1. Chapter 1
Preliminaries 1

2. Economics
Economics is the study of production and consumption of goods and services with the utilization of minimum resources.
Economics is divided into three school of thoughts:
Classical School of Thought
Neo-Classical School of Thought
Modern Economics
Chapter 1: Preliminaries

3. Classical School of thought
The Scotland economist Adam Smith was first economist who gave the idea and define the economics as “Economics is the study of production or earning of money, distribution and interchange of money”.
Many other economists support this idea e.g. J.S. Mill, Recordo and Walker of American Economist. But after the some time many people put objection on this idea and named it the knowledge of diamal sciences and pig philosophy.
Chapter 1: Preliminaries

4. Neo-Classical School of Thought
Due to the objection on Adam Simith idea and his followers then Dr. Marshal introduce the economics as “it is the knowledge of welfare and named it welfare economics” After that Prof. Robens and many other economists objected that this definition limited that only cover the concept of human welfare.
Chapter 1: Preliminaries

5. Modern Economics
According to Prof. Robens “Economics is the knowledge of human behavior and relationship between interchange of goods or services to get maximum benefit under the utilization of minimum resources”
According to Keynes “Economics is the knowledge which give the opportunities of earnings due to the utilization of minimum resources and enhance the income of the economy”
Chapter 1: Preliminaries

6. Preliminaries Microeconomics deals with: Behavior of individual units
When Consuming
How we choose what to buy
When Producing
How we choose what to produce
Chapter 1: Preliminaries 4

7. Preliminaries The Linkage Between Micro and Macro-economics
Microeconomics is the foundation of macroeconomic analysis
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8. Theories and Models Microeconomic Analysis Models:
a mathematical representation of a theory used to make a prediction.
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9. Positive Versus Normative Analysis
Positive Analysis
Positive analysis is the use of theories and models to predict the impact of a choice.
Normative Analysis
Normative analysis addresses issues from the perspective of “What ought to be?” A normative statement expresses a judgment about whether a situation is desirable or undesirable
Chapter 1: Preliminaries 11

10. What is a Market? Markets Markets vs. Industries
The interaction of consumers and producers
A geographically defined area where buyers and sellers interact to determine the price of a product or a set of products.
Markets vs. Industries
Industries are the supply side of the market.
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11. What is a Market? Arbitrage
Buying a product at a low price in one location and selling at a high price in another
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12. What is a Market? Competitive vs. Noncompetitive Markets
Because of the large number of buyers and sellers, no individual buyer or seller can influence the price.
Example: Most agricultural markets
Noncompetitive Markets
Markets where individual producers can influence the price.
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13. What is a Market? Market Price
Competitive markets establish one price.
Noncompetitive markets may set many prices for the same product.
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14. Real Versus Nominal Prices
Nominal price is the absolute or current dollar price of a good or service when it is sold.
Real price is the price relative to an aggregate measure of prices or constant dollar price.
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15. Real Versus Nominal Prices
Calculating Real Prices
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16. An Example: Calculating the Real Price of Milk
Nominal Price Real Price of Milk
Year of Milk CPI in 1970 dollars
= 38.8/38.8 x .40
= 38.8/82.4 x .65
= 38.8/167.0 x 1.05
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17. Calculating Real Prices: An Example - Eggs & College
Consumer Price Index (1983)
Nominal Prices Grade A Large Eggs $0.61 $0.77 $0.84 $0.80 $0.98 $1.04 College Education $2,530 $3,403 $4,912 $8,156 $12,800 $19,213
Real Prices ($1970) Grade A Large Eggs $0.61 $0.56 $0.40 $0.29 $0.30 $0.25 College Education $2,530 $2,454 $2,313 $2,941 $3,800 $4,573
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18. Summary
Microeconomics is concerned with the decisions made by small economic units.
Microeconomics relies heavily on the use of theory and models.
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19. Summary
The market price is established by the interaction of buyers and sellers.
A market’s geographic boundaries and range of products must be defined.
To reduce the effects of inflation we measure real prices, rather than nominal prices.
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20. Thanks 1