydro power?
- Rice from traditional or modern
method of farming?
- Knowledge thru library or
internet?
For whom the goods be produced?
- For the upper bracket of
society?
- Or is it for the middle class?
- It can also be for the benefit of
the general public?
Economic Problems
- These three basic problems are
interdependent.
- The society must make proper
choice about them in order to
meet the development
aspirations of people
satisfactorily.
- The above three questions are
common to all economies but
every economic system attempts
to make its own choice.
- The nature of a particular choice
in a particular society depends
on its specific economic system.
- An economic system is a way of
answering these basic questions.
- Different economic systems
answer the above questions
differently.
- An economic system refers to
how the different economic
elements will solve the central
problems of an economy: what,
how and for whom to produce.
- It refers to the production and
distribution of goods and
services within which economic
activity takes place.
- It refers to the way different
economic elements, individual
workers and managers,
productive organization such as
 factories or firms and
government agencies are linked
together to form an organic
whole.
- Economic system consists
of various individuals and
their institutions like banking,
education,factories, service
provider to cite among others.
The most general economic system are:
- Traditional Economy
- Capitalist Economy
- Socialist Economy
- Mixed Economy
Traditional Economy
● The basic problems are solved
by traditions and custom.
● It produces exactly to its
consumption requirements.
● It is a subsistence (survival)
economy.
The means and ways of production are
based on customs, traditions and
beliefs.
A subsistence economy where one
produces only the things they need.
There are not much of sales as there is
only small scale production.
The same product will be produced by
every generation. The production
techniques are traditional.
It is a very backward type of
economy. It is the production of
products; trading and distribution
of incomes are sanctioned by
customs. Thus, it also refers to the
traditional manner of doing
things, makes decisions on what,
how, and for whom to produce.
The methods of production are
carried over by forefathers.
Technological change and
innovations are closely constrained
because they may clash with tradition
and threaten the social order.
Example of Traditional Economy
- in Saudi Arabia, the women are
not yet liberated from the house
household chores. They are not
permitted to work for a career.
So most of the commodity it
produces favors the men
because they are the labor force
in production.
- Consequently, in Afghanistan
because of its tradition, they can
afford to sacrifice themselves
for jihad or holy war. Since all
men are assigned to be soldiers,
military weapons are a must in
their economic activity. Women
are no longer being sent to
school once they finish their
elementary grades.
Capitalist or Market Economy
● This is an economic system in
which the production and
distribution of commodities take
place through the mechanism of
free markets.
Free- Market - Refers to an economic
market operating by free competition.
- Hence, it is also called as
market economy or free trade
economy.
- Each individual be it a producer,
consumer or resource owner has
considerable economic freedom.

Economic Freedom- Anyone can choose
its own desire.
- An individual has the freedom
to buy and sell any number of goods
and services and to choose any
occupation.
The resources are privately
owned and the people
themselves make decisions.
This is also known as capitalism or free
enterprise economy and it follows the
laissez faire la police.
Profit is the only motive for the
functioning of capitalism.
Production decisions involving high risks
are taken by individual only to earn
large profits.
Hence, profit-motive is the basic force
that drives the capitalist economy.
Freedom of Choice
The question ‘what to produce?’
will be determined by the
producers.
They have the freedom to decide.

Laissez Faire- Means a french term Similarly consumers have the

which means let alone policy or leave it freedom to buy anything they want.
alone.
Market Force
- The economic problems are
being decided by the people who Market forces like demand, supply
actively participate in the and price are the signals to direct
interlocking network of market the system.
and prices.
Most of the economic activities
The Salient Feature of Capitalism are centered on price mechanism.
● Right to Private Property
● Profit- Motive 1. Location
● Freedom of choice 2. Demand
● Market Forces 3. Status
4. Economic Status
Right to Private Property 5. Quality
6. Season
Individuals have the right to buy and
own property. Disadvantage of Capitalism or Market
Economy
There is no limit and they can own
any amount of property. ● Inequalities
● Leads to Monopoly
They also have legal rights to use ● Mechanization and Automation
their property in any way they like. ● Welfare Ignored
● Exploitation of Labor
Profit - Motive ● Basic Social Needs are Ignored
Inequality
Capitalism creates extreme inequalities
in income and wealth.
The producers, landlords, traders reap
huge profits and accumulate wealth.
Thus the rich become richer and the
poor poorer.
The poor with limited means are unable
to compete with the rich.
Thus capitalism widens the gap
between the rich and the poor creating
inequality.
Leads to Monopoly
Inequality leads to Monopoly
Mega corporate units replace smaller
units of production.
Firms combine to form cartels and in
this process bring about reduction in
number of firms engaged in production.
They often hike prices against the
welfare of consumer.
Mechanization & Automation
Capitalism encourages mechanization
and automation.
This will result in unemployment
particularly in labor surplus
economies.
Welfare Ignored
In Under capitalism, private
enterprises produce luxury goods
which give higher profits and ignore
the basic goods required which give
less profit.
Thus the welfare of public is ignored.
Exploitation of labor
Severe labor laws are enacted for the
exclusive profit-motive of capitalists.
Fire and hire policy will become the
order of the day.
Such laws also help to exploit the
labor by keeping their wage rate at
its lowest minimum.
Basic Social Need are Ignored
There are many basic social sectors
like literacy, public health, poverty,
drinking water, social welfare, and
social security.
As the profit margin in these sectors is
low, capitalists will not invest.
Hence most of these vital human issues
will be ignored in a capitalist system.
Socialist or Comnmunistic Economy
In a socialist economy, the means of
production are owned and operated by
the State.
All decisions regarding production and
distribution are taken by the central
planning authority.
Hence the socialist economy is also
called a planned economy or command
economy.
Social welfare is given importance.

Equal opportunity is given to all.
All such advantages have delivered
high level of human development.
Some of the most successful socialist
economies are China, Cuba, Vietnam
and North Korea.
Basic Characteristics Features of
Socialism/Communism
● Social Welfare Motive
● Limited Right to Private Property
● Central Planning
● No Market Forces
Social Welfare Motive
In socialist economies, social or
collective welfare will be the prime
motive.
Unlike capitalism, profit will not be the
aim of policy making.
The decisions will be taken keeping the
maximum welfare of the people in mind.
Thus social well-being of people will be
the purpose of development.
Limited Right to Private Property
The right to private property is limited
under socialist economy.
All properties of the country will be
owned by the State.
That is, the ownership is collective in
nature.
No individual can accumulate too much
property as in the case of capitalism.
Central Planning
Most of the economic policy
decisions will be taken by a
centralized planning authority.
Each and every sector of the
economy will be directed by well
designed planning.
No Market Force
In a centralized planned system of
development, market forces have only
a limited role to play.
Production, commodity and factor
prices, consumption and distribution will
be governed by development planning
with welfare motive.
Merits of Socialist/Communism
Economy
❖ Efficient use of resources
❖ Economic stability
❖ Maximization of Social Welfare
❖ Absence of Monopoly
❖ Basic needs are met
❖ No extreme inequality
Demerits of Socialist/Communism
● Bureaucratic Expansion -
Government Interference
● No Freedom - Absence of
Economic Freedom
● No Competition - Absence of
Consumer’s Sovereignty
● Absence of Technology - Limits
Technological Innovation
Mixed Economy
In a mixed economy, both public and
private institutions exercise economic
control.
The public sector functions as a
socialistic economy and the private
sector as a free enterprise economy.
All decisions regarding what, how and
for whom to produce are taken by the
State.
The private sector produces and
distributes goods and services.
It manufactures consumer and capital
goods in the interest of public welfare.
A mixed economy possesses the
freedom to hold private property, to
earn profit, to consume, produce and
distribute and to have any occupation.
But if these freedoms affect public
welfare adversely, they are regulated
and controlled by the State.
The Main Feature of Mixed Economic
System
● Co- Existence of Public and
Private Sector
● Consolidation of Merits of
Capitalism and Socialism
● Planning
Chapter 4 Decision Making
Introduction
Economics is considered the queen of
all social sciences because it covers
almost every activity of man in relation
to the society.
Because of its multifarious (diverse)
applications, various sciences are
closely related to the study of
economics.
Relationship of Economics to the other
Sciences
● Business Management
● History
● Finance
● Sociology
● Psychology
Business Management
- Business provides employment
opportunities to member of the
society, and is an important
vehicle in the balance of
economic activity.
History
- The history of economics ideas
provides information regarding
theories that can be revisited in
order to evaluate present and
future economic issues.
Finance
- Defined as the management of
money, credit, banking and
investment.
- It is a system that includes the
circulation of money, the
granting of credits, making of
investment and the provision of
banking facilities.
Sociology
- it is the study of the behavior of
societies.
- In relation to sociology,
economics essentially deals with
the behavior of the consumer.
Psychology
- it is the study of the behavior of
man.
 - Psychology is primarily useful in
the study of microeconomics,
which scrutinizes and focuses on
the smallest units of the
economy.
Importance of Studying Economics
To Understand the Society- economics
seeks to analyze transactions made by
the society
and its member, particularly
with regard to details on their
behavior and decision making.
To Understand Global Affairs-
economics seeks to explain the
internal operation and trade
policies of countries. It also
measures the competitiveness of
each country and identifies its
comparative advantage in relation
to other states.
To be an Informed Voter - an
understanding of economics
develops individuals to be wise
voters. Knowledge of economics
provides individuals with an
understanding of economic policies
that are apt (appropriate) for the
state’s current situation.
Efficiency- this refers to the
productivity and proper allocation of
economic resources.
it also refers to the relationship
between scarce factor inputs and
outputs of goods and services.
The 3 E’s of Economics
Equity- equity means justice and
fairness. Thus, while technological
advancement may increase production,
it can also bear
disadvantages to employment of
workers.
Due to the presence of new equipment
and6 machineries, manual labor may
not be necessary, and this can result in
the retrenchment or displacement of
workers.
Effectiveness-means attainment of
goals and objectives.
Economics is an important and
functional tool that can be utilized by
other fields. For instance, with the use
of both production (though manual
labor or though technological
advancement), whatever the output is,
it will be useful for the consumption of
the society and the rest of the world.
Important Terms in Economics
Wealth- refers to anything that has a
functional value (usually money); can be
traded for goods and services. Wealth
therefore, is the stock of net assets
owned by individuals or
households.
Consumption - this refers to the direct
utilization of the available goods and
services by the buyer if the consumer
sector. it is also the satisfaction
obtained by consumers for the use of
goods and services.
Production- it is defined as the
formation by firms of an output
(products or services.) it is the
combination of land, labor, and capital
in order to produce outputs of the
goods and services.

Exchange - This is the process of

trading goods abd/ or services for
money and/or its equivalent. it also
includes the buying of goods and
services either in the form of barter or
though market.

Distribution - this is the process of

allocation or apportioning scare
resources to be utilized by the
household, the business sector, and the
rest of the world.

in specific term, however, it refers to

the process of storing and moving
products to customers often though
intermediaries such as wholesalers and
retailers.