Course Name: Introduction to Microeconomics

Course Instructor: Syed Mortuza Asif Ehsan (SME)

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Lecture-1
 A few out of millions of examples
• What you should major in (depends on expected income after
graduation)

• Whether to produce phones or tablets (related to what consumers want

in the market)

• Negotiation of salary (depends on elasticity)

• Whom you marry (depends on costs and benefits)

• Why some countries are rich and some are poor (efficient use of
resource)

• Whether the government should increase the money supply when

there is a recession.
 Chapters to be covered

Chapter -1 (What economics is about)

Market
(Perfect competition,
Consumers Monopoly, Producers
Monopolistic
competition, Oligopoly)

Chapter 21 Chapter 2, 22
Chapter 3, 5, 20, 23, 24, 25
Consumers
Producers
Market
 Lecture-2

Ch 1: What Economics Is About

Syed Mortuza Asif Ehsan
 Economic Definitions
• No job for Economists in Heaven!!!

• Scarcity is the condition in which our wants are greater than the
limited resources available.

• Economics is the science of people which explains how individuals

and societies make choices with the fact that wants are greater than
the limited resources.
 Economic Categories
• Microeconomics
• Macroeconomics
• Positive Economics
• Normative Economics
Macro. Vs. Micro
• Microeconomics deals with
human behavior and choices as
they relate to relatively small
units.
• Macroeconomics deals with
human behavior and choices as
they relate to an entire
economy
 Positive Vs. Normative

• Positive economics: the study

of “what is” in economic
matters.
• Normative economics: the
study of “what should be” in
economic matters.
 Thinking In Terms of Scarcity
• Scarcity and Effects:

1. Choices

2. Rationing device

3. Scarcity and competition

 Opportunity Cost
• The Higher the opportunity cost of doing something, the
less likely it will be done.
• Free housing, free bridges (“no charge to cross
it”), and free parks are not really free.

• Free implies no opportunities forfeited hence

opportunity cost, which is never the case.
 Important Concepts
• Utility and disutility (goods, bads)

• Resources/ Factors of production

• Land: Anything provided by nature.

• Labor: Any human effort

• Capital: Made by human that are used to assist in production process.

• Entrepreneurship: Organizing the three factors of production

Lecture-3
 Important Concepts
• Costs and Benefits
• Decisions Made At The Margin
• Marginal Benefits vs. Marginal Costs
• Efficiency
• Incentives
• Unintended Effects vs. Intended Effects
• Equilibrium
 Theory and Models
• Models are simplified versions of reality

• Models are based on assumptions

• The Ceteris Paribus Assumption

 Models and Ceteris Paribus

• What determines a person’s wage rate?

 Education 
 
 Age 
 Experience 
W  f 
 Skills 
 Pleasant Conditions 
 
 Female 
 
 Economic Analysis

Ceteris paribus assumption says, 


Education 

change just ONE of the independent  Age 
variables and examine how wage is  Experience 
affected. Assume other variables do W  f 
 Skills 
not change.  Pleasant Conditions 
 
 Female 
 
 Building and Testing A Theory
• Decide on what you want to explain or predict.

• Identify important variables

• State assumptions of the theory

• State the Hypothesis

• Test the theory.

Working with diagrams
• Independent variable: Variable that stands alone
and isn't changed by the other variable.

• Dependent variable: Variable that depends on

other factors.

• Function: A relation between independent and

dependent variable (each value of independent
variable is related to exactly one value of
dependent variable).
• Direct relationship: Both variables move in the
same direction

• Inverse relationship: Variables move in the

opposite direction.

• Drawing graphs from equation

• Slope of a line
• Slope of a curve
• 450 line
 Chapter 2:

Production Possibilities Frontier

The Production Possibilities Frontier (PPF)

• The PPF is a graph representing the

possible combinations of two goods that
an economy can produce in a certain
period of time under the conditions of a
given state of technology, no unemployed
resources and efficient production
Straight Line PPF: Constant Opportunity
Costs
Law of Increasing Opportunity Costs
• In the Real World, most PPF lines are
bowed outward.

• For most goods, the opportunity costs

increase as more of the good is
produced.

• This is called law of increasing

opportunity cost (which is resulted from
 PPF
Total resource: 5 hours, 10 fishes per hour and 3 coconuts per hour

a
15 b

Coconuts
Unattainable
c

d
Attainable

3 e
z

f
0 10 20 30 40 50
Fishes
Bowed Outward PPF: Increasing
Opportunity Costs
 Economic Concepts in a PPF Framework
• Scarcity
• Choice
• Opportunity cost
• Productive efficiency
• Unemployed resources
• Economic growth
 Economic Concepts in a PPF Framework
• The economy is efficient if it is producing the maximum
output with given resources and technology.
• The economy is inefficient if it is not producing the
maximum output with the given resources and technology.
• Efficiency implies gains are impossible in one area without
losses in another area.
 Economic Growth
• Increased productive capabilities of the
economy.

• Two major factors:

1. Increase in resource
2. Advancement in technology
 Technology
• Technology refers to the body of skills and
knowledge concerning the use of resources
in production.
• An advance in technology commonly refers
to the ability to produce more output with a
fixed quantity of resources or the ability to
produce the same output with a smaller
quantity of resources.
Capital Goods and Future Growth
Capital Goods and Future Growth
 Specialization and Trade
– Two goods (Biriyani and Egg)

– Two people with different abilities in

the production of Biriyani and Eggs

– Person will specialize in producing

something for which she/he has lower
opportunity cost (Comparative
advantage)
 Q&A
• What does a straight-line production possibilities
frontier (PPF) represent? What does a bowed-outward
PPF represent?

• In an economy, is there only one combination of goods

that is efficient?

• Why do people trade?

 Chapter - 3
Supply and Demand Theory
 Demand
• Demand is: the willingness and ability of buyers to
purchase different quantities of a good at different
prices during a specific period of time.

• The Law of Demand: as the price of a good rises,

quantity demanded of that good falls; as the price of a
good falls, quantity demanded of that good rises.
 Four Ways to Represent The Law Of
Demand
• In Words: “As price rises, quantity demanded falls”

• In Symbols: P Qd

• In a Demand Schedule

• In a Demand Curve
The Demand Schedule & Demand Curve
• Demand is: the willingness and ability of buyers to
purchase different quantities of a good at different
prices during a specific period of time.

• The Law of Demand: as the price of a good rises,

quantity demanded
(a)
of that good falls; as the price of a
good falls, quantity demanded of that good rises.
(b)
Why Quantity Demanded Goes Down As
Price Goes Up
• People substitute lower-priced goods for higher-priced
goods.

• The Law of Diminishing Marginal Utility: for a given

time period, the marginal (additional) utility or
satisfaction gained by consuming equal successive units
of a good will decline as the amount consumed
increases.
Individual Demand to Market Demand
• Individual demand: Shows
combinations of price and
quantity demanded of a
good for single consumer.

• Market Demand: Shows

combinations and quantity
of a good for all buyers.
Change in Quantity Demanded vs. Change in
Demand
• Change in Quantity Demanded:
Occurs only because of change in it’s own price.
Movement along the curve. Individual demand changes
because of change in the price.

• Change in Demand:
Occurs because of factors other than it’s own price.
Shift of the curve. Individual demand increases at each
price.
Change in Quantity Demanded vs. Change in
Demand
 Causes of Change in the Demand
• Income

• Preferences

• Prices of Related Goods

• Number of Buyers

• Expectations of Future Price

 Income Changes in Demand Shifts
• The demand for a good increases if people are willing
and able to buy more of the good at all prices.

• A normal good is a good the demand for which

rises(falls) as income rises(falls).

• An inferior good is a good the demand for which

rises(falls) as income falls(rises).
 Preferences and Related Goods
• Preferences affect the amount of a good they are
willing to buy at a particular price (Ex: favorite food,
favorite author)

• If the demand for product X increases as the price for Y

increases, and the demand for product X falls as the
price for Y falls, X and Y are substitutes (Ex:Coke and
Pepsi).

• If the price of product A falls and the demand for

product B rises, A and B are Complements (Ex:
Ketchup and Hot Dog Buns).
Number of Buyers and Expectation of Future Price

• The demand for a good in a particular market area is

related to the number of buyers in the area: More
Buyers, More Demand; Fewer Buyers, Less Demand.

• Buyers who expect a price to be higher next month will

buy the good this month, increasing demand. Buyers
who expect a price to be lower next month will wait to
buy the good next month, reducing demand.
 Shifting the Demand Curve
• A change in Demand causes a shift in the Demand
curve.
• A change in the Quantity Demanded moves a point
along the current Demand curve.
• If Demand increases, the curve shifts to the right.
• If Demand decreases, the curve shifts to the left.
Shifts in Demand
 Increase in Quantity
Demanded
P Caused by
A price
$1
decrease
2

$1 B Move from
0 point A to
point B
D
7 8 Movement
Q
along a
demand
 Decrease in Quantity
Demanded
Caused by
P
B price
$5 increase
0
A Move from
$3 point A to
0
point B
D
Movement
4 6 Q along a
demand
 Increase in Demand

Caused by
P non-price
factors

Entire
demand
curve shifts
D1 D2 to the right

Q
Willing to
buy more at
 Decrease in Demand

Caused by
P non-price
factors

Entire
demand
curve shifts
D2 D1 to the left

Q
Willing to
buy less at
Demand Curve from Demand Function
 Supply
• Supply is the willingness and ability of sellers to
produce and offer to sell different quantities of a good
at different prices during a specific period of time

• Law of Supply: As the price of a good rises, the

quantity supplied of the good rises; and as the price of a
good falls, the quantity supplied of the good falls.

• Why Supply Curves Slope Upwards?

Supply schedule to supply curve
Price of pen Quantity Combination
(P) supplied of points
pen (Qs)
10 500 A

15 700 B

20 900 C
 Supply function to supply curve
• Suppose the supply function is Q s= -20+2P

• Supply curve: P
S

10

-20 0 Qs
 Market supply curve
• Market supply schedule:
Pp SA SB Market Supply

10 500 300 800

15 700 400 1100

20 900 500 1400

 Market supply curve

• An Individual supply curve represents the price-

quantity combinations for a single seller

• The Market Supply Curve represents the price-quantity

combinations for all sellers of a particular good.

• Market supply curve can be derived by summing

individual supply curves vertically given the price.
 Δ in Qs vs. Δ in supply

• Change in Quantity supplied:

Occurs only because of change in it’s own price.
Movement along the supply curve.

• Change in supply:
Occurs because of factors other than it’s own price.
Shift of the supply curve. Supply increases at each
price.
Δ in Qs vs. Δ in supply
 Causes of Δ in supply
Factors causing shift of the supply curve:

• Price of relevant resources

• Technology
• Price of other goods
• Number of sellers
• Expectations of Future Price
• Taxes and subsidies
• Government restrictions
 Causes of Δ in supply
• If the price of a relevant resource changes, the supply
curve will shift (EX: wood prices increase, cost of a
new house increases as well)
• Technology can increase the quantity supplied by
producing more of a product with the same quantity of
resources supplied.
• If the number of sellers increase, the supply curve will
shift.
• If the price of a good is expected to be higher in the
future, the supply curve will shift
 Causes of Δ in supply
• Taxes increase unit costs
• Government restrictions can change the supply curve by
increasing or limiting production.
• A Change in the Supply Curve is a shift in the Supply Curve, not
merely moving up and down the same curve.
Shifts in Supply
 Market terms
• If the quantity supplied is greater than the quantity
demanded, the good has a surplus or excess supply.

• If quantity demanded is greater thean quantity supplied,

a shortage or excess demand exists.

• The price at which a quantity demanded equals the

quantity supplied is the equilibrium price.

• The quantity that corresponds to the equilibrium price is

the equilibrium quantity.
 The Market
Putting Supply and Demand Together:

P Qd Qs Condition

15 50 150 Surplus

10 100 100 No surplus or

shortage
5 150 50 Shortage
The Market
 Consumer’s Surplus
• Difference between the “maximum price buyer is
willing and able to pay for a good” and “the price in the
market”.

• CS = Maximum buying price – Price paid

• Demand curve shows the willingness to pay of a

consumer for each quantity of good.

• Consumer’s surplus is the area under the demand

curve and above the price, until the quantity.
Consumer’s Surplus
Consumer’s Surplus
 Producer’s Surplus
• Difference between the “price the seller receives” and
“the lowest price he would be willing to sell the good
for”

• PS = Price received - Minimum selling price

• Supply curve shows the lowest price seller would be

willing to sell the good for.

• Producer’s surplus is the area under the price and

above the supply curve until the quantity.
Producer’s Surplus
Producer’s Surplus
 Market Efficiency

Total surplus (or social welfare) measures the

overall welfare of the society.
Total surplus = CS+PS

In free markets with voluntary trade:

Until what point consumers buy?
Until what point producers sell?

When is efficiency achieved in a free

market?
Market Efficiency