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Page 1: 1 1 MICRO ECONOMICS Chapter 1 Introduction to Economics
Page 2: 1 1 MICRO ECONOMICS Chapter 1 Introduction to Economics

11MICRO ECONOMICS

Chapter 1

Introduction to Economics

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Economics

• Greek word :“Oikonomos” means to “manage

the house”Or management of household

especially in those matters which are relating to the income and expenses of the family.

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Historical definition of economics:

ADAM SMITH

Science of scarcity i.e. limited resources

Prof. ROBBINS

Modern view

Science of material Welfare.

Dr. ALFERD MARSHALL

Neo-Classical viewClassical view

According to ClassicalEconomics is a Wealt\\h\\\\\\economists,.

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Definition of Economics

There are three broad groups to Define Economics.

1. Classical view………..........science of wealth.2. Neo-classical view………..science of material welfare.

3. Modern view………...........science of unlimited wants and limited resources

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Classical economist:

Western Philosophers18th century Name: Adam SmithBirth: June 5, 1723 ScotlandDeath: July 17, 1790 (age 67) Edinburgh, Scotland.Father of EconomicsWrote a book, entitled “wealth of Nation” in 1776.

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CLASSICAL VIEW

• Western Philosophers

• 18th century • Name: Adam

Smith• Birth: June 5,

1723 Scotland• Death: July 17,

1790 (age 67) Edinburgh, Scotland.

• Father of Economics

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The Classical view:

• The classical economists beginning with Adam smith

• who is called the founder of economics, wrote a book

• entitled “Nature and causes of wealth

of nation” in 1776. • He define economics as, “Economics is a

science of wealth”.

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Neo – classical economist:

Western Philosophers.19th century philosophy. Name: Alfred MarshallBirth: July 26, 1842 (Bermondsey) London, England.Death: July 13, 1924 (Bermondsey) London, England. Wrote a book, entitled “Principle of economics”

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2 The Neo-Classical view:

• Dr. Alfred Marshall (1842-1924), wrote a book in 1890 in Cambridge which was entitled “Principle of economics”.

• “He define economics as, economics is the study of mankind in the ordinary business of life, It examines that part of individual and social action which is most closely connected with the attainment and use of material requisites of wellbeing.”

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Explaination of Marshall Definition

1. Mankind in the ordinary business of life: it means common man who lives in society and we will study

common way of life

2. Part of individual and social action: it studies a single person as well as common way of life

of society.

3. Material requisites of wellbeing: it shows general needs of people or society such as

food, cloth, shoes etc

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Modern definition 13

Lionel Robins was a famous British economist of 1920s, he was acting as a senior professor of London school of economics, UK. He wrote a book entitled by the name of “ Nature and significance of economic sciences” in 1931, where he defined economics in terms of some realistic economic problems of human beings.

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In the words of Robins.14

“ Economics is the science which studies human behavior as a relationship between multiple wants and limited means which have alternative uses”.

This definition points out the problem of scarcity and choice in the economic life of people. There are three main points of his definition which are given as under.

1. Multiple wants.2. Limited means and3. Alternative uses.

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Major points of Robins definition.

Multiple wants. Multiple wants mean no limit to wants. human wants are unlimited they keep on rising again and again. This mean they do not come to an end even if they are satisfied once.

Limited resources . There is no limit to human wants, but the means to satisfy these wants are limited in number. This means that resources are limited in the sense that one cannot have as many goods and services as he wishes for the satisfaction of wants.

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16 Alternative uses. The third point gathered from Robins definition

is alternative uses of limited resources. For example, a person has money resource of 1000 Afs, with this limited resource of money income he is able to do anything, he can buy cloths, entertain friends or dine outside with his family. But, being a rational consumer, he will choose the most optimum use of his limited resource of income.

CONT`D

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Economics circle

Human being satisfaction

Human beings Unlimited wants

Limited resourcesAlternative uses Of scarce resources

Economic circleEconomic circle

How Economy operate

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Branches of Economics

1- Micro Economics: 2- Macro Economics:

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Micro Economics

Micro economics deals with a small individual unit of the economy, like the price of a particular commodity, consumption pattern of a particular consumer, income of particular

individual and Producer.

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Macro economics

• Macro economics:

Macro economics deals with total or aggregate level of output aggregate level of consumption, aggregate level of investment, aggregate level of employment.

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Branches of Economics

Macro Economics deals with the aggregate of the economy, like; Inflation Unemployment Aggregate demand Aggregate consumption

Micro Economics deals with the individual units of the economy, like; Consumer Producer Price of a product

ECONOMICS

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METHODS OF ECONOMICS

Descriptive Economics

Theoretical Economics

Policy Economics

The methods which economists use in their studies have three levels:

Collection of Facts about

Economic activity.

Formation of Principles, laws,

Theories.

Formation of Economic policy

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Consumer Behavior under Micro Economics: The foremost topic that we study in

micro economics is the consumer behavior. Under this topic, different consumption theories explain as to how much a consumer his maximizes his total utility or satisfaction by the allocation of his monetary resources on different consumer goods.

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Price determination Under Micro Economics: It explain as to how the interaction of

demand and supply determines the prices of different products. .

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National Income Distribution uder Micro Economics: Under this topic the distribution of

income among different factors of production in the form of wages, rent, interest and profit is studied.

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Importance of micro Economics: 1: Utility Maximization: It teaches us to purchase the

required product in most suitable quantities so that the total utility obtained is maximized.

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Cont……

2:Allocation: By the study of Micro Economics we

come to know how millions of consumers and producers allocate their consumption and production resources in an attempt to achieve their optimum level.

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3: Price determination:

The study of micro economics is highly helpful in understanding the determination of relative prices for the productive services rendered by different factors of production.

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4 : Optimization:

It also help to entrepreneur to achieve optimum production point with their budget constrain , by this they can maximize their profit or at least they will minimize their loses.

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5 : Welfare policies:

It also help to frame economic policies aimed at achieving public welfare e.g. tax exemption on poor, determination of rewards according to qualification and productive capabilities etc.

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The End: