Principles of Microeconomics

Dr. Shereen Ahmed Abdallah

Week No. Contents
Week 1
Week 2 Chapter 1: introduction to the study of microeconomics

Week 3 Chapter 2: Demand theory

Week 4 Chapter 3:Supply theory

Week5
Week6 Chapter 4: Elasticities and market equilibrium

Week7 Midterm exam

Week8 Chapter 5: consumer preferences and the effect of income and
Week9 substitution

Week10 Chapter 6: Consumer equilibrium

Week 11 Chapter 7: Theories of production and producer equilibrium in

Week12 competition and monopoly markets

Week13
Chapter 8: The theory of value and distribution
week14
 Attendance ,quizzes and Assignments (20 Marks)
 Midterm at week 7 (20 Marks)
 Final exam at week 16 (60 Marks)
 ----------------------------------------------------
----------------------
 Total (100 Marks)
 CHAPTER (1)

Introduction to the study of microeconomics

• Main points:
• 1- Definition of economics
• 2- Scope of microeconomics and
macroeconomics
• 3- Positive and normative economics .
• 4- Scarcity ,choices and Economic problem
• 5- Central problems of an economy
• 6- How to deal with economic problems
1- Definition of Economics:-
Economics is the study of how individuals and
societies choose to use their Scarce resources
in order to best satisfy their needs.

In other words:
Economics is the study of how people allocate
their limited resources in an attempt to satisfy
their unlimited needs.
What do we mean by resources and
needs?

Resources Needs
Are inputs used to you have alternatives
produce other things & you must choose
to satisfy people needs, what you would
(factors of production). buy.
 Factors of production, are:
1) Land. Includes all nonhuman gifts of nature. Land
as a resource includes location, climate, and
water
2) Labor. Includes physical and mental efforts used in
production
3)Capital: includes factories, equipments,
machines…..etc, used in the production.
4)Entrepreneur: are individuals who organize production
& perform the following functions:
- Raising Capital.
- Organizing, managing, assembling other factors of
production.
- Making decisions.
- Risk taker.
- Reap profit or losses.
 2- Scope of micro and macroeconomics
Differences Microeconomics Macroeconomics

Definition Deals with the behavior of Study of the economy as a

individual units whole

Concern with Particular households, National income ,general

firms and industries price level
,unemployment, poverty
Tools Price mechanism which National income, output
operates with the help of and employment which
Demand and supply are determined by
Aggregate demand and
aggregate supply
Objective On demand side to Full employment, price
maximize utility and on stability, economic growth
supply side is to maximize and balance of payment
profits at minimum costs
Examples Individual income and Inflation,unemployment,
 State wether the following statements belong to MICRO or MACRO economics?
statement MICRO or MACRO economics

Predicting how consumers will react to

higher gasoline prices

Explaining the effect of higher wage rates

on a company's supply decision
.
Analyzing the consequences of a free
trade agreement between two countries

Tracking the relationship between the

money supply and the inflation rate

Advising a corporation about an

investment proposal

Identifying the least-cost method of

producing textbooks
Explaining how the economy can self-
correct during an economic downturn
 State wether the following statements belong to MICRO or MACRO economics?
statement MICRO or MACRO economics

Predicting how consumers will react to MICROECONOMICS

higher gasoline prices
MICROECONOMICS
Explaining the effect of higher wage rates
on a company's supply decision
. MACROECONOMICS
Analyzing the consequences of a free
trade agreement between two countries

Tracking the relationship between the MACROECONOMICS

money supply and the inflation rate
MICROECONOMICS
Advising a corporation about an
investment proposal
MICROECONOMICS
Identifying the least-cost method of
producing textbooks
Explaining how the economy can self- MACROECONOMICS
correct during an economic downturn
 3- Positive and Normative Economics .
Differences Positive economics Normative economics

Meaning It deals with the things “as It deals with the things “as
they are” they should be”
Basis Based upon real facts Based upon individual
opinions
Verification It can be verified with It can not be verified
actual data
Nature Pure and neutral in nature Suggestive and optimum in
nature
Purpose It aims to make real It aims to determine the
description of an economic ideals
activity
Value judgments It doesn’t give any value It gives value judgments
judgments
Examples Cost of production, budget When to provide free
analysis , maximizing health and education
revenue from sales When to provide the
subsidy by government
State wether the following statements belong to positive or
normative economics?
statement Positive or normative economics

Law of demand when price increase

quantity demanded decrease
The consumers should decrease their
consumption in order to control the
increase in prices
Income is not equal in all countries

Countries should specialize in

producing a certain product and export
it in order to increase its national
income
Unemployment rate reaches 10 % in
2022
Egypt should decrease its
unemployment rate to 5 % by 2025
State wether the following statements belong to positive or
normative economics?
statement Positive or normative economics

Law of demand when price increase Positive economics

quantity demanded decrease
The consumers should decrease their Normative economics
consumption in order to control the
increase in prices
Income is not equal in all countries Positive economics

Countries should specialize in Normative economics

producing a certain product and export
it in order to increase its national
income
Unemployment rate reaches 10 % in Positive economics
2022
Egypt should decrease its Normative economics
unemployment rate to 5 % by 2025
4- Scarcity, choice and Economic
Problem:
 Economic problem occurs because:
our needs exceed our ability to satisfy them
from limited resources.
 Scarcity is the main reason of economic
problem
 Scarcity = shortage of resources.
 We have 2 types of scarcity:

Absolute Scarcity Relative Scarcity

(no resources) (resources is not enough)
scarcity

Economic
problem

Choice
problem

Opportunity
cost
Opportunity Cost:-
Defined as the amount of goods that must be
sacrificed in order to obtain a unit of another
good.
• The concepts of “ choice problem” and
“ opportunity cost” could be explained through
what we call:
Production Possibility Boundary (PPB) =
OR Production Possibility Frontier (PPF):
Production Possibility Boundary (PPB) =
Production Possibility Frontier (PPF):
Is a curve illustrating various combinations of
goods that a society is capable to produce at
any given time, If:
Technology & Resources are fixed.
All resources are fully & efficiently
employed.
Example:
If the economy producing only 2 goods, Guns & Butter,
The (PPB) or (PPF) has 4 important properties:

1) PPB shows the limit to which a society can produce with

the technology and resources at its disposal.

X
Guns/year
2) PPB illustrates maximum production points when all
resources are fully and efficiently employed.
the society can operate inside its boundary, if it doesn't
employ all of its resources fully and efficiently.

3) PPB has a negative or downward slope.

a negative slope indicates that more of one good can be
produced if less of another good is produced, thus
movement along a PPB implies a trade-off between goods.
Y . A
. B

. C

Guns/year X
4) PPB shifts if there is a change either in technology or in
the availability of resources.
• an increase in the availability of a resource used to
produce both guns and butter would shift the PPB
outward.
• an improvement in the technology of gun production,
but not in the technology of butter production, would
shift the PPB outward only on the gun axis, as follows:-
Y (a) Y (b)

X X
Guns/year Guns/year
increase in resources used to produce improvement in the technology
both Guns and Butter. Of Gun production.
Example:
E
. F
.H
.I . G

D
Given the country’s resources, Production can
occur anywhere along or inside the DE curve.
At frontier:
Point G, resources are fully employed & the production is
said to be efficient, this is because it is not possible to
increase the output of one good without lowering the
output of the other.

Inside Frontier:
Point I, there is inefficiency in the production, because the
output of one or both goods can be increased without
increase the resource base of the country.

Outside Frontier:
Point H, Production cannot occur at point outside the
frontier, because this would require resources or
technology not available to the country.
 Example 1
Production Guns Butter MRT
possibilities or
combination
A 21 0
B 20 1
C 18 2
D 15 3
E 11 4
F 6 5
G 0 6
 MRT
Marginal rate of transformation
• It is the number of units of a commodity
sacrificed to gain an additional unit of another
commodity
• MRT = Δ UNITS SACRIFICED / Δ UNITS GAINED
 Solution of Example 1
Production Guns Butter MRT
possibilities or
combination
A 21 0 -
B 20 1 1:1
C 18 2 2:1
D 15 3 3:1
E 11 4 4:1
F 6 5 5:1
G 0 6 6:1
 Example 2
Production Guns Butter Opportunity
possibilities or cost
combination
A 21 0
B 20 1
C 18 2
D 15 3
E 11 4
F 6 5
G 0 6
 Opportunity cost
• Defined as the amount of goods that
must be sacrificed in order to obtain
a unit of another good.
 Solution of Example 2
Production Guns Butter Opportunity
possibilities or cost
combination
A 21 0 -
B 20 1 1 gun
C 18 2 2 guns
D 15 3 3 guns
E 11 4 4 guns
F 6 5 5 guns
G 0 6 6 guns
 Example 3

1- What is the opportunity cost of increasing the production of

trucks from 4 to7? From A TO B?

2- What is the opportunity cost of increasing the production of boats

from 4 to 9? From C TO A ?
 Solution of Example 3

1- What is the opportunity cost of increasing the production of

trucks from 4 to7? From A TO B? 2 boats

2- What is the opportunity cost of increasing the production of boats

from 4 to 9? From C TO A ? 5 trucks
5- Central problems of an economy

For
What to How to
whom to
produce produce
produce
1. What to Produce: •
• This problem involves selection of goods
and services to be produced and the
quantity to be produced of each selected
commodity. Every economy has limited
resources and thus, cannot produce all the
goods. More of one good or service usually
means less of others.
• 2. How to Produce:
• This problem refers to selection of technique to be
used for production of goods and services. A good
can be produced using different techniques of
production. Generally, techniques are classified as:
Labor intensive techniques (LIT) and Capital intensive
techniques (CIT).
• i. In Labor intensive technique, more labor and less
capital (in the form of machines, etc.) is used.
• ii. In Capital intensive technique, there is more
capital and less labor utilization.
• 3. For Whom to Produce:
• This problem refers to selection of the
category of people who will ultimately
consume the goods, i.e. whether to produce
goods for more poor and less rich or more rich
and less poor. Since resources are scarce in
every economy, no society can satisfy all the
wants of its people. Thus, a problem of choice
arises.
 6- How to deal with economic problems

• Different economies solve the central problems differently, as

under:
• (1) Capitalist Economy:
• Market economy is a free economy. It means that producers are free to
decide ‘what, how and for whom to produce’. On what basis do they take
their decisions? It is on the basis of supply and demand forces in the
market and are taken with a view to maximizing profits.

• (2) socialist Economy:

• In a socialist economy, decisions relating to ‘what, how and for whom to
produce’ are taken by some central authority of the government.
• All decisions are taken to maximize social welfare, not to maximize profits.
Those goods and services will be produced which the central authority (or
the government) finds as most useful for the society. That technique of
production will be adopted which is socially most desirable.
(3) Mixed Economy:
• Mixed economy shares the merits of market
economies as well as socialist economies. In a mixed
economy, the decisions relating to ‘what, how and
for whom to produce’ are neither left entirely to the
market forces nor to any central authority. Both
‘market forces’ as well as ‘central authority’ play
their role. While market forces tend to maximize
profits, the central authority focuses on social
welfare.