Welcome to ECN 1100 Introductory

Microeconomics 2022/2023
 Learning Objectives
At the completion of this lecture, students should be able
to have an understanding of:

What is economics?
Micro vs Macroeconomics.
What is an Economy?
Economic Models.
Policy Economics.
Graphs and equation of a Straight line.
 What is Economics?
Economics is the study of how individuals and society
allocate or utilize limited resources to satisfy unlimited
wants.

Economists argue that the fundamental problem of

economics is scarcity.

As a result of this Scarcity, societies as well as individuals

have to make choices amongst the available alternatives in
order to maximize the production of goods and services so
that needs and wants are maintained and fulfilled.
 Needs Vs Wants
“Needs and wants’ are not identical.
A need can be described as a necessity which
an individual is unable to function without such
as food, clothing, shelter, air, water, and sleep.
(See Maslow’s hierarchy of needs).

Meanwhile, a ‘want’ is the desire to have a good

or service which an individual does not need to
maintain his/her survival such as additional
clothing which he or she does not need.
 Branches of Economics
Economics is divided in two branches
• Microeconomics
• Macroeconomic.

•
 Microeconomics
Microeconomics- this involves the study of individual
economic agents and individual markets in an attempt
to understand the decision-making process of firms
and households.

Microeconomics is concerned with the interaction

between individual buyers and sellers and the factors
that influence the choices made by buyers and sellers.
In particular, it focuses on patterns of supply and
demand and the determination of price and output in
individual markets.
 Macroeconomics
Macroeconomics- involves the study of
economics on an aggregated scale or studies the
behavior of the aggregate economy.

Macroeconomics examines economy-wide
phenomena such as changes in unemployment,
national income, rate of growth, gross domestic
product and inflation.
 Branches of Economics Cont’d
Microeconomics variables:
• Price
• Individual quantities demanded.

Macroeconomics variables:
• Inflation
• Aggregate Demand (economy wide)
 What is an Economy?
An economy can be described as an economic
system of a country or other area where the
exchange, production, distribution, and
consumption of goods and services for individuals
within society takes place.
 
Everyday some economic issue is mentioned on the
television, newspaper, or the radio. We live in an
economic system and we engage in economic
activities such as processing, packaging, selling and
distributing goods and services.
 Using Economic models to explain
the economy.
Economists use models to learn about resources
and about the world and these models are most
often composed of diagrams and equation. These
models however, omit many details to allow us to see
what is truly important.
 Economic Models Cont’d
The methodological frame work for using
model to explain economic phenomena is
broken down into four (4) steps:
• State the hypothesis (students who attend
class has better grades than those who skip)
• Observation and Measurement
• Model Building
• Testing Models
 Economic Models Cont’d
According to A. Koutsoyiannis, (1979) an economic
model is a simplified representation of a real
situation. It includes the main features of the real
situation which it represents and implies
abstraction.
Qd= f(Po, Ps, Pc, Yd, T, S, P)

Where : Qd is quantity demanded, Po is own price,

Ps is price of substitutes, Pc is price of compliments,
Yd is disposable income, T is taste and preferences, S
is season, P is population size.
 Economic Methodology
Good economic policy analysis is objective, that is, it
keeps the analyst’s value judgments separate from the
analysis. It does not indicate that this is the way things
should be reflecting the benchmark established by the
analyst. That would be subjective analysis since it
reflects the view of the analysts on how things should be. 

To make a clear distinction between subjective and

objective analysis , economists have divided economics
into two categories:
• Positive Economics
• Normative Economics
 Economic Methodology Cont’d
Positive Economics-
Is the study of what is and how the economy works in
other words these are factual statements and can be
tested against benchmarks, facts, statistics etc. .e.g.
How do price restrictions affect market forces?

Normative Economics-
Is the study of what the goals of the economy should
be. These are statements that show opinion or valued
judgments and cannot be tested for instance what
should be the distribution of income?
 Steps in Scientific Methodology
One of the things that hold economics as a
science is the methodology used. As a social
science, economics attempts to model behaviour
based on scientific methodology.
Assumptions:
• Ceteris Paribus
• The Fallacy of Composition
• The Post Hoc Fallacy
 Scientific Methodology Cont’d
Ceteris Paribus-
It is a Latin term that mean “all other things
being equal or all other relevant things remain
the same”. The ceteris paribus assumption allows
the economist to simplify the reality so it may be
more readily understood. Hence, by changing
one variable at a time (factor) and holding all the
other relevant factors constant, we are able to
isolate the factors of interest and are able to
investigate its effect in the clearest possible ways.
 
 Scientific Methodology Cont’d
The Fallacy of Composition-
Occurs when one incorrectly attempts to
generalize from a relationship that is true for
each individual but is not true for the whole
group. For example, a man may solve his
unemployment problem by great ingenuity in
hunting a job or by willingness to work for less,
but all cannot necessarily solve their job
problems in this way.
 Scientific Methodology Cont’d
The Post Hoc Fallacy-
This occurs if one incorrectly assumes that one event
is the cause of another simply because it preceded
the other. For example, Joan is scratched by a cat
while visiting her friend. Two days later Joan comes
down with a fever. Joan concludes that her fever is as
a result of the cat’s scratch.
 Economizing Problem in Economics
In economics, there are two fundamental facts that
constitutes the economizing problem and provide
the foundation for economics.

• Society’s unlimited economic wants-

• Economic wants of its citizens and institutions
unlimited and insatiable (desires for goods and
services are unlimited and cannot be satisfied).
• Scarce economic resources-
• Economic resources are limited and scarce.
 Factors of production
Economists classify these unlimited and scarce
resources as the four factors of production.
• Land – return is rent
• Labour – return is wages
• Capital- return is interest
• Entrepreneurship or Entrepreneur ability –
return is profit
 Factors of production cont’d
Land – All those gifts of nature, such as a land itself,
forest, mineral deposits commonly called natural
resources are referred to as land by economists. Their
existences are independent of human beings.

Labour -all human resources, mental and physical

talents utilized in the production of goods and
services.
 Factors of production cont’d
Capital – All those manufacturing aids used in the
production of goods and services such as tools,
machinery and factories that are used in the process
of making other goods and services. Economist calls
these capitals. Consumer goods (satisfy wants directly)
vs Capital goods (used to produce consumer goods)

Entrepreneurship- Those who take risks and

initiative by introducing new products and new ways
of making old products (innovators), developing new
businesses and forms of employment.
 Policy Economics
Policy economics recognizes that theories and data
can be used to formulate policies .

Policies are course of action based on economic

principles that are intended to resolve a specific
economic problem or achieve an economic goal.

Economic theories are the foundation of economic

policy.
 Policy Economics Cont’d
In order to create policies to achieve specific goals,
policy makers need to understand the basic steps
that are involved in policy making.
• • State the goal e.g. economic growth
• • Determine the policy options ( fiscal or
monetary policy options or expansionary or
contractionary)
• • Implement and evaluate the policy that
was selected
 Policy Economics Cont’d
Economic Goals
If economics polices are designed to achieve
certain economic goals, then we need to recognize a
number of goals that are widely accepted in Guyana
and many other countries. These include:
• Economic Growth
• Full Employment
• Economic Efficiency
• Price-level Stability
• Equitable Distribution of income
 Policy Economics Cont’d
Economic Growth-
Economic growth is achieved by increasing the
economy's ability to produce goods and services.
This goal is best indicated by measuring the growth
rate of production for example GDP growth.

Full Employment
Achieved when all available resources (labor,
capital, land, and entrepreneurship) are used to
produce goods and services. Commonly indicated
by the employment of labor resources (measured by
the unemployment rate).
 Policy Economics Cont’d
Economic Efficiency-
Efficiency is achieved when society is able to get the
greatest amount of satisfaction from the utilization
of available resources.

Price-level Stability
Stability is achieved by avoiding or limiting
fluctuations in prices. Stability seeks to manage
inflationary cycles within the economy. This goal
is measured by month-to-month and year-to-year
changes in the inflation rate. CPI in Guyana.
 Policy Economics Cont’d
Equitable Distribution of income-
Equity is achieved when income and wealth are fairly
distributed within a society. What constitutes a fair
and equitable distribution is debatable.
 Rational Behavior
Economics is grounded on the assumption of
“rational self-interest.” Individuals pursue actions
that will enable them to achieve their greatest
satisfaction. Rational behaviour means that
individuals will make different choices under
different circumstances
 Rational Behavior Cont’d
Rational decision may change as costs and benefits
change.
It should be made clear that rational self-interest is
not the same as selfishness. Many persons help
their family members or friends, and they
contribute to charities because they derived
pleasure from doing so. Parents help pay for their
children’s education for the same reason.
 Rational Behavior Cont’d
These self-interested but unselfish acts help
maximise the giver’s satisfaction as much as any
personal purchase of goods or services. Self-interest
behaviour is simply behaviour that enables a person
to achieve personal satisfaction irrespective of how
it may be derived.
 GRAPHS AND THEIR MEANING
Graphs are extensively used in Economics.

A graph is a visual representation of the relationship

between two variables. Graphs depict either a direct
relationship or an inverse relationship. By a direct
relationship (positive) we mean that the two variables
change in the same direction. That is when one
increase the other also increases or when one
decreases the other also decreases.
Parts of a Graph

-,+
+,+

-,- +,-
 GRAPHS AND THEIR MEANING

Direct Relationship
Exists between two variables x,y. An increase in x is
always associated with an increase in y and a decrease
in x is associated in a decrease in y.
Direct Relationship
 GRAPHS AND THEIR MEANING
In contrast two variables are said to be inversely
related when as one increase the other decreases,
vice versa. This is also called a negative relationship,
e.g. price and quantity demanded.
 Inverse Relationship
.
 DEPENDENT AND INDEPENDENT
VARIABLES
Although it is not always easy, Economists try to
determine which variable is the “cause” and which is
the “effect.” Or more formally, they seek to
differentiate between the independent variable and
the dependent variable.
 DEPENDENT AND INDEPENDENT VARIABLES
Cont’d
The independent variable is the cause or source; it is
the variable that changes first. The dependent
variable is the effect or outcome; it is the variable
that changes because of changes in the independent
variable.
For example:
Qd= f(P)
 Equation of a Straight Line
Y= mX + C
Where m= slope of a line
C= Y intercept
∆= Delta or Change
∆Y/∆X

 
END