Introduction

Principles of Microeconomics
Evolutionary Schools of
thoughts in Economics
1. Mercantilism
2. Physioctat
3. Classical Economics
4. Keynesian Economics
5. Neo-Classical Economics
6. New Classical Economics
7. New Keynesian Economics
8. Structural Economics
9. Institutional Economics
 1. Mercantilism
(16-18 Centaury)

Key Characteristics;
• A nation's wealth and power were best served
by increasing exports and reducing imports.
• Global wealth was static and that a nation's
economic health relied heavily on its supply of
capital.
• The Need to Increase the Supply of Gold
• Need to Maintain a Trade Surplus
• The Importance of a Large Population
• The Use of Protectionism
1. Mercantilism
Criticism
• Too much government regulations
and monopoly often lead to
inefficiency and corruption.
• Theory of free trade by Adam Smith
• Theory of comparative
advantage (David Ricardo)
Economies of scale from
specialisation possible under free
trade.
• Mercantilism is a philosophy of
a zero-sum game
 Key Characteristics;
 French economists, Led by Francois

2. Physiocrat Quesnay (1694-1774)

 A belief that government policy should
not interfere with the operation of
natural economic laws (Lassies-fair
Economics)
(18th-  land is the only source of all wealth.
(Agri-focused)
century)  Agricultural Labor is only productive
Factor of production
 Single tax system
 2. Physiocrat
(18th-century)

• Focused upon agriculture only

• Considered manufacturing as unproductive
•
Criticism
Ignored utility of value addition
• Law of God/ Natural laws
• too much freedom is not favourable
• Single tax system
 Key Characteristics
• The main classical economists are Adam
Smith, Jean-Baptiste Say, David
Ricardo, Thomas Robert Malthus, and
John Stuart Mill.
• Adam Smith propagated it through his
book Wealth of Nations,
• The concept favoured the laissez-faire
concept, free trade, and competition to
stimulate economic growth.

3. Classical • The theory focuses on producing goods

and services, expanding the market.
Economics (Late 18th-19th
Century)
 3. Classical
Economics

Criticism
• Existence of over-production or under-production
cannot be overruled
• Equilibrium Level need not be full Employment
Level.
• Full employment is not a normal situation.
• Employment and output are not eh function of
wage rate.
• Rate of Interest is not the true Determinant of
Saving and Investment
 Key Characteristics

ideas set forth by John Maynard Keynes in his General Theory of

Employment, Interest and Money

4. Keynesian
Economics A macroeconomic externality

(1930s)
Menu costs

Sticky wages and prices

Aggregate demand, AD, is not always automatically high enough to

provide firms with an incentive to hire enough workers to reach full
employment.
 Criticism

4. Borrowing causes higher interest rates and

financial crowding out

Keynesian The difficulty of predicting output gap

Economic
s Resource crowding out

Encourages big government

5. Neo-Classical
Economics
Three Pillars
1. Rational thinking: People make
rational choices between options based
on the value that they identify in each
choice.
2. Maximizing : Consumers aim to
maximize Information businesses aim
to maximize profits.
3. Information : People act
independently based on having all the
relevant information related to a choice
or action
5. Neo-Classical
Economics
Key Characteristics
• Efficient allocation of limited productive
resources.
• It considers the growth of the resources in the
long term, which will allow for expanding the
production of goods and services.
• It integrates the cost of production theory from
classical economics with the concepts of utility
maximization and marginalism.
• It emphasizes demand as a key driver of the
value of a product or service.
• People are rational in making choices,
maximizing utility
5. Neo-Classical
Economics

Criticism
1. Distribution of resources
2. Appropriation of resources
3. Irrational decisions
4. Available choices
5. Pursuit of profit
6. Standard of living
6. New Classical
Economics
(Early 1970s)

• Key Characteristics
• Stabilization of real variables, such as
output and employment,
• cannot be achieved by aggregate
demand management quantity supplied
equals quantity demanded
• Neoclassicals believe that the economy
is self-correcting, and attempting to fine-
tune the economy through monetary
and fiscal policies makes problems
worse.
6. New Classical
Economics

Criticism
1. Economists tend to focus on markets
or aggregate outcomes instead of
observing individual behaviour.
2. Normative Bias
3. Assumption of rationality
4. Equilibrium Theory
5. Incomplete
 • Key Characteristics
• British economist John Maynard Keynes'1978
• It is a modern twist on the macroeconomic
doctrine that evolved from classical Keynesian
economics principles.
• The new Keynesian theory attempted to
address, among other things,
• the sluggish behaviour of prices and its
cause, and
• how market failures could be triggered by
inefficiencies and

7. New Keynesian • might justify government intervention

Economics
7. New Keynesian
Economics

Criticism:
1. New Keynesian economics was
criticized in some quarters for
failing to see the Great Recession
2008.
2. New Keynesian economics
maintains that rational
expectations become distorted
as market failure arises from
asymmetric information and
imperfect competition .
8. Structural Economics
8. Structural Economics
Criticism
• structural economics neglects variables of
political and social nature
9. Institutional
Economics

• Key Characteristics
• It is a school of thought that studies how
institutional rules influence the economy and its
behaviour.
• It focuses on the role of different institutions in
shaping the economy.
• It guides developing countries to learn from
developed countries and make appropriate
policies.
• It also explains the effect of different institutions
on the daily transactions of the economy
Economic System Characteristics Pros Cons Examples

•Centralized government control •Prioritizes social welfare

Command •Resource allocation based on
•Lack of consumer choice
•Can rapidly achieve large-scale Can result in inefficiencies
•
Cuba, China, North
Economy government planning
•Limited consumer choice
projects
•Reduced likelihood of shortages
•Limited innovation
Korea

•Private ownership and control of

resources •Encourages innovation and •Can lead to income inequality
Market •Resource allocation based on supply efficiency •May not address social welfare United States, United
Economy and demand
•Competition among producers and
•Provides consumer choice
•Efficient use of resources
needs
•Potential for market failures
Kingdom, Singapore

consumers

•Combination of command and •Allows for government

•Can lead to inefficiencies
Mixed market elements
•Government regulation of certain
intervention where necessary
•Can be difficult to find the right Sweden, Canada, Japan
•Promotes economic growth and balance of command and
Economy industries innovation
market elements
•Private ownership of others •Protects social welfare
Amish Communities,
•Based on custom and tradition •Limited technological Indigenous Tribes
•Promotes social cohesion and
Traditional •Bartering and trade rather than
money
stability
advancement
•Can lead to poverty and
Economy •Roles and responsibilities
•Sustainable use of resources
•Conserves cultural heritage
inequality
determined by tradition •May be resistant to change
Gregory Mankiw
10 principles of Economics
1. People Face Trade-offs

2. The Cost of Something is What You Give

Up to Get It

3. Rational People Think at the Margin

4. People Respond to Incentives

5. Trade Can Make Everyone Better Off

Gregory Mankiw
10 principles of Economics
6. Markets Are Usually a Good Way to
Organize Economic Activity
7. Governments Can Sometimes Improve
Economic Outcomes
8. The Standard of Living Depends on a
Country's Production
9. Prices Rise When the Government
Prints Too Much Money
10. Society Faces a Short-Run Trade-off
Between Inflation and Unemployment
 • It is the cost of the next
best alternative forgone
to attain a certain output
Opportunity • Opportunity cost is the
forgone benefit that
Cost would have been derived
from an option not
chosen.
Production Possibility
Frontier (PPF)
• A graph that shows all the different combinations
of output of two goods that can be produced using
available resources and technology PPF captures
the concepts of scarcity, choice, and trade-offs.