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INTRODUCTION: MARKETS
AND PRICES
Introduction
1. What is Microeconomics?
2. What are the key themes of
microeconomics?
3. What is a Market?
4. What is the difference between real and
nominal prices
5. Why study microeconomics?
Chapter 1
What is economics?
The study of how society chooses to
allocate its scarce resources to the
production of goods and services in
order to satisfy unlimited wants
Branch of Economics
Microeconomics
Macroeconomics
Microeconomics
The branch of economics that
studies decision-making by a
single individual, household, firm,
industry, or level of government
Macroeconomics
The branch of economics that
studies decision-making for the
economy as a whole
1. Definition of Microeconomics
Basically economic is deals with
how scarce resources are
allocated to maximize the
unlimited wants that we wants to
fulfill.
(Hashim Ali)
Chapter 1
1. Definition of Microeconomics
The study of how scarce or limited
resources are used to satisfy
unlimited material wants and
needs
(Welch and Welch)
Chapter 1
2. Themes of Microeconomics
Microeconomics deals with limits
Limited budgets
Limited time
Limited ability to produce
Chapter 1
Themes of Microeconomics
Workers, firms and consumers must
make trade-offs
Do I work or go on vacation?
Do I purchase a new car or save my money?
Do we hire more workers or buy new
machinery?
Chapter 1
10
of production
Production technology
11
3,000
2,200
2,000
1,000
300
600 700
The production
possibilities frontier
shows the
combinations of
outputin this case,
Production
cars and computers
Possibilities
that the economy can
Frontier
possibly produce. The
economy can produce
any combination on or
inside the frontier.
Points outside the
E
frontier are not
feasible given the
1,000Quantity of economys resources.
Cars Produced
12
13
14
Resource specialization
15
16
2,300
2,200
600 650
A technological
advance in the
computer industry
enables the economy
to produce more
computers for any
given number of cars.
As a result, the
production
possibilities frontier
shifts outward. If the
economy moves from
point A to point G, then
the production of both
1,000 Quantity of cars and computers
increases.
Cars Produced
17
Economics View
Positive approach
Normative approach
18
Chapter 1
19
Chapter 1
20
3. What is a Market?
Markets
Collection of buyers and sellers, through their
actual or potential interaction, determine the
prices of products
Buyers:
Chapter 1
21
What is a Market?
Market Definition
Determination of the buyers, sellers, and
range of products that should be included in
a particular market
Arbitrage
The practice of buying a product at a low
price in one location and selling it for more in
another location
Chapter 1
22
What is a Market?
Defining the Market
Many of the most interesting questions in
economics concern the functioning of
markets
Why
Chapter 1
23
Types of Markets
Perfectly competitive markets
Because of the large number of buyers and
sellers, no individual buyer or seller can
influence the price.
Example:
Chapter 1
24
Types of Markets
Noncompetitive Markets
Markets where individual producers can
influence the price.
Cartel
Chapter 1
25
Market Price
Transactions between buyers and sellers
are exchanges of goods for a certain
price
Market price price prevailing in a
competitive market.
Some
Chapter 1
26
Market Definition
Market Definition
Which buyers and sellers should be included
in a given market
This depends on the extent of the market
boundaries, geographical and by range of
products, to be included in it
Market
Chapter 1
27
Market Definition
Importance of market definition
In order to set price, make budgeting
decisions, etc., companies must know
Their
competitors
Product-characteristic and geographic
boundaries of the market
Chapter 1
28
ECONOMIC SYSTEM
CAPITALISM
CAPITALISM
SOCIALISM
SOCIALISM
MIXED
MIXED
ECONOMY
ECONOMY
CHARACTERISTICS
CAPITALISM
An economic system where individuals and sellers make economic
decisions using a price system
CHARACTERISTICS
1. Private ownership of resources
2. Freedom of enterprise and choice
3. Consumers sovereignty
4. Competition
5. Government intervention
6. Price system
MERITS
Production according to
consumers needs
Economic freedom
Efficient utilization of
resources
Variety of consumer
goods
Enhanced trade, business
and R&D
Automatic incentives
Flexibility
DEMERITS
Inequality of distribution
of wealth and income
Inflation and high
unemployment rate
Lack of social welfare
Wasteful competition
Misallocation of
resources
Social cost
CHARACTERISTICS
SOCIALISM
An economic system where all the economic decisions are made by
the government or a central authority
CHARACTERISTICS
1. Public ownership of resources
2. Central planning authority
3. Price mechanism of lesser importance
4. Central control and ownership
MERITS
Production according to
basic need
Equal distribution of
income and wealth
Better allocation of
resources
No serious unemployment
or inflation
Rapid economic
development
Social welfare
DEMERITS
Lack of incentives and
initiative by individuals
Loss of economic
freedom and consumer
sovereignty
Absence of competition
Waste of economic
resources
CHARACTERISTICS
MIXED ECONOMY
An economic system which combines both capitalism and
socialism
CHARACTERISTICS
1. Public and private ownership of resources
2. Price mechanism and economic plans in
making decisions
3. Government helps to control income
disparity
4. Government intervention in the economy
5. Co-operation between the government,
THE END