General Introduction

⦿ Managers are required to make choices

amongst various alternatives available for
efficient utilization of our scarce resources.
Continued….
(Scarcity and Efficiency)
⦿ key philosophies in economics:
Scarcity of Goods

⦿ Concept lies at the problem of resource

allocation and problem of a business enterprise.
⦿ The essence of any economic problem, micro
or macro, is the scarcity of resources.
⦿ The managers who decide on behalf of the
corporate unit or the national economy always
face the economic problem of Scarcity of good
quality of materials or skilled technicians
Example
⦿ As a Marketing Manager: He may be
encountering scarcity of sales force at his
command
⦿ As a Finance Manager: He may be facing the
scarcity of funds necessary for expansion or
renovate a program
⦿ As a Finance Minister of the Country: His basic
problem when he prepares the budget every
year is to find out enough revenue resources to
finance the necessary expenditure on plans and
programs. Thus, we see that Scarcity is a
universal phenomenon.
Example: Case of VENEZUELA

Date 2010 – ongoing

Location Venezuela
Cause Government policies,
corruption and smuggling

Outcome Hunger, disease and civil

unrest.
Example: India
⦿ Problem is inefficient supply chain not food shortage
One third of fruits and vegetables produced in India rots because
we do not have proper cold storage facilities. Lack of suitable
storage facilities lead food prices to rise. If India does not have
proper cold storage for its produce then it must sell these to
other countries to improve its export. But this is also not
happening. So we are facing double trouble in which most of the
children do not get sufficient food to eat. According to the Global
Hunger Index of 2011 21% of the population in India is
malnourished. 60 million children have lower weight than
recommended. Low food consumption not only leads to the
problem of malnutrition but also affects the economy of the
country as a malnourished person cannot work with efficiency. It
also leads to an increase in the individual healthcare cost. Apart
from this India also faces the problem of food security which
means challenges in the ongoing availability of food.
Continued…
Efficiency of Resources

⦿ Economy makes best use of its limited

resources. That brings the critical notion of
efficiency. Efficiency denotes most effective
use of a society’s resources in satisfying
people’s wants and needs.
Example
⦿ For e.g. most of us want to lead an exciting life i.e. life full
of excitements, adventures etc. but unluckily we do not
always have the resources necessary to do everything we
want to do. Therefore choices have to be made or in the
words of economists “individuals have to decide “how to
allocate scarce resources in the most effective ways”. For
this a body of economic principles and concepts has been
developed to explain how people and also business react
in this situation. Economics provide optimum utilization of
scarce resources to achieve the desired result. It provides
the basis for decision making. Economics can be studied
under two heads:
⦿ 1. Micro Economics
⦿ 2. Macro Economics
The Three Problems of Economic
Organization:
What to Produce?

⦿ The first question every society faces is what

to produce. Should a society build more
roads or schools? Because of scarcity,
society can not build everything it wants.
Choices have to be made. Once a society
determines what to produce it then needs to
decide how much should be produced. In a
market economy the "what" question is
answered in large part by the demand of
consumers?
How to Produce?
⦿ The next question a society needs to decide
after what to produce is how to produce the
desired goods and services. Each society must
combine available technology with scarce
resources to produce desired goods and
services. The education and skill levels of the
citizens of a society will determine what
methods can be used to produce goods and
services. For example, does a nation possess
the technology and skills to pick grapes with a
mechanized harvester, or does it have to pick
the grapes by hand?
For whom to produce?

⦿ The final question each society needs to ask

is for whom to produce. Who is to receive
and consume the goods and services
produced? Some workers have higher
incomes than others. This means more
goods and services in a society will be
consumed by these wealthy individuals, and
less by the poor. Different groups will benefit
from the different ways that we choose to
spend our money.
 Study of Economics - Micro &
Macro Economics

•Word micro has been derived from the Greek

word `Mikros' i.e. small and the word macro
has been derived from Greek word `Makros' i.e.
large
 Microeconomics: Meaning

• Micro economics analyses individualistic

behaviour. It studies an individual consumer,
producer, price of a particular commodity,
household, etc.
• Object of the study of microeconomics is, in
general, individuals, families and
companies
• Microeconomics is considered to be the
study of the allocation of scarce resources
among alternative purposes
 Definition

⦿ According to Prof. K. E. Boulding, "Micro

Economics is the study of particular firm,
particular household, individual prices,
wages, incomes, individual industries and
particular commodities."
 Characteristics / Features of
Microeconomics
⦿ Nature of Analysis
In micro economics, the behaviour of individual
consumers and producers in detail is
analysed. It is study of subject matter from
particular to general.
⦿ Method
Micro economics divides the economy into
various small units and every unit is
analysed in detail. It is a slicing method.
⦿ Scope
Micro economic analysis involves product pricing,
factor pricing and theory of welfare.
⦿ Application
Both theoretically and practically, micro economics
is useful in formulating various policies,
resource allocation, public finance, international
trade, etc.
⦿ Nature of Assumptions
Assumption of Ceteris Paribus is always made in
every micro economic theory. It means theory is
applicable only when 'other things being same'.
 Uses / Importance / Advantages of
Microeconomics
⦿ Individual Behaviour Analysis
Micro economics studies behaviour of
individual consumer or producer in a
particular situation.
⦿ Resource Allocation
Resources are already scare i.e less in
quantity. Micro economics helps in proper
allocation and utilization of resources to
produce various types of goods and
services.
⦿ Price Mechanization
Micro economics decides prices of various goods and
services on the basis of 'Demand-Supply Analysis'.
⦿ Economic Policy
Micro economics helps in formulating various
economic policies and economic plans to promote
all round economic development.
⦿ Free Enterprise Economy
Micro economics explains operating of a free
enterprise economy where individual has freedom
to take his own economic decisions.
⦿ Public Finance
It helps the government in fixing the tax rate and the
type of tax as well as the amount of tax to be
charged to the buyer and the seller.
⦿ Foreign Trade
It helps in explaining and fixing international trade
and tariff rules, causes of disequilibrium in
Balance Of Payment, effects of factors deciding
exchange rate, etc.
⦿ Social Welfare
It not only analyses economic conditions but also
studies the social needs under different market
conditions like monopoly, oligopoly, etc.
The Circular Flow
Product Markets
money to pay for goods & services

goods & services

Households & Firms

Resource Owners

labor & other resources

resource payments such as wages, rents, & interest

Resource or Factor Markets

Subject Matter or Scope of
Microeconomics
⦿ Commodity Pricing
Prices of individual commodities are determined by market forces of demand
and supply. So micro economics makes demand analysis (individual
consumer behaviour) and supply analysis (individual producer behaviour).
⦿ Factor Pricing
Land, labour, capital and entrepreneur, all factors contribute in production
process. So they get rewards in the form of rent, wages, interest and profit
respectively. Micro economics deals with determination of such rewards
i.e. factor prices. So micro economics is also called as 'Price Theory' or
'Value Theory'.
⦿ Welfare Theory
Micro economics deals with optimum allocation of available resources and
maximisation of social welfare. It provides answers for 'What to produce?',
'When to produce?', 'How to produce?' and 'For whom it is to be
produced?'. In short, Micro economics guides for utilizing scarce
resources of economy to maximize public welfare.
 Disadvantages / Limitations of
Microeconomics
⦿ Unrealistic Assumptions
Micro economics is based on unrealistic assumptions, especially in case
of full employment assumption which does not exist practically. Even
behaviour of one individual can not be generalised as the behaviour of
all.
⦿ Inadequate Data
Micro economics is based on the information dealing with individual
behaviour, individual customers. Hence, it is difficult to get correct
information. So because of incorrect data Micro Economics may
provide inaccurate results.
⦿ Ceteris Paribus
It assumes that all other things being equal (same) but actually it is not
so.
 Difference - macroeconomics
and microeconomics
⦿ Microeconomics is the study of decisions that
people and businesses make regarding the
allocation of resources and prices of goods
and services.
⦿ Means also taking into account taxes and
regulations created by governments.
⦿ Microeconomics focuses on supply and
demand and other forces that determine the
price levels seen in the economy.
⦿ For example, microeconomics would look at
how a specific company could maximize it's
production and capacity so it could lower
prices and better compete in its industry.
⦿ Macroeconomics, is the field of economics
that studies the behavior of the economy as
a whole and not just on specific companies,
but entire industries and economies.
⦿ looks at economy-wide phenomena, such as
Gross National Product (GDP) and how it is
affected by changes in unemployment,
national income, rate of growth, and price
levels.
⦿ Example, macroeconomics would look at how
an increase/decrease in net exports would
affect a nation's capital account or how GDP
would be affected by unemployment rate.
 Positive Vs. Normative Econ.
⦿ Positive economics can be described as “what is, what was,
and what probably will be” economics. Statements are based on
economic theory rather than raw emotion. Often these statements
will be expressed in the form of a hypothesis that can be analysed
and evaluated.
⦿ Examples:
⦿ A rise in interest rates will cause a rise in the exchange rate and an
increase in the demand for imported products
⦿ Lower taxes may stimulate an increase in the active labour supply
⦿ A national minimum wage is likely to cause a contraction in the
demand for low-skilled labour
 NORMATIVE STATEMENTS
⦿ Normative statements are subjective - based on opinion only -
often without a basis in fact or theory. They are value-laden,
emotional statements that focus on "what ought to be".
⦿ It is important to be able to distinguish between these types of
statements - particularly when heated arguments and debates are
taking place.
⦿ A national minimum wage is totally undesirable as it does not help
the poor and causes higher unemployment and inflation
⦿ Protectionism is the only proper way to improve the living standards
of workers whose jobs are threatened by cheap imports
Example from India
⦿ In a country like India where there is great diversification in terms of culture,
geographical features and population composition, microeconomics has great
role to play. It’s potential is being recognized by both public sector and private
players. Encouraging micro savings through payment banks, self-help groups,
cooperative societies etc. are some examples by which importance
microeconomics can be seen.
⦿ Bottom-up approach, focusing on individual economic units or smaller (similar)
areas can help in more equitable growth. And its here that the microeconomics
plays its role.
⦿ Selective Credit Control policies for specific industries/sector
⦿ Promoting MSMEs
⦿ JAM, i.e. Jan-dhan, Aadhaar card, Mobile to bring individuals under digitalization
initiative, are some examples for the same where the focus is on individual
economic units.
⦿ Schemes when tested in smaller areas before a national level launch helps
gauge the impact. If failed, huge amounts of funds are not lost and economy
does not witness any big crisis due to the scheme being tested on only a small
are