Introduction to Microeconomics

Topics: Supply and demand, Economics, Elasticity Pages: 20 (4660 words) Published: November 1, 2012
Introduction to Microeconomics

Q#1: What do you understand by Economics?
Lionel Robbins provided the most complete definition of economics. He wrote a book “Nature and significance of Economic science” in 1932 in which he defined economics as:

“Economics is a science which studies human behavior as a relationship between unlimited wants and limited resources which have many uses.”

Following points are most important in this definition and explain why economics is said to be the science of scarcity and choice: 1. Our wants are unlimited related to our resources.
2. Our resources are limited related to our wants.
3. Wants are unlimited but each want is different in its intensity. 4. Some wants are more intense (necessities) and some are less intense (comforts and luxuries). 5. Our resources can not fulfill all of our wants, so we have to make choices. 6. The choices we make are on the assumption that our resources have alternative uses.

Q#2: Write a short note on Microeconomics and Macroeconomics. Solution:

Microeconomics is the study of small segments of an economy. It can be defined as: “Microeconomics is the study of how individuals and businesses make decisions about producing, exchanging, distributing and consuming particular goods and services and the interaction of those decisions in the market.”

It studies “individual” and “particular” business units, firms, industries, households, prices, wages and income. Thus, we can say it is the study of individual parts of the economy.

E.g. when we say that the price of a particular commodity should be reduced; a certain industry must be given special tax concession; Wages of labor working in shipyard industry must be increased; we are talking about Microeconomics or individual parts of the economy.

The word “Macro” means large. It may be defined as:
“Macroeconomics is the study of economics as a whole. It studies national income, total employment, aggregate income, total production and average prices.” It studies economy in a broad way. It takes into account the totality and aggregates of different performance variables like inflation (average price level), total employment, national income, GDP (Gross domestic product) to give the broader perspective of the economy.

Q#3: What is the difference between ‘Quantity demanded’ and Change in Demand’? Solution:
When price changes, the quantity demanded changes. The change in quantity demanded brings a movement along the demand curve. But, when the non-price factors change, there is a change in the demand curve or a shift in the demand curve. [pic]

Factors of change in Demand (Non Price factors):
When the non-price factors or determinants of demand change, there is a change in the demand curve or a shift in the demand curve. These factors are as follows:

If the population of a country increases due to an increase in immigrants or an increase in birth rate, the demand of various kinds of goods will increase or vice versa.

Changes in Tastes:
Demand for a commodity may change due to change in tastes. For example, if people shift from motorbikes to cars for travel due to change in tastes, the demand for cars will increase and demand for motorbikes will decrease.

Changes in Income:
When the disposable income increases, the purchasing power of people also increases and they demand more goods at the same price or even at a higher price. Conversely, decrease in income results in decrease in the purchasing power and hence demand also decreases.

Price of Related Goods:
In case of substitutes (The goods that can be used in place of other goods) like tea and coffee, if the price of the coffee decreases, the demand of coffee will increase and demand of tea will decrease.

In case of compliments (The goods that are used in combination with other goods) like cars and fuel, if the price of the fuel increases, the demand of...
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