BASIC

MICROECONOMICS
V INTRODUCTION
V BASIC CONCEPTS
V HISTORICAL OVERVIEW
INTRODUCTION

MACROECONOMICS
Microeconomics is the branch of economics that considers the
behavior of decision takers within the economy, such as individuals,
households and firms. The word ‘firm’ is used generically to refer to
all types of business. Microeconomics contrasts with the study of
macroeconomics, which considers the economy as a whole.

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 SCARCITY, CHOICE AND OPPORTUNITY COST

The platform on which microeconomic thought is built

lies at the very heart of economic thinking – namely, how
decision takers choose between scarce resources that have
alternative uses. Consumers demand goods and services and
producers offer these for sale, but nobody can take everything
they want from the economic system. Choices have to be
made, and for every choice made something is forgone
Just as individuals and households make opportunity
cost decisions about what they consume, so too do firms take
decisions about what to produce, and in doing so preclude
themselves from producing alternative goods and services. 3
THE PRICE MECHANISM

Much of the study

of microeconomics is
devoted to analysis of
how prices are
determined in markets.

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 DEMAND
Demand is created by the needs of consumers, and the nature of
demand owes much to the underpinning worth that consumers perceive
the good or service to have.
Level of demand can be determined by :
 The price of the good or service
 Prices of other goods and services, especially substitutes and
complements
 Income
 Tastes and preferences
 Expectations
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 SUPPLY
Supply refers to the quantity of goods and services offered to the
market by producers.
The determinants of supply are:
 Price
 Prices of other goods and services
 Relative revenues and costs of making the good or service
 The objectives of producers and their future expectations
 Technology.

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 ELASTICITY
The concept of elasticity is concerned with the responsiveness of
quantity demanded or quantity supplied to a change in price.


This concept is obviously very important to producers, who have to

estimate the potential effects of their pricing strategies over time. It is also
important to government finance departments, which have to model the
implications of imposing sales taxes on goods and services in order to
predict tax revenues.
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 EQUILIBRIUM
Assuming all determinants of
supply and demand are to be
constant except price, a firm will
produce where the supply curve
intersects the demand curve. By
definition, this is the point at which
the quantity supplied equals the
quantity demanded.
Price is determined at the
intersection of the supply and
demand curves.

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 EQUILIBRIUM
If the price is set above the
equilibrium price, this will result in the
quantity supplied exceeding the
quantity demanded. Therefore, in order
to clear its inventory, the company will
need to reduce its price.
Conversely, if the price is set
below the equilibrium price, this will
result in an excess demand situation,
and the only way to eliminate this is to
increase the price.

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 MARKET INTERVENTION
Some goods and services are ‘public goods and services’, which means that they
can only be provided adequately by intervention. These include law and order and the
military. For this reason, the government or supra-national organizations may choose to
introduce and maintain systems that will ensure that such goods and services are
produced, and may fix prices either above or below the equilibrium price.

.
The impact of intervention in the price system should not be seen as undesirable
in all cases. However, one of the contributions that microeconomic analysis makes is
that it teaches us that there will be consequences of such interventions, and society has
to manage those consequences.

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 THEORY OF THE FIRM
The theory of the firm is a branch of microeconomics that
examines the different ways in which firms within an industry may be
structured, and seeks to derive lessons from these alternative structures.
A Perfectly Competitive Market is one in which:
 There are many firms producing homogeneous goods or services.
 There are no barriers to entry to the market or exit from the market.
 Both producers and consumers have perfect knowledge of the market
place.

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 THEORY OF THE FIRM

Monopoly
A monopoly arises when there is only one producer in the market.
It should be noted the laws of many countries define a monopoly in less
extreme terms, usually referring to firms that have more than a specified
share of a market.
Oligopoly
An oligopoly arises when there are few producers that exert
considerable influence in a market. As there are few producers, they are
likely to have a high level of knowledge about the actions of their
competitors, and should be able to predict responses to changes in their
strategies. 1
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 THEORY OF THE FIRM

Monopolistic competition
Monopolistic competition arises in markets where there are many
producers, but they will tend to use product differentiation to distinguish
themselves from other producers in the market. Therefore, although
their products may be very similar, their ability to differentiate means
that they can act as monopolies in the short-run, irrespective of the
actions of their competitors.

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BASIC CONCEPTS

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 BASIC CONCEPTS

 Incentives and behaviors

How people, as individuals or in firms, react to the situations with which they are
confronted.

 Utility theory
Consumers will choose to purchase and consume a combination of goods that
will maximize their happiness or “utility,” subject to the constraint of how much income
they have available to spend.

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 BASIC CONCEPTS
 Production theory
This is the study of production—or the process of converting inputs
into outputs. Producers seek to choose the combination of inputs and
methods of combining them that will minimize cost in order to maximize
their profits.

 Price theory
Utility and production theory interact to produce the theory of supply
and demand, which determine prices in a competitive market. In a perfectly
competitive market, it concludes that the price demanded by consumers is
the same supplied by producers. That results in economic equilibrium.
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