Basics of Economics and Microeconomics

The study of Economics

• Adam Smith is widely recognized as the “Father of Economics.”

• Lionel Robbins defined economics −→ “The scientific discipline that examines human behaviour as a
relationship between objectives and limited resources that can serve multiple purposes.”.

• People think and make choices, unlike robots, so their individual behaviour is unpredictable. However,
large groups often follow patterns, making it possible to study and analyse. Economists study group
behaviour in economics.

•
Economics is the social sciences
study of through a
group behaviour specific method

• Some key terms

− Goods | Services | Wants | Needs

− Resources −→ goods used to produce other goods.

Why did Economics Emerged?

Resources are used to produce

Earth has Limited Resources
Goods and Services

People Infinite Wants and Needs conflict

Economics Infinite
Source Resource
Wants and Needs

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 How scarce resources are to
Economics be allocated to fulfil economic
wants and needs.

This conflict is the emergence

of many other disciplines.

Infinite wants and needs Finite and Limited Resource

Gives Advice

POLITY
ECONOMICS

Who decides how to How to best utilize

solve this conflict? these resources?

Who have power and What should be the way

control over this resources? to solve this conflict?

SOCIETY ETHICS

Classification of Economics

Classification of Economics

Macroeconomics Microeconomics Positive Normative

Macroeconomics takes Microeconomics focuses Positive economics is Normative economics

broader perspective, on the behavior of concerned with objective deals with value-based
individual entities analysis and is based on judgments and opinions
factual statements. on how the economy
should function.

Example:
“The unemployment rate is 4% in China”

Example:
“India ought to curb unemployment.”

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Actors in Microeconomics and Rational Economic Thinking

2-children of
economy

Consumers Rational Maximize utility at lowest price

Microeconomics

Producers Rational Maximize Profit

Nine Central Concepts

Scarcity
Scarcity is a central concept in economics. It refers to the limited availability of economic resources relative
to society’s unlimited demand for goods and services.

Choice is Opportunity Cost

Necessary
Unlimited Scarcity of
needs and wants Resources
Productive
Efficiency is
Necessary
Allocative

Sustainability is Also known as Rationing is

Necessary Factors of Production Necessary

No Decrease in
Quality and Quantity
over time

Rationing is Necessary

Rationing refers to the allocation of a specified quantity of a commodity to each individual during periods of
scarcity, such as during wartime.

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 Any good/service rationed using
price method is known
as Economic Goods
Price Method
Yes
Scarcity Rationing Because it has a cost

Non-Price Method
No

“Free good” and available

in unlimited quantities
without any cost

Efficiency

Economic efficiency is when all goods and factors of production in an economy are distributed or allocated to
their most valuable uses and waste is eliminated or minimized.

Productive efficiency refers to the concept that, given the

available inputs and technology, it is impossible to increase
the production of one good without simultaneously reducing
the production of another good.

Productive Efficiency

Scarcity Efficiency

Allocative Efficiency

Allocative efficiency involves making the best use of scarce

resources to produce optimal combinations of goods
and services, minimizing resource waste.

Economic Choice

Economics fundamentally studies choice due to the scarcity of resources, which prevents the satisfaction of
all human needs and wants. This necessitates decisions on which goods and services to produce and which
to foregone. Economics analyses how various decision-makers select among competing options and evaluates
the current and future impacts of these decisions.

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Opportunity Cost

Opportunity cost refers to what you give up in order to have something else. For example, if you buy an
empanada instead of a chicken wrap, the opportunity cost of your empanada is the chicken wrap you chose
not to buy.

Sustainability

Sustainability involves meeting present needs without compromising future generations’ ability to meet their
own. This includes limiting resource depletion and avoiding environmental degradation, which can impact
future resources and well-being.

Free vs. Economic Goods

Using the concept of opportunity cost

Free Goods Economic Goods Have an opportunity cost

These are goods that
Scarce by nature
are not scarce
Economic goods might Manufactured items, as
Therefore, have zero
include natural resources all these require scarce
opportunity cost.
like oil, coal, or gold resources to produce.