Microeconomics

Microeconomics
• Is the study of individuals, household and
firms’ behaviour in decision making and
allocation of resources.
• - it is study deals with what choices people
make, what factors influence their choices and
how their decision affect the good markets by
affecting the price, the supply and demand.
Microeconomics and Macroeconomics
• Microeconomics focuses on micro or small
segment of economy and it studies the
decision making process and economic
problems of individuals.
• Macroeconomics- looks at a larger picture and
is study of economy as a whole.
 Ceteris Paribus
• It is a latin phrase which means “ other things
remain constant.”
• - it becomes easy to understand the relationship
between two variables or in other words the
impact of change in one variable on the other
variable while other variables remain constant.
• It helps in exploring relationship between the ff:
Demand and Price, Demand and income,
Demand and price of related goods.
 Chapter 2- Theory of the Firm
• Theory of the firm is the microeconomics
concept founded in neoclassical economics
that states that firms ( including businesses
and corporations) exist and make decisions to
maximize profits. Firms interact with the
market to determine pricing and demand and
then allocate resources according to models
that look to maximize net profits.
• Neoclassical Economist believes that a
consumer number-one concern is to maximize
personal satisfaction, and that everyone
makes decision based on fully informed
evaluations of utility.( Utility-level of happines
the consumer experiences from the good or
service)
 Demand and Supply
• Demand- refers to the number of goods and services
which consumer are willing to buy at a given price,
time and place.
• It is determined by the income, population, taste, price
and expectation and prices of related goods.
• Supply –refers to the number of goods and services
which producers are willing and able to offer at a given
price, time and place. It is determined by technology,
number of sellers, cost of production, prices of their
goods, price expectations, taxes and subsidies.
 Supply and Demand
• Law of demand- The higher the price, the lower
the quantity demanded. The amount of a good
that buyers purchase at a higher price is less
because as the price go up, so does the
opportunity cost of buying goods.
• Law of Supply- This means the higher the price,
the higher the quantity supplied. Producers
supply more at a higher price because selling a
higher quantity at a higher price increases
revenue.
• Supply and Demand Relationship- the law of
supply and demand in a free-market economy.
The law states that when demand is greater
than supply, price increases. When supply is
greater than demand, price decreases.
• This law also applies to the prices of factors of
production. In our country, wages are very low
due to the oversupply of labor.
 Equilibrium
• When supply and demand are equal the
economy is said to at equilibrium. At this
point, allocation of goods is at most efficient
because the amount of good being supplied is
exactly the same as the amount of goods
being demanded.
 Chapter 3- Production Theory
• Production- refers to the transformation of
inputs to outputs (or products)
• An input is a resource that a firm uses in its
production process for the purpose of creating
a good or service.(also the raw materials)
• Output- refers to the number of units of the
commodity produced.
• Labor- refers to the number of workers
employed
 Factors of production
• Man cannot create goods and services without using the
factors of production like:
- land- original gift of nature. It includes soil, rivers, lakes,
oceans, mountains, forest, mineral resources and climate.
- Labor- physical and mental efforts of individuals. This
applies not only to workers, farmers or laborers but also to
professionals like accountants, economist,or scientist.
- refers to the number of workers employed
- Capital- refers to the amount of the equipment used in
production.
- Entreprenuer-organizer and coordinator of land, labor and
capital.
 Production function
• Production is the creation of goods and servicres to satisfy
human wants. The factors of production are called as
inputs of production, and the goods and services that have
been created by the inputs are called outputs of
production.
• Factors of production are classified as fixed factor ( fixed
input) and variable factor( variable input). A fixed factor
remains constant regardless of the volume of production.
This means whether you produce or not, the factor of
production is unchanged.
• Variable factor- more production more variable factors. Ex.
Labor and entreprenuers. More laborers needed when
there are more works.
 Theory of Production
• Process of transforming both fixed and
variable inputs into finished goods and
services.
• The quantity and quality of goods and services
being produced depends on the state of
technology. Modern techniques of production
is more efficient than in primitive technology.
 Law of Diminishing return
• The law of diminishing return also known as law
of diminishing marginal productivity.
• It is a basic law in economics and technology
• The law states that when successive units of a
variable input(like farmers) work with fixed input(
like 1 hectare or land) , beyond a certain point,
the additional product(output) created by which
additional unit of a variable,input decreases.
• Marginal product( additional product brought by
one additional unit of variable input(farmer).
 Payments of the factor of production
• Labor- wages
• Land-rent
• Capital- interest
• Entrepreneur- normal profit
• The sum of these payments is the total cost of
production.