Microeconomics

• This course provides the student with an introduction to the basic elements of modern microeconomics.
• The course provides coverage of the institutional background and the history of significant microeconomic ideas and issues in Kenya and around the world.
• The study employs extensive use of diagrams and mathematical expressions in the illustration of concepts.
• On successful completion of this unit, students should be able to: Demonstrate understanding of the fundamental methodology and principles of Microeconomic theory and practice; Comprehend and critically appraise economic decisions made by governments, Businesses and households; Use a range of skills to access, interpret and apply economic information in real world situations; Use and apply mathematical skills as appropriate – data analysis, graphs; etc; Have a basis for further undergraduate study in economics and business.
• Economics is a social science that has been in existence for about two centuries.
• Various economists have tried to define economics differently.
• Three types of definition can be identified: Wealth definition, Welfare definition, and Scarcity definition.
• The ICC shows equilibrium combinations of x and y consumed at various levels of income, with prices remaining constant.
• The angels curve shows the relationship between income and quantity of goods consumed.
• Income increases the prices of commodities x and y remaining unchanged, causing the budget line to shift to the right from AB to 'B A'.
• For normal goods, engels curve will be positively sloped, and vice versa for inferior goods.
• Engels curve is obtained by plotting the relationship between income and quantity of goods consumed.
• The demand curve in figure B is downwards slopping, thus obeying the law of demand which states that, quantity bought increases as the price falls.
• At point 2 e, the price 2 x p is lower than 1 x p and the quantity demanded has increased to 2 x.
• The relationship between price and quantity shown in figure B is a demand curve.
• Adam Smith and his disciples, J.B. Say, Walker, J.S. Mill defined economics as an inquiry into the nature and courses of wealth of nations.
• The definition of economics as an inquiry into the nature and courses of wealth of nations has been criticized as follows: It restricts economics to the study of wealth alone and does not state clearly how man comes into the study.
• Prices of competing products can affect supply.
• A shift of the supply curve is caused by changes in other factors influencing supply other than price of the commodity.
• A movement along a given supply curve is caused by changes in the prices of the commodity.
• The supply curve of labor for target workers is a downward sloping curve showing that at higher wage rates, target workers are willing to work for less hours while at low wage rates target workers are willing to work for more hours.
• Development of infrastructure, particularly transport and communication, can affect supply.
• A movement from C to D is caused by a rise in price from 1 p to 2 p and a movement from D to C is caused by a fall in price from 2 p to 1 p.
• There are cases where the law of supply may fail to be obeyed, and more may be supplied as prices fall and less as prices rise.
• As wage rate increases, the laborer is able to realize his target within a short time and the rest of his time is spent on leisure.
• A shift of the supply curve can either be to the right or left depending on the direction on which a change has taken place.
• A shift to the right shows an increase in supply while a shift to the left shows a decline in supply.
• An upward movement is caused by an increase in price while a downward movement is caused by a fall in prices.
• The marginal rate of substitution of x for y is defined as the number of units of commodity y that must be given up in exchange for an extra unit of commodity x so that the consumer maintains the same level of satisfaction.
• The number of units of y the consumer is willing to sacrifice in order to obtain an additional unit of x decreases as the quantity of x increases.
• Total change in utility caused by change in y and x is approximately equal to the change in y multiplied by its marginal utility, plus the change in x multiplied by its marginal utility.
• The further away from the origin an indifference curve lies, the higher the level of utility it denotes and the bundles of goods it represents are preferred by the rational consumer.
• The slope of an indifference curve at any point along the indifference curve is given by the slope of the tangent at point A.
• The absolute value of the slope of an indifference curve is the marginal rate of substitution (MRS).
• An indifference curve has a negative slope, which denotes that if the quantities of one commodity (y) decreases, the quantity of the other (x) must increase, if the consumer is to stay on the same level of satisfaction.
• Indifference curves are convex to the origin, implying that their slope decreases (in absolute terms) as we move down from left to right.
• If indifference curve 1 U and 2 U intersect, it would mean that at point p, we could have two different levels of satisfaction, which is impossible.
• Indifference curves do not intersect.
• Alfred Marshall and his disciples, Pigou and Cannon defined economics as the study of man’s activities in the ordinary business of life.
• Microeconomics explains how and why these units make economic decisions, such as how consumers make purchasing decisions and how firms decide how many workers to hire.