Managerial Economics

Microeconomics
Introduction
Prof.Nilanjan Gupta
Jyotirmoy School Of
Business
8/18/14 1 Prof.Nilanjan Gupta
Introduction

After this session,you should be able to:

Define Eono!is

Disuss fators that differ bet"een Eono!i #yste!s

Differentiate bet"een $aroeono!is and

$iroeono!is
8/18/14 % Prof.Nilanjan Gupta
Introduction

Distin&uish bet"een Positi'e and Nor!ati'e Eono!is

and &i'e an e(a!ple of eah.

Define the Eono!i Proble! and e(plain the role

played by soiety)s li!ited resoures o!pared to
people)s unli!ited "ants.
8/18/14 * Prof.Nilanjan Gupta
hat is economics!

Eono!is is the study of choice. +t studies ho" people

hoose to use sare resoures to produe 'arious
o!!odities and distribute these &oods to 'arious
!e!bers of the soiety for their onsu!ption.
8/18/14 4 Prof.Nilanjan Gupta
"imited #esources $ersus
%nlimited ants

,u!an "ants -the a!ounts of &oods that "ould be

desired if they "ere free. are unli!ited but resoures are
li!ited. /hus, the la" of sarity states that "ants
al"ays e(eed soiety)s ability to !eet the!.

/herefore, e'ery soiety faes the eono!i proble! of

so!eho" hoosin& what to produce, how to produce,
and for whom to produce.
8/18/14 0 Prof.Nilanjan Gupta
&he Basic Economic Pro'lems
Any soiety therefore faes * basi proble!s:
1. What o!!odities shall be produed in "hat 1uantities
shall they be produed and "hen shall they be
produed2
2. How shall the &oods be produed ,i.e., by "ho! 3 "ith
"hat resoures 3 in "hat tehnolo&ial !anner are they
to be produed2
3. For whom shall the &oods be produed2
8/18/14 4 Prof.Nilanjan Gupta
(llocation Of Scarce #esources

/he i!balane bet"een "ants and the ability to !eet

the! re1uires an eono!i syste! to pro'ide for orderly
alloation of sare resoures
8/18/14 5 Prof.Nilanjan Gupta
)i*erent resources in a society

/he resoures in a soiety an be di'ided into * !ain

&roups:
1. All the free &ifts of nature: land, forest, !inerals et.
o!!only 6no"n as natural resoures 3 6no"n to
eono!ist as land.
%. All hu!an resoures !ental and physial 6no"n as
labour.
*. All those !an !ade aids to further the prodution suh
as tools, !ahinery, plant 3 e1uip!ent "hih
eono!ists alled capital.
/hese resoures are alled fators of prodution
8/18/14 8 Prof.Nilanjan Gupta
)i*erent resources in a society

7ften a fourth fator888Entrepreneurship is also

distin&uished.

An entrepreneur is one "ho ta6es ris6s.

,e or&ani9es the other fators of prodution 3 direts

the! alon& ne" lines.
8/18/14 : Prof.Nilanjan Gupta
Commodities Divisions

/he thin&s that are produed by the fators of prodution

are alled o!!odities.

;o!!odities !ay be di'ided into:

A. Goods 3
<. #er'ies
)
Goods are tan&ible suh as ars or shoes
)
#er'ies are intan&ible suh as hairuts or eduation.
8/18/14 1= Prof.Nilanjan Gupta
Production + ,onsumption

Goods 3 ser'ies are atually re&arded as !eans for

satisfyin& "ants.

/he at of !a6in& &oods 3 ser'ies is alled production

"hile the at of usin& these &ood 3 ser'ies is alled
consumption.

E'en thou&h the "ants are unli!ited the resoures of

the eono!y are li!ited.

$ost of the proble!s of eono!y arise out of the use of

sare resoures to satisfy hu!an "ants.
8/18/14 11 Prof.Nilanjan Gupta
- .uestions all economies face

Aordin& to Prof. >ipsey all eono!ies fae se'en

1uestions 3 ans"er to these 1uestions onstitute se'en
branhes of eono!i theory.
1. What commodities are being produced & in what
quantities?
.
/his is onerned "ith the alloation of li!ited 3 sare
resoures a!on& alternati'e uses.
.
+n a free !ar6et eono!y the deisions re&ardin& the
alloation of resoures are !ade throu&h the prie
syste!.
.
/he study of ho" this syste! "or6s is the !ajor topi in
!E !E"#$ "% &#'CE.
8/18/14 1% Prof.Nilanjan Gupta
- .uestions all economies face
%. (y what methods the commodities are to be
produced?

/his 1uestion arises beause there are tehnially

different "ays of produin& &oods 3 ser'ies.

?uestions about hoie of !ethods of prodution is

dealt by !E"#$ "% &#"D)C'"*.
*. ?uestion re&ardin& how goods & services are divided
among the members of the society is onerned "ith
the distribution of ino!e a!on& different indi'iduals 3
&roups of people.

/his is dealt by !E"#$ "% D'+#'()'"*.

8/18/14 1* Prof.Nilanjan Gupta
- .uestions all economies face
4.!ow efficient is the society,s production &
distribution?

,o" an effiieny be jud&ed2

Prodution is said to be effiiently or&ani9ed if it is not

possible to inrease the prodution of one o!!odity
"ithout reduin& the prodution of any other o!!odity.

/his 1uestion is dealt in WE-%.#E EC"*"/'C+.

8/18/14 14 Prof.Nilanjan Gupta
- .uestions all economies face

?uestions 1 to 4 are related to the alloation of

resoures 3 distribution of ino!e.

/hey are inti!ately related to the "ay in "hih the prie

syste! "or6s.

/hese are &rouped to&ether under the headin& of

/'C#"EC"*"/'C+.
8/18/14 10 Prof.Nilanjan Gupta
- .uestions all economies face
0. .re the countries resources being fully utilised or
some of them are lying idle?

E'en thou&h resoures are sare, so!eti!es they

re!ain unutili9ed or in'oluntarily une!ployed.

E(a!ple

/his subjet !atter is dealt in #.DE C$C-E !E"#$.

/his subjet reei'ed stron& i!petus "ith the

publiation of General /heory 7f E!ploy!ent, +nterest 3
$oney in 1:*4 by @.$ Aeynes.
8/18/14 14 Prof.Nilanjan Gupta
- .uestions all economies face

/his branh of eono!is is 6no"n as

/.C#"EC"*"/'C+.
4. 's the purchasing power of money constant or is it
being eroded because of inflation?

#ubjet !atter of $aroeono!is

5. 's the economy,s capacity to produce goods &
services growing from year to year or is it remaining
static?

Dealt by !E"#$ "% EC"*"/'C 0#"W!.

8/18/14 15 Prof.Nilanjan Gupta
Interdependence of
Microeconomics +
Macroeconomics
Example
1. A&&re&ate in'est!ent funtion an be deri'ed fro! the
indi'idual in'est!ent deisions of the fir!s. #o, here "e
ha'e macroeconomics depending on
microeconomics.
%. /he deter!ination of fator pries li6e rent, "a&e,
interest 3 profit is inluded in the subjet !atter of
!iroeono!is. <ut profit annot be deter!ined
"ithout onsiderin& the !aroeono!i en'iron!ent in
"hih the fir! operates. ,7B222
8/18/14 18 Prof.Nilanjan Gupta
Interdependence of
Microeconomics +
Macroeconomics

Profit is the result of unertainty bearin& 3 unertainty is

reated as a result of a&&re&ate de!and. E(a!ple:
Groery store, s"eet shop et.

,ere, "e ha'e microeconomics depending on

macroeconomics.

/herefore, "e an say that microeconomics &

macroeconomics are complementary rather
than competitive.
8/18/14 1: Prof.Nilanjan Gupta
Positi/e economics + Normati/e
economics

Eono!i theory an be di'ided into % ate&ories:

1. &ositive Economics
.
/his is onerned "ith the desription of fats,
iru!stanes, relationships in the eono!y et.
.
+t desribes theories 3 la"s to e(plain obser'ed
eono!i pheno!ena.
E1ample
Bhat is the une!ploy!ent rate today2
,o" "ill a ta( on petrol affet its use2
.
These questions can be resolved only by reerence
to acts.
8/18/14 %= Prof.Nilanjan Gupta
Positi/e economics + Normati/e
economics
2. *ormative Economics

/his in'ol'es ethis 3 'alue jud&e!ents.

<y 'alue jud&e!ents "e !ean the oneptions of

people about "hat is &ood or bad.

/hese oneptions are based on ethial, politial,

philosophial, 3 reli&ious beliefs of the people.

E1ample

#hould ta(es be le'ied on poor or rih2

#hould defense e(penditure be inreased at *C or 0C in

a year2

/hese are 1uestions in'ol'in& 'alues or !oral

jud&e!ents.
8/18/14 %1 Prof.Nilanjan Gupta
$alue + Price

Dalue of a o!!odity !eans its 'alue8in8use.

Prie is represented by 'alue8in8e(han&e.

E1ample: Bater has &reat 'alue8in8use but 'ery little

'alue8in8e(han&e. Dia!ond has little 'alue8in8use but
&reat 'alue8in8e(han&e.

Bater8Dia!ond parado(: #o!e 'ery useful o!!odities

ha'e 'ery lo" pries "hereas ertain non8essential
ite!s ha'e 'ery hi&h pries.
8/18/14 %% Prof.Nilanjan Gupta
Scope of Microeconomics

/he subjet !atter of !iroeono!i theory an be

di'ided into three broad &roups:
Theory of Consumer Behaviour
A. /heory of Produt Priin& Theory of Production & Cost
Theory of Pricing/Markets
Rent
<. /heory of Eator Priin& Wages
Interest
Profit
;. /heory of Belfare eono!is.
8/18/14 %* Prof.Nilanjan Gupta
%ses of Microeconomic &heory
1. igh!y usefu! for the formu!ation of economic "o!icies
#hich #i!! "romote the #e!fare of the "o"u!ation.
+n other "ords, it tells us ho" a free !ar6et eono!y
"ith its lar&e nu!ber of onsu!ers and produers "or6
to deide about the alloation of resoures a!on& the
thousands of alternati'e use.
%. It can $e a""!ied to economic "o!icies. /his !eans "e
an use !iroeono!is to analyse the ations of the
&o'ern!ent "hen it funtions to influene the eono!y.
For example! the effet of i!position of ta( on a
o!!odity an be e(plained "ith the help of
!iroeono!i theory.
8/18/14 %4 Prof.Nilanjan Gupta
%ses of Microeconomic &heory
*. Manageria! economics dea!s #ith the a""!ication of
microeconomic mode!s to help the deision !a6ers in
the business enterprises.
4. Internationa! economics is a!so another a""!ication of
microeconomics.
Eor e(a!ple, ho" the &ains fro! international trade an
be distributed a!on& the partiipants.
+n the deter!ination of e1uilibriu! rate of e(han&e the
tools of DD 3 ## are used.
8/18/14 %0 Prof.Nilanjan Gupta
!.*3 $")
8/18/14 %4 Prof.Nilanjan Gupta