Lecture 1 - Introduction to Microeconomics | Microeconomics- Interaction between individual buyer-seller PDF Download

 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