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Unit 1 Introduction to Micro Economics Definition of Economics The Theterm term“Economics” “Economics”was wasoriginally originallyderived derivedfrom fromthe thetwo twoGreek Greekword word“Oikos” “Oikos”wh w household householdand and“Nomon” “Nomon”which whichmeans meansmanagement. management.Thus, Thus,ititrefers referstotomanaging managingofo

using using the limited limited funds. funds. Many Manythe economists economists like likeStigler, Stigler,Samuelson, Samuelson,Macifie, Macifie,Oscar OscarLange, Lange,Sciovosky, Sciovosky,have haveg economics – 1. “Economics “Economicsisisfundamentally fundamentallyaastudy studyofofscarcity scarcityand andthe theproblems problemswhich whichscarcity scarcitygiv gi  -Stonier and Hagur 2. “Economic “Economicisisaascience scienceconcerned concernedwith withthe theadministration administrationof ofscarce scarceresources.” resources.” Scito

Economics as a Science simplewords, words,aascience scienceisiscommonly commonlydefined definedasasaasystematic systematicbody bodyofofkn k 1) InInsimple particular branch of the universe. 2) In Inthe theopinion opinionofofPoincare Poincarewho whosays says––“A “Ascience scienceisisbuilt builtupon uponfacts factsasa stones.” Apply plying ing th this is is to our su subje bject ct,, we fin find d ec econo onomi mics cs is bui built lt upo upon n fac 3) Ap systematized systematizedby byeconomists. economists.Further, Further,economics economicslike likeother otherscience sciencededu ded

gene generali ralizati zations ons after after obse observin rving, g, coll collecti ecting ng and exam examini ining ng fact facts. s. Thu Thus, s, obs observ ervati ation on of fact facts. s. (ii) (ii) Me Measu asurem rement ent (ii (iii) i) Ex Expla planat nation ion (iv) (iv) Verifi erifica ca formulates formulateseconomic economiclaws lawsabout abouthuman humanbehaviour. behaviour.InInthis thisway wayeconomics economicsh aascience scienceof ofmaking makingand and possessing possessing laws laws for foritself. itself. 4) Science Scienceeconomics economicssatisfies satisfiesall allthe thetests testsof ofaascience, science,economics economicsisisregarded regarded science. science. In Inshort, short,itit isisno no way way less less than than other othersciences. sciences. The The economics economics as as aa science science can can be be divided divided into into two two parts parts i.e. i.e. (a) (a) Positive Positive S Normative Science.

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From From the the above above noted noted discussio discussion, n, we can say say that that economics economics is is both both positiv positivee and as asatatpresent, present,ititdeals dealswith with‘what ‘whatis’ is’and and‘what ‘whatought oughttotobe’. be’.Therefore, Therefore,ititnot noto certain certainthings thingshappen, happen,ititalso alsoconveys conveyswhether whetherititisisthe theright rightthing thingtotohappen. happen. Economics as an art Art Art is is completely completely different different from from science. science. 1) In Inthe thewords wordsof ofCossa Cossa––“A “Ascience scienceteaches teachesus ustotoknow; know;an anart artteaches teachesuu words, words, science science explains explains and andexpounds; expounds; art art directs, art art imposes imposes precepts precepts or or p other otherwords, words, science science isistheoretical theoretical but butan an art artdirects, isispolitical. political. Whatisisan anArt? Art?As AsJ.M. J.M.Keynes Keyneshas hasput putit: it:“An “Anart artisisaasystem systemof ofrules rulesfor forthth 2) What given givenend”. end”.The Theobject objectof ofan anart artisisthe theformulation formulationof ofprecepts preceptsapplicabl applicab implies impliesthat thatart artisispractical. practical.Applying Applyingthis thisdefinition definitionof ofart, art,we wecan cansay sayecono econ sev severa erall br branc anches hes li like ke I con consum sumpt ption ion,, pro produc ducti tion on and pub publi licc fi finan nance ce guidance guidancetotosolve solveeconomic economicproblems. problems.Again Againfor forexample examplethe thetheory theoryofofcon co the theconsumer consumertotoobtain obtainmaximum maximumsatisfaction satisfactionwith withhis hisgiven givenincome income(mean (mea economics economicscan canbe beconsidered consideredas asan anart artininthe thewider widersense senseof ofthe theterm termart arti.i practical science. It mean meanss creation or practical application application of kn knowledge. owledge. It It we treat economics as an art. In Inaanutshell, nutshell,we wecan canconclude concludethe thediscussion discussionthat thateconomics economicsisis both science and a Practical uses of Economics

The Themain mainpoints pointsof ofpractical practical uses uses are arediscussed discussed below below– – 1. Useful Useful to to the the Consumer Consumer 2. Useful Useful to to the the Producer Producer 3. Helpful Helpful to to Business Business Community Community 4. Solution Solution to to Economic Economic Problems Problems 5. Helpful to Workers 6. Helpful Helpful in in Price Price Determination Determination Significant for for Economics Economics Development Development 7. Significant Useful for for Economic Economic Planning Planning 8. Useful Useful for Social Social Workers Workers 9. Useful Helpful to to Social Social Welfare Welfare Activities Activities 10. Helpful 11. Helpful Helpful in in international international Trade. Trade. In In short short economics economics is is useful useful for for all. all.

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as as consumers, consumers, and and the the individual individualss or firms as producers-pl producers-play ay their parts parts in in the the wo wo economic organism.” Acc Accord ording ing to K.E K.E.. Bou Bouldi lding ng – ‘Micro economics is the study of particular households, households,individual individualprices, prices,wages, wages,incomes, incomes,individual individualindustries industriesand andparticular particular According to Shapir Shapiro o– – “Micro “Micro economics economics deals deals with with small small parts parts of of the the economy. economy. In Inevery everysociety, society, the theeconomic economic problems faced faced by by different different economic agents agents (su (s consumers, consumers, producers, producers, etc.) etc.)can canproblems be be analyzed analyzed with with the the help helpofofeconomic microeconomic microeconomic theo the that economics is a social science which whichaims aimsatatanalyzing analyzingthe theeconomic economicbehavior behavioroo social social environment. environment. Importance/Use Importance/Usefulness fulness of Microec Microeconomics onomics 1. Determination of demand pattern: It It determines determines the the pattern pattern of of demand in the amounts amountsofofthe thedemand demandfor forthe thedifferent differentgoods goodsand andservices servicesininthe theeconomy, economy,b demand demandfor foraagood goodor orservice serviceisisthe thesum sumtotal totalof ofthe thedemands demandsofofall allthe theindiv indiv determining determiningthe thedemand demandpatterns patternsof ofevery everyindividual individualororfamily, family,microeconomic microeconomi demand demand pattern pattern in in the the country country as as aa whole. whole. 2. Determination of the pattern of supply: In In aa similar similarway, way,the the pattern pattern of of supply supply a whole can be obtain obtained ed from the amo amounts unts of of goods goods and and serv services ices prod produced uced by b

economy. economy.Microeconomics, Microeconomics,therefore, therefore,determines determinesthe thepattern patternof ofsupply supplyas aswell. well.

3. Pricing: Probably Probablythe themost mostimportant importanteconomic economicquestion questionisisthe theone oneofofprice pricede d

prices of the various goods goods and services determine the pattern of resource allocatio The Theprices, prices,ininturn, turn,are aredetermined determinedby bythe theinteraction interactionof ofthe theforces forcesof ofdemand demanda goods goodsand andservices. services.By Bydetermining determiningdemand demandand andsupply, supply, Microeconomics Microeconomicshelps helpsususininunderstanding understandingthe theprocess processofofprice pricedetermination determinationand, and,h of ofdetermination determination of ofresource resourceallocation allocation in inaa society. society. 4. Policies Policies for improv improvemen ementt of res resour ource ce alloc allocation ation:: As As is is well-known, well-known, econo econo stresses stressesthe theneed needfor forimproving improvingthe thepattern patternofofresource resourceallocation allocationininthe thecount coun polices, therefore, can bbee formulated only if we understand how the pattern of res determined. determined.For Forinstance, instance,ififwe wewant wanttotoanalyze analyzehow howaatax taxor oraasubsidy subsidywill willaffe aff scarce resources in the economy economy,, we have have to know how how these these will will affect affect their their pric pri prices and, hence, the pattern of resource allocation, microeconomics helps appropriate appropriate development policies policies foran an underdeveloped underdeveloped economy. economy. 5. Solution Solution development to the probl problems ems of for micr micro-unit o-units: s: Since Since the the study study of of microeconomic microeconomi individual individualconsumers consumersand andproducers, producers,policies policiesfor forthe thecorrection correctionofofany anywrong wrongdecis deci level levelare arealso alsofacilitated facilitatedby bymicroeconomics. microeconomics.For Forexample, example,ififaafirm firmhas hasto toknow kno should shoulddo doininorder ordertotorun runefficiently, efficiently,itithas hastotoknow knowthe theoptimal optimalquantities quantitiesofofoutput outpu inputs inputspurchased. purchased.Only Onlythen thencan canany anydeviation deviationfrom fromthese these optimal optimal levels levels be be corre corre microeconomics microeconomicshelps helpsthe theformulation formulationof ofpolicies policiesatatthe themicro-level. micro-level. Limitations of Microeconomics Microeconomics

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3. Business cycles: AArelated relatedpoint pointisisthat, that,ititdoes doesnot notanalyze analyzethe thecauses causesof offluctu fluctu

in inco come me.. Th Thee up upss-an andd-do down wnss of na nati tion onal al in inco come me ov over er ti time me are are kn know own n as Micro Microec econo onomi mics cs doe doess not help us in und under ersta standi nding ng as to wh why y th these ese cycl cycles es oc remedies are. Unemploym Unemployment: ent: One One of of the the main main economic economic problems problems faced faced by by an an economy economy problem of une unemployment. mployment. This, again, is one ooff the areas on which microeconom much muchlight. light.Because, Because,ififwe weare aretotofind findaasolution solutiontotothe theunemployment unemploymentproblem proble und unders erstan tand d th thee cau causes ses of th this is pro proble blem. m. Fo Forr th that, at, in tu turn, rn, we mu must st und unders ersta ta employment employmentlevel levelininthe theeconomy economyisisdetermined. determined.This Thisisisdifficult difficulttotounderstand understan confines confines of of microeconomics. microeconomics. Methods of Economic Analysis An Aneconomic economictheory theoryderives deriveslaws lawsor orgeneralizations generalizationsthrough throughtwo twomethods: methods: (1) Deducti Deductive ve Method of Ec Economic onomic Ana Analysis lysis The deductive method is also named as analytical , abstract orprior method. method. The The de de method methodconsists consistsininderiving derivingconclusions conclusionsfrom fromgeneral generaltruths, truths,takes takesfew fewgeneral generalprin prin applies applies them them draw draw conclusions. conclusions. (GENERAL TO PARTICULAR) For instance, ififwe weaccept acceptthe thegeneral generalproposition propositionthat thatman manisisentirely entirelymotivated motivatedby by Then Then Ram Ram (a (a man) man)isis also also entirely entirely motivated motivated by by self selfinterest. interest. The The classical classicaland and neo-classical neo-classical school school of of economists economists notably, notably, Ricardo, Ricardo, Senior, Senior, C C Mill, Mill, Malthus, Malthus, Marshall, Marshall, Pigou, Pigou, applied applied the the deductive method in their economi investigations. Steps of Deductive Method:

The Themain mainsteps stepsinvolved involvedin indeductive deductivelogic logicare areas asunder: under: (i) Per Percept ception ion of the prob problem lem to be inquir inquired ed into: In In the the process process of of deriving deriving

generalizations, generalizations,the theanalyst analystmust musthave haveaaclear clearand andprecise preciseidea ideaofofthe theproblem problemtotob into. (ii)

Defin Defining ing ofFurther, terms terms::assumptions The Thenext nextstep step in inthis this isisto todefine define clearly clearly the thetech tech used used analysis. analysis. Further, assumptions made made for foradirection adirection theory theoryshould should also alsobe be precise. precise. (iii) Deducing Deducing hypothesis hypothesis from the assumptions: The third step in deriving gene

isisdeducing deducinghypothesis hypothesisfrom fromthe theassumptions assumptionstaken. taken. (iv) Testing esting of hyp hypoth othesi esis: s: Bef Before ore establi establishin shing g law lawss or gene generali ralizati zations, ons, hypo

verified verifiedthrough throughdirect directobservations observationsofofevents eventsininthe therear rearworld worldand andthrough throughstat sta (Their (Theirinverse inverserelationship relationshipbetween betweenprice priceand andquantity quantitydemanded demandedofofaagood goodisisaa

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Demerits of Deductive Method: ItItisistrue truethat thatdeductive deductivemethod methodisissimple simpleand andprecise, precise,underlying underlyingassumptions assumptionsare arev (i) The The deductive deductive method method is is simple simple and and precise precise only only if if the the underlying underlying assum assum valid . .More Moreoften oftenthe theassumptions assumptionsturn turnout outtotobe bebased basedon onhalf halftruths truthsororhave haven reality. reality.The Theconclusions conclusionsdrawn drawnfrom fromsuch suchassumptions assumptionswill, will,therefore, therefore,be bemisleading misleadin (ii) In Inand deductive deductive method, thepremises premises from from which which inferences inferences are are drawn drawnmay may no times, times, and places. places.method, As As such such the deductive reason reasoning ing is not applicable universally . not (iii) The The deductive deductive method method isis highly highly abstract. abstract. It requires a great deal of care to a or faulty economic economic reasoning. reasoning.

(2) Indu Inductive ctive Meth Method od of Economi Economicc Analysis Analysis:: Inductive metho method d which which is is also also called called empirical empirical method was was adopted adopted by by the the “Hist “Hist ofofEconomists". Economists".ItItinvolves involvesthe theprocess processofofreasoning reasoningfrom fromparticular particularfacts factstotogeneral genera (PARTICULAR TO GENERAL) This Thismethod methodderives deriveseconomic economicgeneralizations generalizationson onthe thebasis basisofof(i) (i)Experimentations Experimentations Observations Observations and and (iii) (iii) Statistical Statistical methods. methods.

In Inthis thismethod, method,data dataisiscollected collectedabout aboutaacertain certaineconomic economicphenomenon. phenomenon.These Theseare are systematically systematicallyarranged arrangedand andthe thegeneral generalconclusions conclusionsare aredrawn drawnfrom fromthem. them. For example, we weobserve observe200 200persons personsininthe themarket. market.We Wefind findthat thatnearly nearly195 195person perso the thecheapest cheapestshops, shops,Out Outofofthe the55which whichremains, remains,44persons personsbuy buylocal localproducts productseven evena just just to to patronize patronize their their own own products, products, while while the the fifth fifth is is aa fool. fool. From From this this observation observation draw drawconclusions conclusionsthat thatpeople peoplelike liketotobuy buyfrom fromaacheaper cheapershop shopunless unlessthey theyare areguided guide patriotism patriotism or or they they are are ddevoid evoid of of commonsense. commonsense. Steps of Inductive Method: The Themain mainsteps stepsinvolved involvedininthe theapplication applicationof ofinductive inductivemethod methodare: are: (i) Observation. (ii) Formation Formation of of hypothesis. hypothesis. (iii) Generalization. (iv) Verification. Merits of Inductive Method: (i) ItIt is is based based on on facts facts as as such such the the method method isis realistic. realistic. orderr to test the econ economi omicc prin principl ciples, es, method method mak makes es stat statist istical ical techni (ii) In orde inductive inductive method method is, is, therefore, therefore, more more reliable. reliable. Inductivemethod methodisisdynamic. dynamic.The Thechanging changingeconomic economicphenomenon phenomenonare areanal ana (iii) Inductive basis basis of of collected collected da data, ta, conclusions conclusions and and so solutions lutions are are drawn drawn from from th them. em. (i ) Ind Ind cti cti eemethod methodalso alsohelps helpsin inff tt re rein in estigations estigations

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Conclusion: The Theabove aboveanalysis analysisreveals revealsthat thatboth boththe themethods methodshave haveweaknesses. weaknesses.We Wecannot cannotrely rel any anyone oneofofthem. them.Modern Moderneconomists economistsare areofofthe theview viewthat thatboth boththese thesemethods methodsare arecom co They They partners partners and and not not rivals. rivals. Alfred Marshall has has rightly rightly remarked: remarked: “Inductive and Deductive methods are both needed for scientiic thought, as the right both both needed needed for for walking”. walking”. We We can can apply apply any any of of them them or or both both as as the the situation situation demands. demands.

What is Economic Equilibrium? Economic Economicequilibrium equilibriumisisaacondition conditionor orstate stateininwhich whicheconomic economicforces forcesare arebal ba economic economicvariables variablesremain remainunchanged unchangedfrom fromtheir theirequilibrium equilibriumvalues valuesininthe theabs ab influences. influences.Economic Economicequilibrium equilibriumisisalso alsoreferred referredto toas asmarket marketequilibrium. equilibrium.

Econom Economic ic equilibrium is the the combination combination of of economi economicc variable variabless (usuall (usually y price an an which whichnormal normaleconomic economicprocesses, processes,such suchasassupply supplyand anddemand, demand,drive drivethe theeco ec economic economicequilibrium equilibriumcan canalso alsobe beapplied appliedtotoany anynumber numberof ofvariables variablessuch suchasa aggregate aggregateconsumption consumptionspending. spending.The Thepoint pointofofequilibrium equilibriumrepresents representsaatheore theor where whereall alleconomic economictransactions transactionsthat that“should” “should”occur, occur,given giventhe theinitial initialstate state of all variables, variables, have have taken taken place. place.

KEY TAKEAWAYS Economic Economicequilibrium equilibriumisisaacondition conditionwhere wheremarket marketforces forcesare arebalanced, balanced,aaconcep conce physical physical sciences, sciences, wher wheree observable observable physica physicall forces can balance each other. The Theincentives incentivesfaced facedby bybuyers buyersand andsellers sellersininaamarket, market,communicated communicatedthrough throughc quantities quantitiesdrive drivethem themtotooffer offerhigher higherororlower lowerprices pricesand andquantities quantitiesthat thatmove movethe the equilibrium. Economic Economicequilibrium equilibriumisisaatheoretical theoreticalconstruct constructonly. only.The Thema...