GPM 3 (1)

Introduction to Microeconomics

Introduction to Economics

J.M. Keynes

Keynes is a pivotal figure in economic thought; he criticized the classical economic theory for being overly reliant on definitions and advocated for a more pragmatic approach to understanding economics.

Definitions of Economics

Economics can be perceived through various definitions, leading to different interpretations:

Wealth Definitions

• Focus mainly on the generation of wealth and resources within an economy.

• Adam Smith defined political economy as the discipline aiming to enhance a nation’s wealth and power, emphasizing the importance of production versus distribution.

Scarcity Definitions

• Definition by Lionel Robbins: Economics is defined as the study of the relationship between ends (needs) and scarce means (resources) that have alternative uses. Key concepts include unlimited wants, resource scarcity, and the necessity of making choices based on available alternatives.

Welfare Definitions

• Alfred Marshall’s definition: Economics examines human actions related to material requisites for well-being, highlighting how it intersects with social, religious, and other life aspects.

Key Definitions and Perspectives

• Alfred Marshall: Defined economics as the study of ordinary business life and human behavior, focusing on how material needs are satisfied through economic activity.

• Lionel Robbins: Viewed economics as a science of human behavior concerning scarcity and choices, stressing the significance of resource allocation.

• David Ricardo: Concentrated on wealth distribution among economic classes, introducing theories of comparative advantage crucial for understanding international trade and income distribution.

• John Maynard Keynes: Offered a methodology for economic thinking, concentrating on aggregate demand's influence on economic health, particularly during downturns.

• Amartya Sen: Expanded the definition of economics to include assessments of human welfare, development, and poverty alleviation.

Methodology of Economics

Positive vs. Normative Economics

• Positive Economics: Focuses on objective analysis and describes economic phenomena without bias, relying on empirical evidence.

• Normative Economics: Engages in value-based judgments, prescribing what ought to be, and is often driven by subjective opinions.

Scientific Method in Economics

The scientific method in economics involves:

• Observations leading to hypothesis formulation,

• Data collection for evidence,

• Model building to simplify real-world complexities,

• Policy recommendations based on data-driven insights.

Economic Models

Economic models provide simplified representations of economic realities, built on rational behavior assumptions and ceteris paribus (all else being equal) considerations. They are essential for analyzing interactions among economic variables.

Scope of Economics

Traditional Scope

• Consumption: Examination of how goods and services are used within an economy.

• Production: Focused on the processes of creating goods and services.

• Distribution: Investigates how income and resources are allocated through various economic mechanisms.

• Exchange: Studies the dynamics of trade and market interactions.

Modern Scope

Modern economics has expanded to include:

• Behavioral Economics: Which looks at psychological influences on economic decision-making.

• Development Economics: Concentrating on economic growth in developing countries and poverty alleviation strategies.

• Environmental Economics: Analyzing the economic impact of environmental policies and regulations.

Microeconomics Overview

Microeconomic Focus

Microeconomics studies:

• Production Decisions: What goods are to be produced and in what quantities,

• Methods of Production: Evaluating different techniques and processes,

• Distribution Efficiency: Analyzing how effectively the produced goods and services are allocated among consumers.

Microeconomics vs. Macroeconomics

Microeconomics

Zooms into specifics such as:

• Characteristics of individual decision-makers (households, firms),

• Pertinent examples include individual demand and pricing strategies for products.

Macroeconomics

Looks at broader economic phenomena, including:

• Overview of the entire economy, major determinants like national income and aggregate demand,

• Examples include poverty assessment at a societal level and understanding overall economic trends.

Differences Between Microeconomics and Macroeconomics

Basis of Differentiation

• Microeconomics: Provides in-depth analysis of specific segments, addressing detailed issues like demand and supply, applied primarily to internal matters affecting individual economic agents.

• Macroeconomics: Evaluates the economy's collective aspects, addressing external factors that influence overall economic health.

Significance

• Microeconomics: Crucial for regulating product pricing, determining factor costs, and informing supply chain management.

• Macroeconomics: Essential for addressing larger economic issues like inflation, unemployment rates, and fiscal policies.

Limitations

• Microeconomics: Often based on assumptions like full employment that can be unrealistic.

• Macroeconomics: Sometimes criticized for oversimplified aggregations that might lead to misleading interpretations.