INTRODUCTION TO

MICROECONOMICS
Basic concepts and
theories

Mr Aziz Rashid
 Outline
Contents

Concept of microeconomics
Meaning of microeconomics
Why study microeconomics?
Micro Vs Macroeconomics
Theories, models, principles
Scarcity and choice
Opportunity cost
Marginal analysis
Price elasticity
 What is Contents
economics?

 Economics is the science which studies human behavior as a

relationship between given ends and scarce means which
have alternative uses.“
 Lionel Robbins, An Essay on the Nature and Significance of
Economic Science (London: MacMillan, 1932)
 What is microeconomics?
Contents

 Microeconomics is the branch of economics that focuses on

the behavior of individual economic agents—such as
households, firms, and governments—and how these
entities make decisions with limited resources.
microeconomics zooms in on specific units within the
economy.
 What is microeconomics?
Contents

 Microeconomics studies how individuals and businesses

make choices based on resource scarcity and examines the
interactions within individual markets to understand price
mechanisms and allocation of resources.
 Economic Agents
Contents

 In microeconomics, economic agents are individuals,

organizations, or institutions that make economic decisions,

interacting within markets and influencing the allocation of
resources. Each agent plays a specific role in the economy by
making choices that affect supply, demand, prices, and
overall market equilibrium.
 Microeconomics
Contentsperspective

 Microeconomics; individual fish  Macroeconomics; would be like

(people, households, or companies) looking at the aquarium as a whole
move around the ocean, make or even the entire ocean ecosystem.
choices, and react to different things It examines the big-picture
like light, food, or obstacles. dynamics, like overall water quality
 Why one fish might go for the food (the health of the economy) or
temperature changes (inflation,
in one corner, while another stays
employment rates), and how these
put. How does an individual decide
affect the behavior of fish
to buy a product? Why does a
collectively.
company set a particular price?
 Economic Agents
Contents

Agents makes contribute three important

decisions;
Influence market market outcomes
Influence allocation of resources across the
economy.
Create the market forces of supply and demand
 Why studyingContents
microeconomics?

Understanding consumer Behavior; By studying concepts like utility

and demand, we gain insights into what influences people to buy
certain products or services over others.
Guiding business decisions; Through concepts like cost, revenue,
and profit maximization, elasticity of demand Firms use
microeconomic principles to make pricing decisions, analyze market
demand, understand competition, and determine production
levels.etc
 Why studyingContents
microeconomics?

Understanding consumer Behavior; By studying concepts like utility

and demand, we gain insights into what influences people to buy
certain products or services over others.
Guiding business decisions; Through concepts like cost, revenue,
and profit maximization, elasticity of demand Firms use
microeconomic principles to make pricing decisions, analyze market
demand, understand competition, and determine production
levels.etc
 Why studyingContents
microeconomics ?

Analyzing Market Dynamics; Studying microeconomics helps us

understand how markets work. Concepts such as supply and
demand, equilibrium, and price mechanisms show how prices are
determined and how resources are distributed within different
markets. This knowledge enables policymakers to address issues like
price fluctuations, shortages, and surpluses, and to create policies
that promote fair and efficient markets.
 Why studyingContents
microeconomics?

Analyzing Market Dynamics; Studying microeconomics helps us

understand how markets work. Concepts such as supply and
demand, equilibrium, and price mechanisms show how prices are
determined and how resources are distributed within different
markets. This knowledge enables policymakers to address issues like
price fluctuations, shortages, and surpluses, and to create policies
that promote fair and efficient markets.
 Why studyingContents
microeconomics ?

Optimizing Resource Allocation; Microeconomics provides tools to

allocate scarce resources (labor, capital, raw materials) efficiently. By
analyzing production costs and resource availability, firms and
policymakers can minimize waste and maximize productivity. This
focus on optimal allocation benefits economies by helping to ensure
that resources are used where they have the highest value.
 Microeconomics Contents
VS Macroeconomics
Criteria Microeconomics Macroeconomics
Scope of Study Focuses on individual economic Focuses on the economy as a
agents (households, firms, whole (national and global
markets). economy).
Level of Analysis Analyzes smaller units like Analyzes broad aggregates like
individual markets and firms. national income, GDP, inflation.

Key Variables Prices, wages, production costs, GDP, inflation rates,

supply and demand in specific unemployment rates, national
markets. income.
Objective Understand how individual Understand and explain
decisions impact resource broader economic phenomena
allocation and market like growth, inflation, and
outcomes. unemployment.

Policy Implications Market regulations, price Fiscal and monetary policies,

controls, competition policies. government spending.
 Important
Microeconomics
Concepts
 Economic theories
Contents

Economic Theories refer to conceptual

frameworks or systematic sets of principles and
assumptions used to explain and predict the
Economic behavior of individuals, firms, markets, or entire
theories economies.
These theories and models simplify complex
economic phenomena by focusing on key variables
and relationships
 Economic theories
Contents

A simplified representation or abstraction of real-

world economic situations. Models typically use
mathematical or graphical tools to show
Economic relationships between variables and predict
Models
outcomes under certain conditions. They are
based on assumptions that make it easier to
analyze complex situations.
 Economic theories
Contents

The law of demand states that, all else being equal,

as the price of a good or service decreases, the
quantity demanded by consumers increases, and
Demand vice versa.
and supply
theory
 ScarcityContents
and choice

Scarcity means limited in supply.

Scarcity implies that resources (such as

Scarcity time, money, labor, and raw materials) are

limited, and society cannot produce all
&choice
goods and services people want. Thus,
economic agents must make choices on
how to allocate these scarce resources.
 ScarcityContents
and choice

Scarcity means limited in supply.

Scarcity implies that resources (such as

Scarcity time, money, labor, and raw materials) are

limited, and society cannot produce all
&choice
goods and services people want. Thus,
economic agents must make choices on
how to allocate these scarce resources.
 Analogy one; growing wheat or corn analogy.
Contents

Imagine a farmer who has a

limited amount of land. They
must decide between growing
wheat or corn. The choice of one
crop over another illustrates the
concept of scarcity, land is finite,
and decisions are necessary to
make the best use of it.
Microeconomics insight; the
farmer has to decide whether to
plan wheat or corn.
 Analogy two; Concert
Contents ticket analogy

Imagine a football match is held at

Mkapa stadium that only holds 60,000
fans. Thousands more fans want to
attend than the available seats. The
limited number of tickets compared to
the high demand creates scarcity,
leading to higher prices or
disappointment for some fans.
microeconomics Insight: Scarcity
forces a choice, fans may need to
either pay a high price or miss the
match.
 Opportunity
Contents cost

Opportunity cost is the value of the

next best alternative that is foregone
when a economic choice is made.
Simply put, it’s what you give up in
order to pursue a certain action or
decision).
It reflects the trade-offs inherent in
every decision especially in the
context of scarce resources.
 Analogy three; wheat and corn farming
Contents

Career Choice; If you choose to go to college instead of working immediately,

the opportunity cost is the income you would have earned by working during
that time.
Time Management: Spending an hour watching TV instead of studying has an
opportunity cost, the knowledge you could have gained or the higher grade
you could have earned by studying.
Opportunity costs enables individuals and firms consider not just the
benefits of a choice but also what they sacrifice/lose when making
choices, helping both individuals and businesses to allocate resources
more effectively and make decisions that maximize value.
 Scenario; OpportunityContents
cost of SGR construction
The Tanzanian government has committed 13 trillion Tsh to
build a Standard Gauge Railway (SGR) network. This project
aims to enhance transportation efficiency, lower shipping costs,
and attract investment by positioning Tanzania as a major trade
hub in East Africa. However, with this significant investment in
infrastructure, the government has fewer funds to allocate
toward other essential areas, such as healthcare, education,
and agriculture all of which have pressing needs that impact
Tanzanians’ daily lives.
 Questions onContents
opportunity cost
What immediate healthcare
improvements could 13 trillion Tsh
bring, and how might these benefit
Tanzanians more quickly than the
SGR?
Could an equivalent investment in
agriculture to boost productivity
and food security yield faster
economic returns and more
immediate rural benefits compared
to the SGR’s long-term gains?
 Questions onContents
opportunity cost

Marginal analysis is an economic concept used to

examine the additional (or marginal) benefits and
costs of a decision.
Marginal
Analysis This approach helps individuals, businesses, and
governments make decisions by comparing the
extra gain or loss associated with each incremental
change.
 Example one ofContents
marginal analysis

Business Pricing: A company may use marginal analysis to determine

how many additional units of a product it should produce. If the cost to
produce one more unit is lower than the expected sales revenue
(marginal benefit), production should continue. But if the marginal cost
exceeds the marginal revenue, it’s time to stop production.
 Example two ofContents
marginal analysis

Studying for Exams: Suppose a student has studied for five hours and
is considering whether to study one more hour. The student would
weigh the potential benefit of increased knowledge (marginal benefit)
against the extra fatigue or time lost for other activities (marginal
cost). If the additional study hour is expected to significantly improve
their score, they might continue; otherwise, they may stop.
 Example three of marginal analysis
Contents

Government Spending: For instance, in healthcare, a government

might assess whether allocating more funds to a specific health
program will yield additional public health benefits (marginal benefit)
that justify the cost (marginal cost). If the benefits of improving public
health outcomes outweigh the costs, the spending could be
increased/justified.
END