ECONOMICS - LESSON 1

Š Economics is the study of how societies use scarce resources to produce valuable
commodities and distribute them among different people.
ŠMicroeconomics deals with:
• Behavior of individual units
• When Consuming; How we choose what to buy
• When Producing; How we choose what to produce
• Markets: The interaction of consumers and producers
• Analysis of aggregate issues:
yEconomic growth
yInflation
yUnemployment
Microeconomics vs. Macroeconomics
Microeconomics is the foundation of macroeconomic analysis.
Themes of Microeconomics
Š According to Mick Jagger & the Rolling Stones, “You can’t always get what you want”.
Why Not?
ŠLimited Resources
ŠUnlimited Wants
Š Allocation of Scarce Resources and Trade-offs
Š In a planned economy
Š In a market economy
Š Microeconomics and Optimal Trade-offs

1. Consumer Theory
2. Workers
3. Theory of the Firm
   Š Microeconomics and Prices
   – The role of prices in a market economy
   –How prices are determined
   Theories and Models
   ŠMicroeconomic Analysis
   – Theories are used to explain observed phenomena in terms of a set of basic
   rules and assumptions. For example
   – The Theory of the Firm
   – The Theory of Consumer Behavior
   –Models:
   A mathematical representation of a theory used to make a prediction.
   –Validating a Theory
   The validity of a theory is determined by the quality of its prediction, given
   the assumptions.
   – Evolving the Theory
   Testing and refining theories is central to the development of the science of
   economics.
   Positive versus Normative Economics
   ŠPositive Economics
   Positive economics deals with the observations or predictions of the facts of
   economic life. For example:
   What will be the impact of an increase in wages on the price of a product?
   ŠNormative Economics
   Normative Economics is the value judgments about how economics should
   operate, based on certain moral principles or preferences?” For example:
   What wage rate should be paid to the auto workers to make them an active
   member of the society?
   What is a Market?
   ŠMarkets
   A geographically defined area where buyers and sellers interact to determine the
   price of a product or a set of products.
   Š Markets vs. Industries
   Industries are the supply side of the market.
   Š Defining the Market
   The market parameters must be set before an analysis of the market can take
   place.
   ŠArbitrage
   Buying a product at a low price in one location and selling at a high price in
   another.
   Š Competitive vs. Noncompetitive Markets
   –Competitive Markets
   Š Because of the large number of buyers and sellers, no individual buyer
   or seller can influence the price.
   Š Example: Most agricultural markets
   –Noncompetitive Markets
   Š Markets where individual producers can influence the price.
   ŠExample: OPEC
   ŠMarket Price
   – Competitive markets establish one price.
   – Noncompetitive markets may set many prices for the same product.
   Š Market Definition - The Extent of a Market
   – Market Definition
   Which buyers and sellers should be included in a given market?
   – Market Extent
   Defines the boundaries of the market
   ŠGeographic
   Š Range of products
   –Examples
   –Geographic boundaries
   Š Gold: Lahore vs. Karachi
   Š Housing: Islamabad vs. Rawalpindi
   – Range of Products
   Š Gasoline: regular, super, & diesel
   Š Cameras: Polaroid, point & shoot, digital
   – Markets for Prescription Drugs
   Š Well-defined markets - therapeutic drugs
   Š Ambiguous markets – painkillers