Page 1
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
Lesson: Introduction to Microeconomics
Lesson Developer: Dipavali Debroy
College/Department: SGGSCC, University of Delhi
Page 2
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
Lesson: Introduction to Microeconomics
Lesson Developer: Dipavali Debroy
College/Department: SGGSCC, University of Delhi
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
Table of Contents
1.Learning Outcomes
2.Introduction
3. Evolution of the Subject
4. Methodology of Economics: Positive Economics and Normative Economics
5. Art or Science
6. Scope of Economics - Related Subjects
7. Models and Hypotheses
8. Market and Equilibrium
8.1 Demand and Supply
9. Concept of ceteris paribus – General Equilibrium Partial Equilibrium
10. Static and Dynamic Equilibrium
11. Short-Run and Long Run Equilibrium
12. Nobel Prize in Economics
13. Summary
14. Exercises
15. Glossary
16. References
17. Activity
18. Quiz
1.Learning Outcomes
After you have read this chapter you should be able to define Micro-
Economics. Macro-Economics, Market, Demand, Supply, Equilibrium, Partial
and General Equilibrium, Static and Dynamic Equilibrium understand the
central problems of an economy identify variables, constants and
parameters differentiate Micro-Economics from Macro-Economics appreciate
the scope of the subject of Economics apply the knowledge of basic
Economics
2. Introduction
Micro-Economics is the branch of Economics that studies economic issues minutely
in individual details, as if under a microscope. In contrast, Macro-Economics is the
branch of Economics that studies economic issues in aggregative and overall forms,
looking at the broad picture. . The word Micro comes from the Greek word Micros
(small). Macro comes from Greek macros ( long or huge). Micro-Economics and
Macro-Economics are thus two complements of the subject of Economics
But what is Economics?
Value Addition 1: Focus of the Section
Topic Economics
This section is to make you aware of what Economics is.
The purpose of this section is to make you familiar with the various
Definitions of Economics, the Evolution of the subject, its Scope,
Methodology, Tools and Basic Concepts Concepts.
Text for the section
Page 3
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
Lesson: Introduction to Microeconomics
Lesson Developer: Dipavali Debroy
College/Department: SGGSCC, University of Delhi
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
Table of Contents
1.Learning Outcomes
2.Introduction
3. Evolution of the Subject
4. Methodology of Economics: Positive Economics and Normative Economics
5. Art or Science
6. Scope of Economics - Related Subjects
7. Models and Hypotheses
8. Market and Equilibrium
8.1 Demand and Supply
9. Concept of ceteris paribus – General Equilibrium Partial Equilibrium
10. Static and Dynamic Equilibrium
11. Short-Run and Long Run Equilibrium
12. Nobel Prize in Economics
13. Summary
14. Exercises
15. Glossary
16. References
17. Activity
18. Quiz
1.Learning Outcomes
After you have read this chapter you should be able to define Micro-
Economics. Macro-Economics, Market, Demand, Supply, Equilibrium, Partial
and General Equilibrium, Static and Dynamic Equilibrium understand the
central problems of an economy identify variables, constants and
parameters differentiate Micro-Economics from Macro-Economics appreciate
the scope of the subject of Economics apply the knowledge of basic
Economics
2. Introduction
Micro-Economics is the branch of Economics that studies economic issues minutely
in individual details, as if under a microscope. In contrast, Macro-Economics is the
branch of Economics that studies economic issues in aggregative and overall forms,
looking at the broad picture. . The word Micro comes from the Greek word Micros
(small). Macro comes from Greek macros ( long or huge). Micro-Economics and
Macro-Economics are thus two complements of the subject of Economics
But what is Economics?
Value Addition 1: Focus of the Section
Topic Economics
This section is to make you aware of what Economics is.
The purpose of this section is to make you familiar with the various
Definitions of Economics, the Evolution of the subject, its Scope,
Methodology, Tools and Basic Concepts Concepts.
Text for the section
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
According to the renowned economist Alfred Marshall, it is the study of human
beings as they go about their everyday life.
To quote from Marshall’s Principles of Economics (1890, "a study of mankind in the
ordinary business of life; it (Economics) examines that part of individual and social
action which is most closely connected with the attainment and with the use of the
material requisites of wellbeing. Thus it is on one side a study of wealth; and on the
other, and more important side, a part of the study of man." For decades this was
the most accepted definition till, in 1935, Lionel Robbins focused on another aspect
of the subject and defined it as the study of choice under conditions of scarcity.
"Economics is a science which studies human behavior as a relationship between
ends and scarce means which have alternative uses."
Productive Resources ( land, labour, capital goods such as machinery, technical
knowledge) are scarce or limited and the resource applied to the production of a
certain commodity or service is unavailable for the production of another alternative
one. But human wants for the Consumption of goods and services ( cereals and
pulses, meat and fish and poultry, vegetable, clothes, woolens, houses, roads, cars,
railways, airplanes, books, theatre , film, television and countless others) are
unlimited, and come from numerous members of the society .Economics is the study
of how people can choose to use the scarce or limited resources to produce various
good and services and distribute them to various members of society for their
consumption.
The Central Problems of an Economy
Any society faces three fundamental and interdependent economic problems:
1. What to Produce and How Much of them
2. How to Produce, that is, by whom and by what resources and technology
3. For Whom to Produce, that is, how is the total amount of production in the
society to be distributed among its members.
Different kinds of society have different ways of solving them. A tribal society hunts
and forages together and shares the fruits of their labour more or less equally. In the
feudal society , the serfs produce and pay certain shares of the production to the
feudal lords as per the traditions established by the lords. An advanced capitalist
society produces through a complicated division of labour and distributes the total
product in a complex and unequal way.
In a socialist state, central planning takes care of production and its equitable
distribution.
But all societies must face the three problems :What to Produce, How and For Whom
; in more technical terms, the problems of Allocation, Choice of Techniques and
Distribution.
The Production Possibility curve or frontier is a geometrical way of depicting this
choice problem. It depicts the production possibilities or “menu” as Paul Samuelson
had put it.
Suppose a society or economy, using all its resources fully, has the option of
producing any combination out of a maximum of , say, food crops (represented by
the symbol X), and a maximum of aero planes (Y).
Represent food crops (X) on the horizontal axis and aero planes (Y) on the vertical.
Each point on the X-Y plane would then represent a numerical combination of food
grains and aero plane.
Suppose we have the following chart of alternative combinations of the maximum
number of aero planes that can be produced along with a certain amount of food
grains, or vice versa. That is, we have a chart of alternative combinations of
maximum Y’s going with different X’s ( or, combinations of maximum X’s going with
Page 4
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
Lesson: Introduction to Microeconomics
Lesson Developer: Dipavali Debroy
College/Department: SGGSCC, University of Delhi
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
Table of Contents
1.Learning Outcomes
2.Introduction
3. Evolution of the Subject
4. Methodology of Economics: Positive Economics and Normative Economics
5. Art or Science
6. Scope of Economics - Related Subjects
7. Models and Hypotheses
8. Market and Equilibrium
8.1 Demand and Supply
9. Concept of ceteris paribus – General Equilibrium Partial Equilibrium
10. Static and Dynamic Equilibrium
11. Short-Run and Long Run Equilibrium
12. Nobel Prize in Economics
13. Summary
14. Exercises
15. Glossary
16. References
17. Activity
18. Quiz
1.Learning Outcomes
After you have read this chapter you should be able to define Micro-
Economics. Macro-Economics, Market, Demand, Supply, Equilibrium, Partial
and General Equilibrium, Static and Dynamic Equilibrium understand the
central problems of an economy identify variables, constants and
parameters differentiate Micro-Economics from Macro-Economics appreciate
the scope of the subject of Economics apply the knowledge of basic
Economics
2. Introduction
Micro-Economics is the branch of Economics that studies economic issues minutely
in individual details, as if under a microscope. In contrast, Macro-Economics is the
branch of Economics that studies economic issues in aggregative and overall forms,
looking at the broad picture. . The word Micro comes from the Greek word Micros
(small). Macro comes from Greek macros ( long or huge). Micro-Economics and
Macro-Economics are thus two complements of the subject of Economics
But what is Economics?
Value Addition 1: Focus of the Section
Topic Economics
This section is to make you aware of what Economics is.
The purpose of this section is to make you familiar with the various
Definitions of Economics, the Evolution of the subject, its Scope,
Methodology, Tools and Basic Concepts Concepts.
Text for the section
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
According to the renowned economist Alfred Marshall, it is the study of human
beings as they go about their everyday life.
To quote from Marshall’s Principles of Economics (1890, "a study of mankind in the
ordinary business of life; it (Economics) examines that part of individual and social
action which is most closely connected with the attainment and with the use of the
material requisites of wellbeing. Thus it is on one side a study of wealth; and on the
other, and more important side, a part of the study of man." For decades this was
the most accepted definition till, in 1935, Lionel Robbins focused on another aspect
of the subject and defined it as the study of choice under conditions of scarcity.
"Economics is a science which studies human behavior as a relationship between
ends and scarce means which have alternative uses."
Productive Resources ( land, labour, capital goods such as machinery, technical
knowledge) are scarce or limited and the resource applied to the production of a
certain commodity or service is unavailable for the production of another alternative
one. But human wants for the Consumption of goods and services ( cereals and
pulses, meat and fish and poultry, vegetable, clothes, woolens, houses, roads, cars,
railways, airplanes, books, theatre , film, television and countless others) are
unlimited, and come from numerous members of the society .Economics is the study
of how people can choose to use the scarce or limited resources to produce various
good and services and distribute them to various members of society for their
consumption.
The Central Problems of an Economy
Any society faces three fundamental and interdependent economic problems:
1. What to Produce and How Much of them
2. How to Produce, that is, by whom and by what resources and technology
3. For Whom to Produce, that is, how is the total amount of production in the
society to be distributed among its members.
Different kinds of society have different ways of solving them. A tribal society hunts
and forages together and shares the fruits of their labour more or less equally. In the
feudal society , the serfs produce and pay certain shares of the production to the
feudal lords as per the traditions established by the lords. An advanced capitalist
society produces through a complicated division of labour and distributes the total
product in a complex and unequal way.
In a socialist state, central planning takes care of production and its equitable
distribution.
But all societies must face the three problems :What to Produce, How and For Whom
; in more technical terms, the problems of Allocation, Choice of Techniques and
Distribution.
The Production Possibility curve or frontier is a geometrical way of depicting this
choice problem. It depicts the production possibilities or “menu” as Paul Samuelson
had put it.
Suppose a society or economy, using all its resources fully, has the option of
producing any combination out of a maximum of , say, food crops (represented by
the symbol X), and a maximum of aero planes (Y).
Represent food crops (X) on the horizontal axis and aero planes (Y) on the vertical.
Each point on the X-Y plane would then represent a numerical combination of food
grains and aero plane.
Suppose we have the following chart of alternative combinations of the maximum
number of aero planes that can be produced along with a certain amount of food
grains, or vice versa. That is, we have a chart of alternative combinations of
maximum Y’s going with different X’s ( or, combinations of maximum X’s going with
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
different Y’s).Each such combination has its position on the X-y plane. Join them to
get the Production Possibility Curve (PPC).
Each point on the PPC represents a maximum of X ( at a certain Y) or a maximum of
Y ( at a certain X). All points below and including the PPC represents combinations of
X and Y that are Attainable by the society concerned but only points on the PPC
represent points of maximum X(given the Y’s) or maximum Y ( given the X’s). Points
below the PPC ( including the two axes and so, the origin) represent what the society
concerned can produce but without using its (scarce) resources fully.
When, for some reason or the other, the society becomes capable of producing more
of X ( at every given Y) or more of Y (at every given X), the PPC curve shifts
forward. This indicates Economic Growth. When the reverse happens, the PPC
shrinks back.
Page 5
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
Lesson: Introduction to Microeconomics
Lesson Developer: Dipavali Debroy
College/Department: SGGSCC, University of Delhi
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
Table of Contents
1.Learning Outcomes
2.Introduction
3. Evolution of the Subject
4. Methodology of Economics: Positive Economics and Normative Economics
5. Art or Science
6. Scope of Economics - Related Subjects
7. Models and Hypotheses
8. Market and Equilibrium
8.1 Demand and Supply
9. Concept of ceteris paribus – General Equilibrium Partial Equilibrium
10. Static and Dynamic Equilibrium
11. Short-Run and Long Run Equilibrium
12. Nobel Prize in Economics
13. Summary
14. Exercises
15. Glossary
16. References
17. Activity
18. Quiz
1.Learning Outcomes
After you have read this chapter you should be able to define Micro-
Economics. Macro-Economics, Market, Demand, Supply, Equilibrium, Partial
and General Equilibrium, Static and Dynamic Equilibrium understand the
central problems of an economy identify variables, constants and
parameters differentiate Micro-Economics from Macro-Economics appreciate
the scope of the subject of Economics apply the knowledge of basic
Economics
2. Introduction
Micro-Economics is the branch of Economics that studies economic issues minutely
in individual details, as if under a microscope. In contrast, Macro-Economics is the
branch of Economics that studies economic issues in aggregative and overall forms,
looking at the broad picture. . The word Micro comes from the Greek word Micros
(small). Macro comes from Greek macros ( long or huge). Micro-Economics and
Macro-Economics are thus two complements of the subject of Economics
But what is Economics?
Value Addition 1: Focus of the Section
Topic Economics
This section is to make you aware of what Economics is.
The purpose of this section is to make you familiar with the various
Definitions of Economics, the Evolution of the subject, its Scope,
Methodology, Tools and Basic Concepts Concepts.
Text for the section
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
According to the renowned economist Alfred Marshall, it is the study of human
beings as they go about their everyday life.
To quote from Marshall’s Principles of Economics (1890, "a study of mankind in the
ordinary business of life; it (Economics) examines that part of individual and social
action which is most closely connected with the attainment and with the use of the
material requisites of wellbeing. Thus it is on one side a study of wealth; and on the
other, and more important side, a part of the study of man." For decades this was
the most accepted definition till, in 1935, Lionel Robbins focused on another aspect
of the subject and defined it as the study of choice under conditions of scarcity.
"Economics is a science which studies human behavior as a relationship between
ends and scarce means which have alternative uses."
Productive Resources ( land, labour, capital goods such as machinery, technical
knowledge) are scarce or limited and the resource applied to the production of a
certain commodity or service is unavailable for the production of another alternative
one. But human wants for the Consumption of goods and services ( cereals and
pulses, meat and fish and poultry, vegetable, clothes, woolens, houses, roads, cars,
railways, airplanes, books, theatre , film, television and countless others) are
unlimited, and come from numerous members of the society .Economics is the study
of how people can choose to use the scarce or limited resources to produce various
good and services and distribute them to various members of society for their
consumption.
The Central Problems of an Economy
Any society faces three fundamental and interdependent economic problems:
1. What to Produce and How Much of them
2. How to Produce, that is, by whom and by what resources and technology
3. For Whom to Produce, that is, how is the total amount of production in the
society to be distributed among its members.
Different kinds of society have different ways of solving them. A tribal society hunts
and forages together and shares the fruits of their labour more or less equally. In the
feudal society , the serfs produce and pay certain shares of the production to the
feudal lords as per the traditions established by the lords. An advanced capitalist
society produces through a complicated division of labour and distributes the total
product in a complex and unequal way.
In a socialist state, central planning takes care of production and its equitable
distribution.
But all societies must face the three problems :What to Produce, How and For Whom
; in more technical terms, the problems of Allocation, Choice of Techniques and
Distribution.
The Production Possibility curve or frontier is a geometrical way of depicting this
choice problem. It depicts the production possibilities or “menu” as Paul Samuelson
had put it.
Suppose a society or economy, using all its resources fully, has the option of
producing any combination out of a maximum of , say, food crops (represented by
the symbol X), and a maximum of aero planes (Y).
Represent food crops (X) on the horizontal axis and aero planes (Y) on the vertical.
Each point on the X-Y plane would then represent a numerical combination of food
grains and aero plane.
Suppose we have the following chart of alternative combinations of the maximum
number of aero planes that can be produced along with a certain amount of food
grains, or vice versa. That is, we have a chart of alternative combinations of
maximum Y’s going with different X’s ( or, combinations of maximum X’s going with
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
different Y’s).Each such combination has its position on the X-y plane. Join them to
get the Production Possibility Curve (PPC).
Each point on the PPC represents a maximum of X ( at a certain Y) or a maximum of
Y ( at a certain X). All points below and including the PPC represents combinations of
X and Y that are Attainable by the society concerned but only points on the PPC
represent points of maximum X(given the Y’s) or maximum Y ( given the X’s). Points
below the PPC ( including the two axes and so, the origin) represent what the society
concerned can produce but without using its (scarce) resources fully.
When, for some reason or the other, the society becomes capable of producing more
of X ( at every given Y) or more of Y (at every given X), the PPC curve shifts
forward. This indicates Economic Growth. When the reverse happens, the PPC
shrinks back.
Introduction to Microeconomics
Institute of Lifelong learning, University of Delhi
Economics studies these Central Problems of human society, and has by now come
to study much more.
How did economics evolve as a subject?
3. Evolution of the subject
Etymologically, the word Economics derives from the Greek word oikos ( house) and
nomos ( management).
A wife doing a good job of running the household was often called thrifty or
economical. However from the second half of the seventeenth century, the word
Economics came to be applied to a much wider context, viz., the management of
the various resources of a whole country or nation.
Adam Smith is known as the `father’ of the subject of Economics. His book An
Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776,
is the first-ever treatise on Economics . Smith’s concern was about nations or
countries, that is, it was a macro-type concern , although the term macro was not in
use then.
Later T.R. Malthus, David Ricardo and even J.S.Mill wrote important treatises on the
subject, taking the same overall perspective. They made sweeping generalizations
taking long-run perspectives. They are known as Classical economists. Thus, by and
large, Classical economists did not take a micro-approach but rather a macro one.
Towards the end of the 19
th
century, economists began to study economic issues on
a more specific and individual level. A new or neo approach evolved that has come to
be called the Neo-Classical approach. It concentrated on how the price and quantity
of specific goods (and services) were determined in the market though a rational
balancing of their `marginal’ costs and benefits (`utilities and
productivities).Foremost among these Neo-Classical economists( also described as
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