Preliminaries

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Chapter 1

• Preliminaries

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Economics

• Economics is the study of production and
  consumption of goods and services with the
  utilization of minimum resources.
• Economics is divided into three school of
  thoughts
• Classical School of Thought
• Neo-Classical School of Thought
• Modern Economics

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Classical School of thought

• The Scotland economist Adam Smith was first
  economist who gave the idea and define the
  economics as Economics is the study of
  production or earning of money, distribution and
  interchange of money.
• Many other economists support this idea e.g. J.S.
  Mill, Recordo and Walker of American Economist.
  But after the some time many people put objection
  on this idea and named it the knowledge of diamal
  sciences and pig philosophy.

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Neo-Classical School of Thought

• Due to the objection on Adam Simith idea and his
  followers then Dr. Marshal introduce the
  economics as it is the knowledge of welfare and
  named it welfare economics
• After that Prof. Robens and many other economists
  objected that this definition limited that only
  cover the concept of human welfare.

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Modern Economics

• According to Prof. Robens Economics is the
  knowledge of human behavior and relationship
  between interchange of goods or services to get
  maximum benefit under the utilization of minimum
  resources
• According to Keynes Economics is the knowledge
  which give the opportunities of earnings due to
  the utilization of minimum resources and enhance
  the income of the economy

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Preliminaries

• Microeconomics deals with
• Behavior of individual units
• When Consuming
• How we choose what to buy
• When Producing
• How we choose what to produce

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Preliminaries

• The Linkage Between Micro and Macro-economics
• Microeconomics is the foundation of macroeconomic
  analysis

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Theories and Models

• Microeconomic Analysis
• Models
• a mathematical representation of a theory used
  to make a prediction.

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Positive Versus Normative Analysis

• Positive Analysis
• Positive analysis is the use of theories and
  models to predict the impact of a choice.
• Normative Analysis
• Normative analysis addresses issues from the
  perspective of What ought to be?
  A normative statement expresses a judgment about
  whether a situation is desirable or undesirable

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What is a Market?

• Markets
• The interaction of consumers and producers
• A geographically defined area where buyers and
  sellers interact to determine the price of a
  product or a set of products.
• Markets vs. Industries
• Industries are the supply side of the market.

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What is a Market?

• Arbitrage
• Buying a product at a low price in one location
  and selling at a high price in another

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What is a Market?

• Competitive vs. Noncompetitive Markets
• Competitive Markets
• Because of the large number of buyers and
  sellers, no individual buyer or seller can
  influence the price.
• Example Most agricultural markets
• Noncompetitive Markets
• Markets where individual producers can influence
  the price.

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What is a Market?

• Market Price
• Competitive markets establish one price.
• Noncompetitive markets may set many prices for
  the same product.

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Real Versus Nominal Prices

• Nominal price is the absolute or current dollar
  price of a good or service when it is sold.
• Real price is the price relative to an aggregate
  measure of prices or constant dollar price.

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Real Versus Nominal Prices

• Calculating Real Prices

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An ExampleCalculating the Real Price of Milk
Nominal Price Real Price of Milk Year of
Milk CPI in 1970 dollars

• 1970 .40 38.8 .40 38.8/38.8 x .40
• 1980 .65 82.4 .31 38.8/82.4 x .65
• 1999 1.05 167.0 .24 38.8/167.0 x 1.05

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Calculating Real PricesAn Example - Eggs
College
1970 1975 1980 1985 1990 1998

• Consumer Price Index (1983) 38.8 53.8 82.4
  107.6 130.7 163.0
• Nominal Prices Grade A Large
  Eggs 0.61 0.77 0.84 0.80 0.98 1.04 College
  Education 2,530 3,403 4,912 8,156 12,800 19,
  213
• Real Prices (1970) Grade A Large
  Eggs 0.61 0.56 0.40 0.29 0.30 0.25 College
  Education 2,530 2,454 2,313 2,941 3,800 4,57
  3

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Summary

• Microeconomics is concerned with the decisions
  made by small economic units.
• Microeconomics relies heavily on the use of
  theory and models.

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Summary

• The market price is established by the
  interaction of buyers and sellers.
• A markets geographic boundaries and range of
  products must be defined.
• To reduce the effects of inflation we measure
  real prices, rather than nominal prices.

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Thanks