PRELIMS I

Introduction to Microeconomics

“The purpose of studying economics is not to acquire a set of

ready-made answers to economic questions but to avoid being
deceived by economists”
- Joan Robinson
"Marx, Marshall and Keynes" (1955)

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I. Microeconomics vs. Macroeconomics

What’s the difference between micro and macroeconomics? These two economic disciplines
can see confusing at first glance, but once you learn their focus it’s easy to differentiate microeconomic
issues and questions from macroeconomic ones.
The difference between micro and macroeconomics is simple. Microeconomics is the study of
economics at an individual, group or company level. Macroeconomics, on the other hand, is the study
of a national economy as a whole.
Microeconomics focuses on issues that affect individuals and companies. This could mean studying
the supply and demand for a specific product, the production that an individual or business is capable
of, or the effects of regulations on a business.
Macroeconomics focuses on issues that affect the economy as a whole. Some of the most common
focuses of macroeconomics include unemployment rates, the gross domestic product of an economy,
and the effects of exports and imports.
Does this make sense? While both fields of economics often use the same principles and
formulas to solve problems, microeconomics is the study of economics at a far smaller scale, while
macroeconomics is the study of large-scale economic issues.
Microeconomic Problems Macroeconomic Problems

Microeconomics seeks to solve problems on a Macroeconomics looks at the bigger picture. In

small level. Some economics like to describe
microeconomics as the study of economics and
behavior from the bottom up, since it’s focused
on the effects of low-level decisions on the
economy.
macroeconomics, a common issue is the effects
of certain policies on the national or regional
economy.

“Both fields of economics are interdependent”

At first glance, micro and macroeconomics might seem completely different from one another.
In reality, these two economic fields are remarkably similar, and the issues they study often overlap
significantly.
For example, a common focus of macroeconomics is inflation and the cost of living for a
specific economy. Inflation is caused by a variety of factors, ranging from low interest rates to
expansion of the money supply.
While this might seem like a purely macroeconomic field of study, it’s actually one that’s very
important in microeconomics. Since inflation raises the price of goods, services and commodities, it has
serious effects for individuals and businesses.
On a microeconomic level, this has several effects. Businesses are forced to raise their prices in
response to the increased cost of materials. They also need to pay their employees more over the long
term to account for the higher cost of living.
This is just one example of a macroeconomic phenomenon – in this case, inflation and a rising
cost of living – affecting a microeconomic one. Other macroeconomic decisions, such as the creation of
a minimum wage or tariffs for certain goods and materials, have significant microeconomic effects.

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II. Purpose of Economic Theory

The primary functions of economic theory:
1. To explain the nature of economic activity
2. To predict what will happen to the economy as facts change
The explanation of the nature of economic enables us to understand the economic activity
enables us to understand the economic environment in which we live – how one part relates to
others and what causes what. To be able to predict with some degree of accuracy what is likely
to happen to the key variables that affect our well-being and to be able to do something about
them if we dislike the predicted consequences.
What are some applications of economic theory in everyday life?

Ex. “Marginal Theory of Utility & Law of Diminishing utility”

Presupposing that a bottle of water owned has a corresponding
Bob Joe
Bottles already owned 4 50
Bottle they want to purchase 1 1
Total bottles owned 5 51
Proportion 1/5 or 20% 1/51 or 1.96%

Consider Bob has four bottles of water and purchases a fifth bottle of water. Next,
imagine that Joe has 50 bottles of water and purchases one more bottle of water. Bob--buying the
fifth bottle of water will get far more utility from that fifth bottle of water because of its
proportion to the total. This fifth bottle increases the total water by 20 percent. Joe gains far less
utility from purchasing a 51st bottle of water, precisely because its proportion to the total is so
low. This 51st bottle of water increases the total water by only 1.96 percent.
As a person purchases more and more of a product, the marginal utility to the buyer gets
lower and lower, until it reaches a point where the buyer has zero need for any additional units of
the good or service. At that point, the marginal utility of the next unit equals zero.

III. Functions of Microeconomics

Main focus
Though microeconomics is a study of individual’s behavioral status in economy it also deals with
many other related subject matter such as –

1. Product Pricing:
Price of a product is determined by market on the basis of demand of consumers for the product
and supply of that product by manufacturer. Microeconomics analysis both demand and supply
for proper pricing.

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2. Pricing for other factors:

In a production, except main ingredients or raw materials, lots of other related factors are being
involved. Such as land, office, factory shed labors and employees, etc. This study determines the
correct price for these factors through proper analysis

3. Establishing economic welfare:

Economy is the backbone of a nation, so economic welfare is a necessary factor for every society.
This branch of economics deals with these problems gives proper solution to build an improved
and efficient economic structure and enhances public welfare.

Making important business decisions

Taking a correct decision for an important issue is a quite significant factor in the field of business.
A single wrong decision can lead your business to ruin. Microeconomics plays a vital role in
making right decision in major business issues like –

1. Proper utilization of limited resources

2. Right analysis of demand
3. Correct cost analysis
4. Shows the benefits of free market
5. Optimal production decisions
6. Correct pricing

IV. Market

What is 'Market'

A market is a medium that allows buyers and sellers of a specific good or service to
interact in order to facilitate an exchange. This type of market may either be a physical
marketplace where people come together to exchange goods and services in person, as in a
bazaar or shopping center, or a virtual market wherein buyers and sellers do not interact, as in an
online market. Market can also refer to the general market where securities are traded. This form
of the term may also refer to specific securities markets and may take place in person or online.
The term "market" can also refer to people with the desire and ability to buy a specific product or
service.

Markets may come in the form of physical locations where transactions are made, which
may exist as anything from thrift or boutique stores selling individual items to wholesale markets
selling goods to other distributors. Yet, markets do not necessarily need to be a physical meeting
place. Internet-based stores and auction sites, for example, are all markets in which transactions
can take place entirely online and where the two parties do not ever need to physically meet.
Technically speaking, a market is any medium through which two or more parties can engage in
an economic transaction, even those that do not necessarily need to involve money. A market
transaction may involve goods, services, information, currency or any combination of these
things passing from one party to another in exchange for one of these or another combination.

How Do Markets Work?

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Markets establish the going rates for goods and other services, which sellers determine by
creating supply and which buyers determine by creating demand. A market is a focal center for
the distribution of goods and resources within a society, though they are not always deliberately
created. Markets may emerge organically or as a means of enabling ownership rights over goods,
services and information. When on a national or other more specific regional level, markets may
often be categorized as “developed” markets or “developing” markets, depending on many
factors including income levels and the nation or region’s openness to foreign trade.

Markets vary widely for a number of reasons, including the kinds of products sold,
location, duration, size and constituency of the customer base, size, legality and many other
factors. For example, the term black market refers to an illegal market. Yet, like markets in
general, a black market can be a physical market where illegal goods are traded in person or a
virtual market where illegal goods are traded with relative anonymity. A variation on this is a
grey market, which is an unauthorized or unofficial locus of trade through channels that are
otherwise legal.

Because a market may often be bound to a geographic region, nation or state, even when
the market in question is not physical, it is subject to rules and regulations set by a regional or
other governing body that determines the market’s nature. This may be the case when the
regulation is as wide-reaching and as widely recognized as an international trade agreement
(such as the North American Free Trade Agreement or the European Union) or as local and
temporary as a pop-up street market where vendors self-regulate through market forces.

The theoretical optimally functioning market is one experiencing perfect competition, a

condition in which no individual party or other entity within the market is powerful enough to
determine the price of a particular good or service. In addition, though only two parties are
needed to make a trade, at minimum a third party is needed in order to introduce an element of
competition and bring balance to the market. As such, a market in a state of perfect competition,
among other things, is necessarily characterized by a high number of active buyers and sellers.

Securities Markets
The most common types of securities markets are stock markets, bond markets, currency
markets (called foreign exchange markets or forex), money markets and futures markets. Many
of these markets manifest themselves in the form of exchanges. In the case of the stock market,
there are a variety of exchanges around the world, the most popular of which are the New York
Stock Exchange, NASDAQ, the United Kingdom's London Stock Exchange, Japan’s Tokyo
Stock Exchange, China’s Shanghai Stock Exchange, the Hong Kong Stock Exchange, Euronext,
China’s Shenzen Stock Exchange, Canada’s TMX Group and Germany’s Deutsche Börse.

A Market as a Group of People

This use of “market” can refer to a constituency with interest in a product or service that is of
any size and exists on any social level. For example, it can be used in reference to something as
local as “the Brooklyn housing market” or as broad as “the global diamond market.”