Assignment -

Introduction to Microeconomics

Introduction to

Microeconomics

Instructor: Iftekhar Hossain (IkH)

ECO-101 SECTION-13

Submission Date: 20th April,2015

Prepared By:

Md. Ferdous Khan Samuel 111 0706 030

An Introduction To

Microeconomics

Microeconomics is a branch of economics that studies the behaviour of individuals and small

impacting organizations in making decisions on the allocation of limited resources. The

science of scarcity , the science of how individuals deals with the fact that wants are greater

than the limited resources available to satisfy those wants. Typically, it applies

to markets where goods or services are bought and sold. Microeconomics examines how

these decisions and behaviours affect the supply and demand for goods and services, which

determines prices, and how prices, in turn, determine the quantity supplied and quantity

demanded of goods and services.

Economists talks about goods and bads. A good is anything which gives a person utility or

satisfaction. A bad is something that gives you disutility or dissatisfaction. We need resources

to produce goods. Generally, economists divide resources into four broad categories: land,

labor, capital, and entrepreneurship. Land includes natural resources, such as minerals,

forests, water, and unimproved land. Labor consists of the physical and mental talents people

contribute to the production process. Capital consists of produced goods that can be used as

inputs for further production. Entrepreneurship refers to the particular talent that some people

have for organizing the resources of land, labor, and capital to produce goods, seek new

business opportunities, and develop new ways of doing things. Scarcity is the condition in

which our wants (for goods) are greater than the limited resources (land, labor, capital, and

entrepreneurship) available to satisfy those wants. A rationing device is a means of deciding

who gets what. It is scarcity that implies the need for a rationing device. The most highly

valued opportunity or alternative forfeited when a choice is made is known as opportunity

cost. Marginal Benefits is Additional benefits. The benefits connected to consuming an

additional unit of a good or undertaking one more unit of an activity. Marginal Costs is

Additional costs. The costs connected to consuming an additional unit of a good or

undertaking one more unit of an activity. Positive Economics is the study of “what is” in

economic matters. Normative Economics is the study of “what should be” in economic

matters. Production Possibilities Frontier (PPF) represents the possible combinations of two

goods that can be produced in a certain period of time under the conditions of a given state of

technology and fully employed resources.

Market is any place people come together to trade. Demand is the willingness and ability of

buyers to purchase different quantities of a good at different prices during a specific time

period. Law of Demand is the price of a good rises, the quantity demanded of the good falls,

and as the price of a good falls, the quantity demanded of the good rises, ceteris paribus, a

Latin term meaning “all other things constant” or “nothing else changes.” Law of

Diminishing Marginal Utility is for a given time period, the marginal (additional) utility or

satisfaction gained by consuming equal successive units of a good will decline as the amount

consumed increase. Normal Good is a good the demand for which rises (falls) as income rises

(falls). Inferior Good is a good the demand for which falls (rises) as income rises (falls).

Neutral Good is a good the demand for which does not change as income rises or falls.

Substitutes are two goods that satisfy similar needs or desires. If two goods are substitutes,

the demand for one rises as the price of the other rises (or the demand for one falls as the

price of the other falls). Complements goods are two goods that are used jointly in

consumption. Law of Supply is as the price of a good rises, the quantity supplied of the good

rises, and as the price of a good falls, the quantity supplied of the good falls, ceteris paribus.

Equilibrium Quantity is the quantity that corresponds to equilibrium price. The quantity at

which the amount of the good that buyers are willing and able to buy equals the amount that

sellers are willing and able to sell, and both equal the amount actually bought and sold.

Real GDP is the value of the entire output produced annually within a country’s borders,

adjusted for price changes. Fiscal Policy is the changes in government expenditures and/or

changes in taxes to achieve particular macroeconomic goals. Monetary Policy is the changes

in the money supply, or the rate of growth of the money supply, to achieve particular

macroeconomic goals. Consumer Price Index (CPI) is a widely cited index number for the

price level; the weighted average of prices of a specific set of goods and services purchased

by a typical household. Inflation is an increase in the price level. Real Income is the Nominal

income adjusted for price changes. Nominal Income is the current-dollar amount of a

person’s income.

Marginal Physical Product (MPP) is the change in output that results from changing the

variable input by one unit, holding all other inputs fixed. Law of Diminishing Marginal

Returns As ever larger amounts of a variable input are combined with fixed inputs, eventually

the marginal physical product of the variable input will decline. Marginal Cost (MC ) is the

change in total cost that results from a change in output. Economies of Scale is the

Economies that exist when inputs are increased by some percentage and output increases by a

greater percentage, causing unit costs to fall.

Microeconomics involves some key players. These are: 1. consumers, 2. business firms, and

3. factor (or resource) owners. All of microeconomics is really about: 1. objectives, 2.

constraints, and 3. choices. Consumers objective of trying to maximize their utility or

satisfaction. Firms of buyers objective is to maximize profit. Firms of sellers objective in this

role is to maximize profit. The objective of factor owners is to maximize the income they

earn from selling their factors. Price Elasticity of Demand is a measure of the responsiveness

of quantity demanded to changes in price. Elastic Demand The demand when the percentage

change in quantity demanded is greater than the percentage change in price. Quantity

demanded changes proportionately more than price changes. Inelastic Demand The demand

when the percentage change in quantity demanded is less than the percentage change in price.

Quantity demanded changes proportionately less than price changes. Unit Elastic Demand

The demand when the percentage change in quantity demanded is equal to the percentage

change in price. Quantity demanded changes proportionately to price changes. Perfectly

Elastic Demand The demand when a small percentage change in price causes an extremely

large percentage change in quantity demanded (from buying all to buying nothing. Perfectly

Inelastic Demand The demand when the quantity demanded does not change as price

changes.

Utility is a measure of the satisfaction, happiness, or benefit that results from the

consumption of a good. Util is an artificial construct used to measure utility. Total Utility is

the total satisfaction a person receives from consuming a particular quantity of a good.

Marginal Utility is the additional utility a person receives from consuming an additional unit

of a good. Law of Diminishing Marginal Utility is the marginal utility gained by consuming

equal successive units of a good will decline as the amount consumed increases. Consumer

Equilibrium occurs when the consumer has spent all income and the marginal utilities per

dollar spent on each good purchased are equal.

Perfect Competition is a theory of market structure based on four assumptions: (1) There are

many sellers and buyers, (2) sellers sell a homogeneous good, (3) buyers and sellers have all

relevant information, and (4) entry into or exit from the market is easy. Price Taker is a seller

that does not have the ability to control the price of the product it sells; the seller takes the

price determined in the market. Marginal Revenue (MR) is the change in total revenue that

results from selling one additional unit of output.

Monopoly is a theory of market structure based on three assumptions: There is one seller, it

sells a product for which no close substitutes exist, and there are extremely high barriers to

entry. Natural Monopoly is the condition where economies of scale are so pronounced that

only one firm can survive. Price Searcher A seller that has the ability to control to some

degree the price of the product it sells. Monopolistic Competition is a theory of market

structure based on three assumptions: many sellers and buyers, firms producing and selling

slightly differentiated products, and easy entry and exit. Oligopoly is a theory of market

structure based on three assumptions: few sellers and many buyers, firms producing either

homogeneous or differentiated products, and significant barriers to entry.

The study of microeconomics reveals how both consumers and businesses make financial

decisions. Although a variety of impulses and imperatives drive these decisions, a principal

determinant for the consumer is price, and for business the supply-demand factor as it relates

to pricing and output.