Micro Economics

Dr Mohamed I. Migdad
Professor in Economics

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• The first semester
• September 2011
 Economics

Is the newist of sciences

And
the oldest of art

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 Contents of the course

• CONTENTS: This course introduces

basic concepts in Economics and
treats main topics in Microeconomics
theory .

• It consists of the following chapters:

 Chapter 1, includes

1. Introduction, definitions, importance,

reasoning, branches, pitfalls in
economic, scarcity law, collecting data
and basic analysis.
2. The three problems of economic
organization
3. Society's technological possibilities
 Chapter 2, includes
• Markets and government in a modern
economy
1. what is market and what is the
invisible hand
2. How market solve the basic economic
problems
3. The economic role of government
4. Trade, Money and Capital
 Chapter 3, includes
Basic elements of supply and demand
1. demand schedule, function, equation,
and curve.
2. supply schedule, function, equation,
and curve.
3. equilibrium of supply and demand.
 Chapter 4, includes

1. price elasticity of demand and supply

2. price ceiling and price floor
3. other topics, includes: minimum
wages, price control
 Chapter 5

• Demand & consumer behavior

1. choice and utility theory
2. marginal utility theory
3. the indifference curve
 Chapter 6
Production and business organization
1. Business organization
2. Theory of production and marginal
products
 Chapter 7
Analysis of cost
• 7.1 Economic analysis of cost
• 7.2 Business accounting and
opportunity cost
 Chapter 8
Supply and pricing in competitive
markets
• 8.1 Supply behavior of the competitive
firm
• 8.2 Supply behavior in competitive
industries
• 8.3 Efficiency and equity of competitive
markets
 Chapter9
• imperfect competition and monopoly
• 9.1 Pattern of imperfect competition
• 9.2 Marginal revenue and monopoly
 EVALUATION

• EXAMS + ASSIGNMENTS
• Final Exam 60%,
• Midterm Exam 30%,
• Assignments & Discussion 10%
 MAIN TEXTBOOKS

• 1- Economics, Samuelson Paul A and

Nordhaus William D, 1995.

• 2- The Micro Economy Today, Schiller

Bradley r. 1995.
 Definition of Economics

It is the study of wealth (Adam smith)

Or
It is the study of welfare (Pegout)
Or it is
A study of exchange and production

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 D. Of Economics
• Economics is the social science that
study the allocation of the scarce
recourses to satisfy the unlimited
wants.
• Economics is a science which studies
human behavior as a relationship
between ends and scarce means which
have alternative uses."
Marshall defined economics as
"a study of mankind in the ordinary
business of life; it examines that part
of individual and social action which
is most closely connected with the
attainment and with the use of the
material requisites of wellbeing. Thus
it is on one side a study of wealth; and
on the other, and more important side,
a part of the study of man."
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 The standard definition

"Economics is the social science which

examines how people choose to use
limited or scarce resources in
attempting to satisfy their unlimited
wants

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 Branches of Economics

Economics is usually divided into

two main branches

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 Microeconomics

which examines the economic behaviour of

individual actors such as businesses,
households, and individuals, with a view
to understand decision making in the
face of scarcity and the allocation
.consequences of these decisions

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 Macroeconomics
which examines an economy as a whole
with a view to understanding the
interaction between economic
aggregates such as national income,
employment and inflation. Note that
general equilibrium theory combines
concepts of a macro-economic view of
the economy, but does so from a strictly
.constructed microeconomic viewpoint
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 Other subdisciplines includes
international economics, labour economics,
welfare economics, neuroeconomics,
information economics, resource
economics, environmental economics,
managerial economics, financial
economics, urban economics,
development economics, and economic
.geography

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 Why we study economics
• Hope to make money.
• Worry to be considered illiterate if
they cannot understand the laws of
demand and supply.
• To understand the effect of the
information revolution on shaping our
society.
• To understand the effect of internet.

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 Continue
• To be fully informed about the international
trade.
• To study the tradeoff between inflation and
unemployment.
• To help you invest your saving.
• To know how to make economic decision.

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 Scarcity and Choice

• Scarcity means that people want more

than is available. Scarcity limits us both as
individuals and as a society. As
individuals, limited income (and time and
ability) keep us from doing and having all
that we might like.

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 Scarcity for society
• As a society, limited resources (such as
manpower, machinery, and natural
resources) fix a maximum on the amount
of goods and services that can be
produced

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 Scarcity requires choice
• People must choose which of their desires
they will satisfy and which they will leave
unsatisfied.
• When we, either as individuals or as a
society, choose more of something,
scarcity forces us to take less of
something else.

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 New definition

• Economics is sometimes called the study

of scarcity because economic activity
would not exist if scarcity did not force
people to make choices.

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 The logic of economics
• How do economic go about the complex
understanding of the economic activities.
• The following are the some of the
common fallacies encountered in
economic reasoning:
 The post hoc fallacy
• This involves the inference of causality.
The post hoc fallacy occurs when we
assume the previous event cause the later
one, which is not necessary correct
assumption.
 The failure of holding other things
constant
• Remember to hold other things constant
when you are analyzing the impact of one
variable on the economic system.
• e.g. the effect of tax rate on tax revenue.
 The fallacy of composition
• Some times we assume that what holds
true for part of a system also holds true for
a whole.
• In economics however, we find that the
whole is different than the sum of parts.
• When you assume that what is true for the
part is also true for a whole, you are
committing the fallacy of composition.
 Examples
• If one farmer produce cucumber, he will
have a higher income, but if all farmers
produce cucumber they will have lower
income.
• If high tariff is put on a particular industry,
the producer in that industry is likely to
profit, if high tariffs are out on all products,
all producers and consumers will be worse
off.
Basic problems of economic
organization

Or basic three questions

 The three problems of
economics

• What commodities are produced and

what quantities?
• How are goods produced?
• For whom are goods produced?
What commodities are produced
and what quantities?
• The society have to decide and determine
how much of each goods will make and
when they will be produced.
• Will we produce pizzas or shirts today, few
high quality shirts or many cheap shirts.
• Or will we produce fewer consumer goods
and more investment goods
 How are goods produced?
• The society have to determine who will
produce with what resources and what
techniques they will use.
• Who farms and who teaches?
• Is electricity generated from oil, from coal
or from the sun?
• Will factories be run by people or robots?
• Will we use the labor intensive or capital
intensive technique?
 For whom are goods
produced?
• Who gets to eat the fruits of economic activates?
• Is the distribution of income and wealth is fair and
equitable?
• How is the national product divided among
different household?
• Are many people poor and few rich?
• Do high wages go to teachers or farmers?
• Will society provide minimal consumption to the
poor? Or must people work if they are to eat?
 The distribution system
• We have different distribution systems
depending on and though alternative
economic systems.
• We have market, command, mixed and
Islamic economy.
 Positive and Normative
Economics

• This is to study
• what is for positive economics
• or
• what ought to be for normative

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 Positive economics

• Positive economics studies economic

behavior without making judgments. It
describes what exists and how it works.
Positive economics includes:
– Descriptive economics, which
involves the compilation of data that
describe phenomena and facts.
– Economic theory, which involves
building models of behavior.
• An economic theory is a general
statement of cause and effect, action
and reaction.
 Normative economics
• Normative economics, also called policy
economics, analyzes outcomes of
economic behavior, evaluates them as
good or bad, and may prescribe courses
of action.
Society’s technological possibilities

• Every gun that is made, every warship

launched, every rocket fired signifies, in the
final sense a theft from those who hunger
and not fed. Pres. Eisenhower.
 STP
• Each economy has a stock of limited
resources (labor, technological knowledge,
factories and tools, capital, materials, land,
energy)
• Each economy have to decide how to
allocate his resources among the different
possible commodities.
• Land for producing wheat or housing the
population.
 Inputs and outputs
• Imputes are the resources available for the
society.
• Another terms for inputs are factors of
productions.
• FoP are land, labor, capital and
management.
• Some time we call them as 7M and they
are: money, material, management,
markets, machinery, men,
 land
• Or more generally natural resources that
represents the gift of nature to our
productive process.
• It includes the land it self, the energy
resources that fuel our cars & heat our
homes, nonenergy resources like copper,
iron and sand, the environmental
resources, such as clean air and drinkable
water.
 labor
• Includes the human time spend in
production at all skill levels.
• Includes also human time spend in
management.
 capital
• Capital resources from the durable goods
of an economy.
• Capital goods include machines, roads,
trucks.
 management
• We might consider it as a part of the labor
or as a fourth factor of production.
The Production Possibility
Frontier (PPF)
• The production possibility
frontier (ppf) is a graph that shows
all of the combinations of goods and
services that can be produced if all
of society’s resources are used
efficiently.
The Production Possibility
Frontier
• The production
possibility frontier
curve has a
negative slope,
which indicates a
trade-off between
producing one good
or another.
The Production Possibility
Frontier
• Points inside of the
curve are inefficient.
• At point H, resources
are either
unemployed, or are
used inefficiently.
The Production Possibility
Frontier
• Point F is desirable
because it yields
more of both goods,
but it is not
attainable given the
amount of
resources available
in the economy.
The Production Possibility
Frontier
• Point C is one of the
possible
combinations of
goods produced
when resources are
fully and efficiently
employed.
The Production Possibility
Frontier
• A move along the
curve illustrates the
concept of opportunity
cost.
• From point D, an
increase the production
of capital goods
requires a decrease in
the amount of
consumer goods.
The Law of Increasing
Opportunity Cost
• The slope of the
ppf curve is also
called the marginal
rate of
transformation
(MRT).
 the law of increasing opportunity
cost
• The negative slope of the ppf curve
reflects the law of increasing opportunity
cost. As we increase the production of one
good, we sacrifice progressively more of
the other.
 Scarcity, Choice, and
Opportunity Cost

• Human wants are unlimited, but

resources are not.
• Three basic questions must be
answered in order to understand an
economic system:
– What gets produced?
– How is it produced?
– Who gets what is produced?
Scarcity, Choice, and Opport. Cost
• Every society has some system or
mechanism that transforms that society’s
scarce resources into useful goods and
services.
 Scarcity, Choice, and
Opportunity Cost
• Capital refers to the things that are
themselves produced and then used to
produce other goods and services.
• The basic resources that are available
to a society are factors of production:
–Land
–Labor
–Capital
 Scarcity, Choice, and
Opportunity Cost
• Production is the process that transforms
scarce resources into useful goods and
services.
• Resources or factors of production are the
inputs into the process of production;
goods and services of value to
households are the outputs of the
process of production.
 Scarcity and Choice
in a One-Person Economy

• Nearly all the basic decisions that

characterize complex economies must
also be made in a single-person
economy.
• Constrained choice and scarcity are
the basic concepts that apply to every
society.
 Scarcity and Choice
in a One-Person Economy

• Opportunity cost is that

which we give up or forgo,
when we make a decision or
a choice.
 Scarcity and Choice
in an Economy of Two or More
• A producer has an absolute
advantage over another in the
production of a good or service if it
can produce that product using
fewer resources.
 Scarcity and Choice
in an Economy of Two or More
• A producer has a comparative
advantage in the production of a
good or service over another if it
can produce that product at a lower
opportunity cost.
 Efficiency
• Efficiency means that the economy’s
resources are being used as efficiently as
possible to satisfy people’s needs and
desires.
 Productive efficiency
• Productive efficiency occurs when an
economy cannot produce more of one
good without producing less of another
good.
• This implies that the economy is on its
production possibility frontier.
 Collection of economic data

• Economic data includes quantitative and

qualitative data.
• Quantitative data includes the numeric or
measurable data.
• i.e. prices, quantities, profit, product,
cost, and so on.
• Qualitative data, includes descriptive
data such as, quality.
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 Primary and secondary data
• We collect primary economic data through
questionnaires, meetings, focus group,
and so on.
• And we collect the secondary data through
books, magazines, the net, and the
Palestinian bureau of statistics.
 Models

• Formulation of models of economic

relationships, for example, the relationship
between the general level of prices and
the general level of employment

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 Statistics

• Taking economic statistics of production

and applying the

• the data collected, and applying the model

being used to produce a representation of
economic activity

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 How to read Graphs
• To be explained in the lecture

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