Microeconomics

Course code :- BBA133

Every field of study of has its own
language
Economist’s language
 Economics
• Economics word is originated
from Greek word ‘Oikonomia’
• Oikos means household
• Nomos means management
• Aristotle described economics as a
household management that
means the problems of food,
shelter, clothing, education,
treatment etc. for family members
and the process of solving these
problems by earning money.
 Economics

Economics is a study of social science which studies the way a

society chooses to use its limited resources, which have
alternative uses, to produce goods and services and to
distribute them among different groups of people.
Economics and business decisions
Economics and business decisions
Andalusian region
 Ten Principles of Economics
How People Make
How people Interact
Decisions
• People Face Trade-offs • Trade Can Make Everyone
• The Cost of Something Is Better Off
What You Give Up to Get It • Markets Are Usually a
• Rational People Think at Good Way to Organize
the Margin Economic Activity
• People Respond to • Governments Can
Incentives Sometimes Improve
Market Outcomes
How the
Economy as a Whole Works
• A Country’s Standard of
Living Depends on Its
Ability to Produce Goods
and Services
• Prices Rise When the
Government Prints Too
Much Money
• Society Faces a Short-Run
Trade-off between
Inflation and
Unemployment
Principle 1:- People face trade-off
 Principle 1:- People face trade-off
• To get one thing, you have to give up something else.
• Trade off means any situation where making one
choice means losing something else
• Making decisions requires trading off one goal against
another.
• “There ain’t no such thing as a free lunch”.
 Common trade-off

Study

Job
 Trade off for student

Unit 1

Economics

Unit 2

Study Accounting
Unit 1

Watching movie,
rest, shopping
 Trade off – Family income

Education Savings Grocery Vacation

• 10th • Monthly • Food items • Domestic

• 12th savings • Beverages • International
• Graduation • Bank FD • Baking
• Post • Shares • Dairy items
graduation • Mutual Fund • Sauces
• Frozen foods
Classic trade-off :- guns Vs butter
Trade off between clean environment and
high level of income
 Trade-off at society level

• Society faces an important tradeoff:

efficiency vs. equality
• Efficiency: when society gets the most from its scarce resources
• Equality: when prosperity is distributed uniformly among society’s
members
Tradeoff: To achieve greater equality, could redistribute income from wealthy to poor.
But this reduces incentive to work and produce, shrinks the size of the economic “pie.”

Tax payers Distribution of tax

Conclusion
Principle 2 :- The Cost of Something Is What You Give Up
to Get It

• In decision making individual compares cost and benefit of alternative

choices.

• The opportunity cost of any item is what you give up to obtain it.

• Opportunity cost is the value of what you lose when choosing between

two or more options. 

 Opportunity cost = FO – CO
Where: FO stands for Return on best-forgone selection and CO stands
for return on the selected option

• Company have 1,00,00,000 and choose to invest it in a product line

that will generate a return of 5%.
• If you could have spent the money on a different investment that
would have generated a return of 7%.
• What is opportunity cost?
• The 2% difference between the two alternatives is the foregone
opportunity cost of this decision.
 Education :- 12th
Wealth :- INR 1250 Crore
• What is opportunity cost of Sportsman not attending the
college ?
• High
• Low
 Opportunity cost of going to college

• No job experience

• Giving up salary due to education

• No time for leisure activities

• Total spent on food, clothing, books, transportation, tuition,

lodging, and other expenses,
 Opportunity cost
Opportunity cost for that action ( What
Action taken ( Cost of something) you give up to get it)

• Watching movie is not a price of ticket • The value of time we spent in the

• Sales manager left job to do MBA theatre

• Investing in shares of listed company • Salary forgone

• Starting own venture • Losing risk free interest return

• Salary forgone
 Principle 3: Rational People Think at the
Margin
• Economists normally assumes that the people are rational.
• Rational people
• People who systematically and purposefully do the best they can to achieve their
objectives
• Marginal change
• A small incremental adjustment to a plan of action
• From an economist’s perspective, making choices involves thinking ‘at the
margin’ - that is, making decisions based on small changes in resources.
• In decision making rational people compare marginal cost against marginal
benefit
Margin and business decisions
• You own a store with 10 employees who collectively earn $350,000
per year in wages, for an average of $35,000 per employee. Your store
takes in $500,000 per year in revenue, so each worker is earning an
average of $15,000 in profit for you.
• Adding an additional employee will raise total wage costs to $385,000
per year, while revenues rise to $537,000.
• Should you hire the eleventh worker? Why or why not?
• You own a store with 10 employees who collectively earn $350,000
per year in wages, for an average of $35,000 per employee. Your store
takes in $500,000 per year in revenue, so each worker is earning an
average of $15,000 in profit for you.
• Adding an additional employee will raise total wage costs to
$385,000 per year, while revenues rise to $537,000; each worker is
now making you an average profit of $13,818 per year.
 Water vs Diamond

Water Diamond
• Humans needs water to survive, while diamonds are unnecessary.
• Person’s willingness to pay for a good is based on the marginal benefit
of an extra cup of is small because water is plentiful
• Diamond is not required but it rare resource , people consider the
marginal benefit of an extra diamond of an extra diamond is large.
 Principle 4: People Respond to Incentives

• Incentive

• Something that induces a person to act

• Because rational people make decisions by comparing costs and

benefits, they respond to incentives

Fruit and vegetable producer response to
rising prices
 Incentives and individual response

• When gas prices rise,

• consumers buy more hybrid car
• Consumers prefer to use small cars rather than SUVs
• Prefer to relocate near to work place
• Prefer to share car pool facilities
• Use public transport
Oil price and demand for cars

Oil price Cars

Public policy and incentives
Bus Drivers Respond to Incentives :-
Study at Chile
• Companies in Chile pay bus
drivers one of two ways: either
by the salary or by trip based.
• Use shortcuts when the traffic is
bad.
• Take shorter meal breaks and
bathroom breaks.
• They want to get on the road
and pick up more passengers as
quickly as they can.
• In short, their productivity
increases
Creating Helpful Incentives to Produce
Semiconductors for America Act

Strengthening national security

Less dependence on foreign

sources

Help to build cars cheaper, appliances

cheaper, computers cheaper
 Section 102 – CHIPS for America Fund 

• Over the next five years, $50 billion is allocated to develop

domestic semiconductor manufacturing production:
• $39 billion is to be used for financial assistance for building or
modernizing domestic semiconductor manufacturing capabilities.
• $6 billion of these funds is appropriated for direct loans and loan
guarantees.
• $11 billion is to be appropriated over the next five years for the
implementation of research and development and workforce programs.
What are the economic advantages and disadvantages of living in a
group?
What are the economic advantages and disadvantages of not living in a
group?
Which group you like to join and why?
Society
Alone
Principle 5: Trade Can Make Everyone Better
Off
Trade Can Make Everyone Better Off
 Why to do people trade

• Assume people didn’t trade with each other. What will happen?
• Individual can not produce everything himself ( clothes, fruits, vegetables,
equipment, cars, healthcare).
• Key points is :- everyone specialises in the production of goods and
services and trade it with others.
• Key point is :- More access to trade means more choices and a higher
standard of living
• What would happen it cities or states do not trade with each other?
• Limiting trade would reduce people’s choices and make people worse off.
 Principle 6: Markets Are Usually a Good Way to
Organize Economic Activity

• Economy
• An economy is the large set of inter-related production, consumption, and exchange
activities that aid in determining how scarce resources are allocated.
• Centrally planned economy
• Central planners decides what goods and services to be produced, how much to be
produced, and who to produce and consume these goods and services.
• Market economy
• An economy that allocates resources through the decentralized decisions of many firms
and households as they interact in markets for goods and services
• In a market economy, households freely decide what to buy and who to work for
and firms freely decide who to hire and what to produce.
Characteristics of market economy
Market economy and invisible hand

Adam Smith
• 18th-century Scottish philosopher and
economist
• An Inquiry into the Nature and Causes of the
Wealth of Nations
• Invented concept of the “invisible hand” 
In market economy price is instrument which guide
to buyer to demand and produce to produce a
particular quantity
 Principle 7: Governments Can Sometimes
Improve Market Outcomes
• Property rights
• The ability of an individual to own and exercise control over scarce resources
• Externality
• The impact of one person’s actions on the well-being of a bystander
• Market power
• The ability of a single economic actor (or small group of actors) to have a substantial
influence on market prices ( Monopoly)
Invisible hand can show its magic only if
government enforces the rules
Externality :- 15 Fish Meal Firms Shut Down For Causing Air &
Water Pollution As Per Order By Pollution Control Board .

• Following the repeated warning and orders issued to the

15 Fish Meal plants in Ullal and Mukka by the Pollution
Control Board, the Dakshina Kannada district
administration has closed down these 15 fish meal
firms, including 13 in Ullal and two in Mukka. The
directions were from Karnataka State Pollution Control
Board (KSPCB) for constantly polluting air and water
under the Air and Water (Prevention and Control of
Pollution) Acts, respectively.
• The Board chairman in his two orders issued on August
5 noted that the industries have continuously been
violating the provisions of the two Acts thereby
affecting the environment through the discharge of
untreated industrial effluent into rivers and the sea and
inconveniencing the general public through foul smell.
Market Power :- Cartels in cement and steel
industry
Cartel is a collection of companies in the same industry that collude together to control the
price of a product/service

• Cement and Steel producers are once again under the ire of
government as union minister Nitin Gadkari indicated a brewing cartel
in the two industries.
• Big players in the steel and cement industry are conspiring together to
jack up prices
• The steel prices have risen by 55 percent in the last six months, even
though the cost of key inputs like raw materials and power remained
the same.
• In 2019, country's anti-trust body started examining complaints of
cartelization in the cement industry. Following this, in December
2020, it raided top five cement companies,
• Productivity :-
• Productivity is the quantity of goods and services
from each unit of labor input.
• In nations where workers can produce a large
quantity of goods and services per hour, enjoy a
high standard of living
Principle 8: A Country’s Standard of Living Depends
on Its Ability to Produce Goods and Services
 Principle 8: A Country’s Standard of Living Depends on
Its Ability to Produce Goods and Services

GDP Per Capita

80000

70000

60000

50000

40000

30000

20000

10000

0
India UK USA China

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Principle 9 :- Prices rises when
the governments prints too
much money
Society Faces a Short-Run Trade-off between Inflation and Unemployment