Introduction to Microeconomics

Lecture 01

Prepared by the Faculty Members

 Key points
Definitions of Economics. Why we study Economics?

Importance of Economics in our life

Scope and Methods of Economics

Fundamental Questions

The Production Possibility Frontier

Economic Systems
 What is Economics?
Economics is the study of
allocation of scare resource
s to meet unlimited wants.

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 Economics as a social science

• Economics studies human behaviour.

• We study how markets work and how they fail.
• We seek to understand the dynamics of change at a
micro level (e.g. within an industry) or at a macro l
evel (e.g. within and between countries).

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 Some Economic terms

1. Ceteris Paribus
– all else equal
– used to analyse the relationship between two variables w
hile the values of other variables are held unchanged.

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• Needs:
Something that is essential for your survival, for example food,
shelter, cloth.

• Wants:
Something that is good to have but not essential for survival, fo
r example, mobile, laptop.

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Consumer:
Consumer is a person who purchases goods and services for
personal use.

Producer:
A producer is someone who supplies goods or services dem
anded by individuals.

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 Why study Economics?
Marginalism Opportunity Cost

IMPORTANCE OF ECONOMICS

Expenditures Savings

How to maximize utility

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• Opportunity cost:
– The best alternative that we forgo, or give up, when we make
a choice or a decision.

• Marginalism:
– The process of analyzing the additional or incremental costs
or benefits arising from a choice or decision.

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 SCARCITY

SCARCITY is the basic and central economic

problem confronting every society. It is the heart
of the study of economics and the reason behind
its establishment.
Scarcity defined in various ways:

• a commodity or service being in short supply, relative to

its demand.

• it pertains to the limited availability of economic resour

ces relative to society’s unlimited demand for good and
services.
 Problem of Scarcity
Limited Resources Unlimited wants

Scarcity
This illustrate the interaction of limited resources available
and unlimited wants of the society. If limited resources fall
short to meet the unlimited wants of the society, it will eve
ntually create a problem, which is called “SCARCITY”.
 ECONOMICS
• Economics is a social science that deals with the ma
nagement of scarce resources.
• It is also described as a scientific study on how indi
viduals and the society generally make choices.
• Economics is a study of the problem of using availa
ble economic resources as efficiently as possible so
as to attain the maximum fulfillment of society’s un
limited demand for goods and series.
 Economics
Limited Resources Unlimited Wants

Allocation
This depicts the relationship between available limited resource
s and the unlimited wants of the society. This shows that when
limited resources fail to meet the unlimited wants of the societ
y, economics comes into play in order to effectively and efficie
ntly allocated resources.
Relationship between Economics and Scarcity

• The problem of scarcity gave birth to the study of econ

omics.
• Their relationship is such that if there is no scarcity, th
ere is no need for economics.
• The study of economics was essentially founded in ord
er to address the issue of resource allocation and distrib
ution, in response to scarcity.
 Scope/Divisions of Economics

ECONOMICS

Microeconomics Macroeconomics

individual units aggregate

e.g., Tree e.g., Forest

 Difference between Micro and Macro

• Microeconomics: is a branch of economics that de

als with the individual units of an economy. For inst
ance, firms, households income
• Macroeconomics: is a branch of economics deals t
he economy as a whole. For example, national ou
tput, unemployment, inflation
 Diverse fields of Economics
Examples of Microeconomic and Macroeconomic concerns
Production Prices Income
Production/Output in Individu Price of Individual Goods Distribution of Income an
Micro al Industries and Businesses H and Services Price of medi d Wealth Wages in the au
ow much steel How many offi cal care Price of gasoline to industry Minimum wa
ces How many cars Food prices Apartment ren ges Executive salaries Po
ts verty

National Production/Output T Aggregate Price Level Co National Income Total w

Macro otal Industrial Output Gross D nsumer prices Producer Pr ages and salaries Total co
omestic Product Growth of Ou ices Rate of Inflation rporate profits
tput
 The Methods of Economics
• Positive Economics:
It is concerned with “what is”.
A statement that can be proved or disproved by reference to f
acts.
• Normative Economics:
It is concerned with “ what should be “.
Normative economics involves judgments and prescriptions
for courses of action.
Fundamental of
Economics
THREE Basic Economic Problems/Questions
 1. What to Produce?

• Which goods and services should produce?

• The problem of scarcity.

• Example: Should the economy devote resources to health and ed

ucation or defense and police?
• Who will do the production and which method of
production will be used.

• Should the economy use labor-intensive technique

and everyone has a job or use more efficient metho
ds of production that involve the use of machines e
ven if this means fewer jobs?
 3. For whom to Produce?
• Means who will consume the goods & services after they have be
en produced.

• Should an economy be geared to provide goods & services to eve

ry person as equally as possible or should those who work hard g
et more?

• What is the best method of distributing products to ensure the hig

hest level of wants are met?
Production
Possibilities
Frontier
 The Production Possibilities Frontier (PPF)

• PPF shows all the combinations of goods and se

rvices that can be produced if all of society’s reso
urces are used efficiently.
Graphical Representation of PPF
 Explanation of Graph
• The curve shows efficient use of resources.

• Things on the curve (point A-D) are available.

• What we can’t have- what is unavailable to us because we don’t have enough

resources to produce it- is anything beyond the PPF (point F)

• Point F is beyond the curve, which is unattainable.

• That’s how the PPF shows us scarcity.

 Explanation of Graph
• We can also underutilize our resources (point E) which is below the
curve and shows inefficient use of resources.

• Point F is beyond the curve, which is unattainable.

• That’s how the PPF shows us scarcity.

• We can also underutilize our resources (point E) which is below the

curve and shows inefficient use of resources.
 Shift in the curve
• The location of the PPF for an economy is determined mostly by the
amount of resources available and the level of technology in society.

• If more resources become available or the level of technology increa

ses, more goods and services can be produced and the PPF will shift
to the RIGHT.

• If the amount of resources diminishes, if there is less, the economy c

an no longer produces at previous levels and the PPF will shift to the
LEFT.
 Figure 2 The Production Possibilities Frontier
Computers
Produced new computer
technology was
3,000 released?
D
2,200 C
A
2,000
Production
possibilities
1,000 B frontier

0 300 600 700 1,000 Quantity of

Cars Produced
 Shift in the Production Possibilities Frontier
Quantity of
Computers
Produced

4,000

3,000

2,100 E
2,000 A

0 700 750 1,000 Quantityof

Cars Produced
Economic
Systems
 Economic systems

• The manner or the structure through which the

economy of a country operates is known as Ec
onomic System.
 Types of Economic Systems

• Command Economy
• Socialism / Laissez-faire economy/ Free
market
• Mixed economy
• Command Economy
• An economy in which a central governm
ent either directly or indirectly sets output
.
• Government owns most of the businesse
s and makes all economic decisions.
• Socialism / laissez-faire economy/ Free
market
• “allow [them] to do.”
• An economy in which individual people a
nd firms pursue their own self- interest wi
thout any government direction or regulat
ion.
• Mixed Economy:
• This involves a degree of private econom
ic freedom mixed with a degree of gover
nment regulation of markets.
 References
• Books
– N. Gregory Mankiw, Principles of Microecon
omics: eight Edition,, Chapter 1: Introductio
n.

– Microeconomics by Michael Parkin (Elevent

h Edition)