What is Microeconomics -Step By Step Analysis?
Introductions to Economics
When you hear of the term economics, what comes up in your mind? Most people relate economics with money only. Yet economic discipline is vast and deals with more than money. Let’s explore and understand the basics of economics.
We can better appreciate the definition of economics by examining different definitions of economics which can be classified into:
Science of Wealth
Early economist understood Economics as a study of wealth. Adam Smiths laid foundation of Economics as a study and emphasized the need to increase society`s wealth as the subject matter of economics.
Science of Material Well Being
Towards the end of 19th Century, writers explained economics as a science which studied economic goods or wealth in their relation to man. We can, therefore, say that economics involves management of society resources since they are scarce. You can also say that economics is the study of how society manages its limited resources. Economist’s studies how people interact with each other. They analyze forces and trends that affect the economy, e.g., the unemployed population and inflation.
What are the main Scope of Economics
On the other hand, we need understand the scope of economics to understand the subject better. The range of economics can be described by proper understanding of its subject matter and its nature as a science. To understand it better, let’s know the following concepts;
Subject Matter of Economics
Adam Smith, the father of Economics, considered economics as a science of wealth.
Alfred Marshal made it the study of material welfare. Hence economics studies how many uses the material requisites for his wellbeing.
What is an Economic Problem
What do you think economics helps you to achieve? How does it help you? You can only understand the concept by analyzing the idea of financial problem. The economic issue concerns the ends to be achieved and the means to achieve these ends. Therefore any typical economic problem, e.g. drought in Kenya, lack of enough hydropower is addressed by the following:
1) What to produce.
2) How to produce.
3) For whom to produce.
4) The problem of economic efficiency.
Nature of Economics
Would you consider economics as an art or a science? It’s generally accepted that economics is a social science which deals with human behavior in solving economic problems arising from multiplicity of wants and scarcity of means. But is it real science or normative science?
- Positive science describes things as they are.
- Normative science describes things as what they ought to be.
We can say that positive science studies existing facts but does not comment on whether they are desirable. Normative science comments on the desirability or observed phenomena in the context of being ethical
What are the main Methodology of Microeconomics
You are now familiar with economics as a subject. Let’s now examine the subject matter of our course, which is microeconomics. Microeconomics is a study of economics which deals with small and individual units of an economy. It’s the study of particular firms, particular households, different prices, wages, income, various industries, and specific commodities. It’s observing the economy through a microscopic view to find out the working of markets, for individual products and the behavior consumers and producers.
The distinction between Micro Economics and Microeconomics
Microeconomics studies the behavior units, the households, firms, etc
Macroeconomics deals with economic affairs in large and overall dimensions of economics life such as employment, determination of output and income, fluctuations of income, trade cycles, growth, and international trade.
Microeconomics is based on the independence of individual units.
The macroeconomic theory considers interdependence among the individual units.
The study of economics involves understanding the various building of models to increase our understanding of the real-world economic models. You will analyze very many financial problems using the models. But what are they?
An Economic model can be defined as set organised relationships that shows the functioning of the economic distinctiveness within a conventional assumptions where a conclusions can be logically derived -Economic identity means households, industry, a region or an economy). The economic model is a set of economic relations expressed through a set of mathematical equations.
A model is built for two primary purposes;
1. Analysis (explanation)
How would you develop and test an economic model
· To define the problem
· Formulate assumptions
· Collect data
· Derive logical deductions
· To Test the Model Empirically.
· To accept the project or revise the model
Let’s illustrate a sample model by considering the Production
curve model. One popular model in economics is the Production Possibility Curve model. Let’s see what it analyzes and how.
Production Possibility Curve model
Possibility curve is an analytical tool used to illustrate and explain the problem of choice.
1. Only 2 goods X - consumer goods ,and Y -Capital goods- are made in different parts of the economy in a given situation.
2. Same resources might be used or both to producer and that goods and freely shifted freely among them.
3. Supplies of the main factors are static. But, can be re-allocated for production within limits for these goods.
4. Production techniques are given and constant.
5. The economy resources technically efficient and fully employed.
6. Time period limitation.
Explaining the Production Possibility schedule /Curve
Possibilities Quantity of X Quantity of Y
P 0 250
B 100 230
C 150 200
D 200 150
P1 250 0
1. P and P1 are possibilities in which the economy can produce both 250 units of Y and 250 units X with given.
2. The PP schedule shows that when the economy produces more units of X, it produces fewer units of Y successively.
The Concept of Equilibrium in Economics
You already have heard of the term equilibrium. What do you think the term means? An equilibrium is a position of rest characterized by the absence of change. There is complete agreement of economic plans of the various market participants. All decisions by the participants in the market are in unity with each other.
Partial Equilibrium analysis
We can now examine the significance of partial equilibrium, having seen what equality is. It’s the study of an individual, a firm, an industry or a group of sectors viewed in isolation to understand the equilibrium.
Have you ever come across people comparing how market dynamics such as pricing, distribution of goods and services, ownership, etc work from one country to another? In some countries, financial systems and the way people work have some similarities. In others, things are entirely different. Why do we have these differences? Some of them can be explained by the economic systems that we have.
Economic Systems refers to the way economic elements, individual workers, firms, government activities are linked as organic whole.
In the recent past, there has been criticism of capitalist system which is being blamed for the current economic crises in USA. It’s seen to be the origin of global financial crisis. We can now study it to understand the system.
It is a system in which consumers or producer of resources are engaged in economic activities with a large measure of financial freedom.
· Private property.
· The profit motive is a paramount goal.
· Price mechanisms are not controlled by central authorities.
· Role of state was confined to maintenance of law and order.
· Competition implies a large number of buyers and sellers.
It is an economic organization in which land, labor, organization, and capital are owned and regulated by the state. There are collective ownership and regulation by the government. We generally have the following features:
a) Public ownership of means of production and distribution.
b) Central planning of the economy.
c) Equality of income distribution.
d) The prices are controlled by and regulated by the central planning authority.
It is a golden average between a capitalist economy and a socialist economy.
What are the features?
a. Public sector .It is controlled and directed by the state.
b. Private Sector. Production and distribution of goods and services are done by private enterprises.
c. Joint sector. It is run jointly by the state and provides enterprises.
d. Cooperative sector.
e. Economic planning. An economy functions according to the objectives, priorities, and targets laid down in the economics plan.
f. Social Welfare. Aims to remove inequities in society.
Science of wealth
Science of material well being
Applying economic concepts
What are the weaknesses and strengths of the capitalist system?
Discuss the Comb-web model.
1. Define economics
Economics studies how people make decisions, how they work, what they buy, how much they save, how much of their savings are invested. Economist study how people interact with each other. Economics analyse the forces ,trends that affects the economy(s) as a whole growth of income, unemployed population, inflation.
2. State what is a normative science
Normative science describes things as of what they ought to be.
2. Discuss what is an economic model?
An Economic model can be defined set of relationships that describe the functionings of an economic identities under a sets of assumption(s) from which a sets of conclusion is logically derived -(Economic identity means households, industry, a region or an economy).Economic model is a set of economic relations expressed through a set of mathematical equations.
3. What do you understand by equilibrium?
Equilibrium is a position for which there is no tendency to move. It is a rest featured by lack of change or changes. There is broad agreement of economic strategies the various market participants so that no one has a tendency to revise or offer this decision.
4. Explain socialism
Socialism is an economic organization in which means of production are owned and regulated by the state. There is collective ownership and regulation by the government.