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ECO 1010 Week1

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ECO 1010 Week1

Uploaded by

Déborah Muleka
Copyright
© © All Rights Reserved
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ECO 1010.

PRINCIPLES OF
MICRO- ECONOMICS
LECTURE NOTES
By Dr. Odhiambo Sule
WEEK ONE
INTRODUCTION

• As a scholarly discipline, economics is slightly over two centuries old.


Adam Smith who published his path-breaking book “The Wealth of
Nations” in 1776 represented only a beginning. As Adam Smith said,
“economics is an inquiry into the nature and causes of wealth of
nations”.
Why have we to study economics

• All your life – from cradle to grave – you will run against the bare
truths of economics:
• As a voter
• Earning your lifetime income
• Spending your income
• Saving and investing etc.
• Definition:
• Economics is the study of how people choose to employ scarce
resources that could have alternative use in order to produce various
commodities and to distribute them for consumption, now or in near
future, among various persons and groups in society.
Types of resources (economic resources)

• Natural resources: Land, water, air, minerals, forests


• Labor resources: skilled and unskilled labor
• Capital –produced to make other goods, e.g. machinery, equipments, and
buildings.
• These resources are also called factors of production because they are used in the
process of production.
• Often a fourth factor is entrepreneurship is distinguished (from the work
entrepreneur – one who undertakes the tasks).
• Positive and normative economics
• Economics is used in two important ways today. The first is to
describe, explain and predict the behavior of production, inflation,
incomes etc. but for many, the fruit of such labors is found in a second
task – to improve economic performance. One of the central
distinctions is a science like economics is between a value judgment
and a factual statements.
• The concept of a functional relationship
• These are relations of quantities which are measurable. The idea of
quantitative relations (one thing depends on another) is one of the
basic notions behind all sciences
• K – Measures frequency of crime
• U – Measures the rate of or level of unemployment
• Or
 K is af function
• qs – Quantity supplied (U ) of price p offered in the market
•

qs  f ( p )
• precise relation may be expressed by a particular equation such as

Y  2X , Y  4X 2 or Y  X  2 X 2  0.5 X 3
Or Y  10  2 X or Y  10  2 X
Functional relationship can be alternative
expressed in a

• Verbal statement
• Arithmetical illustration
• Algebraic statement
• Geometrical (graphical) statement
Functional relationship can be alternative
expressed in a

• Verbal statement
• Arithmetical illustration
• Algebraic statement
• Geometrical (graphical) statement
Functional relationship can be alternative
expressed in a

• Verbal statement
• Arithmetical illustration
• Algebraic statement
• Geometrical (graphical) statement
• Algebraic statement (equations)
C  a  bY

C  800  0.8Y
• 800 – Autonomous consumption
• 0.8 – proportion of additional income diverted to expenditure spent
as Y increases by one unit
Consumption and income relationship for an
household.

Y (£s) C (£s) Reference letter


0 800 A
2500 2800 B
5000 4800 C
7500 6800 D
10000 8800 E
Basic problems of economic organization

• At the foundation of any community there will always be seen a few


universal economic conditions. Any society, whether it consists of
totally collectivized communistic state, a tribe in a Pacific island, a
capitalists’ industrial nation, a developing country, or even a colony of
bees must somehow confront three fundamental and interdependent
economic problems and some minor ones.
A. What and in What Quantities
• What commodities and in what quantities. That is, how much and
which alternative goods and services shall be produced; and when
shall they be produced? This question arises directly out of the
scarcity of resources. It concerns the allocation of scarce resources
among alternative uses (resource allocation).
• In free-market economies, most decisions concerning the allocation
of resources are made through price system. The study of how this
system works is the major topic in the Theory of price.
B) How
• How to produce the goods or what methods to use to produce the goods,
or in other words, by whom and with what resources and in what
technological manner are they to be produced?
• The economically correct method is what yields the least cost per
unit of output, i.e. the least-cost production technique. Questions
about why one method of production is used rather than another
and the consequences of these choices about production methods
are topics in the Theory of production.
C) To Whom
• Who shall get what share of the national output? Why can some
individuals and groups consume a large share of national output,
while other individuals and other groups can consumer only a small
share? In a money-using economy, this depends on the distribution of
money income
• The distribution of money income is mainly determined by the
quantity and quality of resources – labor, land and capital goods –
which an individual or a group posses and contributes to production
and by the price which these services command in the market.
SCARCITY & CHOICE
• THE CONCEPT OF OPPORTUNITY COST AND PRODUCTION
POSSIBILTIY FRONTIER

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