FTU- MICROECONOMICS

Contents
1.
2.
3.

Basic Concepts
Economy and Three basic questions
The optimum economic choices

Chapter 1: Basic Concepts in Economics
and Microeconomics
Basic Microeconomics
For Undergraduates

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Resources
1.
2.
3.

1.1.Basic Concepts

4.

Land: Nature resources
Labor (L):
Capital: Physical capital (K)
Entrepreneurship

Limited nature of society’s resources.
•Economy
•Resources

Resources are scarce.

•Individuals

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Scarcity
Scarcity means that society has limited resources and

therefore cannot produce all the goods and services
people wish to have.

Limited
Resources

Unlimited
Wants
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Economy



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Individuals

“oikonomos” (Greek): “One who manages



a household”




Household - many decisions of allocate

Household = Consumers
Firms = Producers
Government



limited resources
 Ability, effort, desire



Society - many decisions
 Allocate
 Allocate

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resources
outputs (goods and services)
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Our first model: The circular-flow diagram
 Visual

model of the economy
how dollars flow through markets
among households and firms

 Shows

 Decision


makers

Firms & Households

 Markets



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For goods and services
For factors of production

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The circular flow

1.2. Economics and
Three Basic Questions of the Economy
•

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•
Principles
Microeconomics and Macroeconomics
•
Positive vs Normative Analysis
•
Models

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1.2.1 Three Questions of an economy
Scarcity raises three questions, which every economy must answer.

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1.2.2 Economics Definition




What to produce?

How to produce?

For whom?

• Using the economy’s
scarce resources to
produce one good
requires giving
up/sacrificing/trade off
another good. Every
society must decide
what it must produce
with its scarce
resources.

• Society has to make

best decision or
choices in determining
how goods and
services should be
produced.

• If goods or services are
produced, a decision
must be made about
who will get it. A
decision to have one
person or group
receive a good or
services usually means
it will not be available
to someone else.

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Economics

Economics is to study of how society allocates its scarce
resources for competitive goals (D.Begg)



Economics is to study of how society manage its scarce
resources (G.Mankiw)






Economics is a social science.
Economists try to explain puzzling observations and facts
about the economy.
Economists study:




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How people make decisions: how much they work, what they
buy, how much they save, and how they invest their savings.
How people interact with one another
Analyze forces and trends that affect the economy as a whole

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FOUNDATIONS OF MODERN
ECONOMICS

1.2.3 Microeconomics and
Macroeconomics


CLASSICAL
 ADAM SMITH: The Wealth of Nations (1776)
 ALFRED MARSHALL: Principles of Economics (1890).
NEOCLASSICAL
 During the 1940s - 1950s
 Modern classical school of economics.

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



Studies how households (or individuals), business (or
firms, enterprises) and the government make decisions,
given scarcity of resources.
Studies the interactions among those market members
and how these interactions have impacts on their
economic benefits and the economy.
focuses on how the markets work.


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




The study of how households and firms make decisions
And how they interact in markets

Macroeconomics


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The study of economy-wide phenomena, including inflation,
unemployment, and economic growth

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1.2.4 The scientific method of
economics

Microeconomics


Microeconomics

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Observation, theory, and more observation
 Observation
 Theory (Model)
 Conducting experiments
 More observation

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Economics model



Economic model

Economic model: an explanation of how the economy or
part of the economy works.
Assumption: Judgements about features that can be
ignored to make the world easier to understand.


Ceteris paribus assumption:All other things being equal. The
term refers to holding all other variables constant when one

variable is changed.

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Come in many forms:
 Numerical tables
 Graphs
 Algebraic equations
 Wordy descriptions

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Positive vs. Normative economic
analysis


Positive statements







Attempt to describe the world as it is
Descriptive

Confirm or refute by examining evidence
Answer for “What be”

Normative statements




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Attempt to prescribe how the world should be
Prescriptive
Answer for “What should be”

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1.3. The optimum economic choice

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1.3.1 Why people choice?




People face the fact that resources are scared
People want to maximize their benefit.




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1.3.2 How People Make Decisions



Principle 1: People face trade-offs
Making decisions





Trade off one goal against another
Student – time
Parents – income
Society





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Opportunity Cost
Principle 2: The cost of something
is what you give up to get it


National defense vs. consumer goods
Clean environment vs. high level of income
Efficiency vs. equality

Households (consumers): maximizing benefit (utility)
Firms (producers): maximizing profit
Government: maximizing social welfare



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Make decisions
 Compare cost with
benefits of
alternatives
Opportunity cost

 Whatever most be
given up to obtain
one item
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Principle 3: Rational people think at the
margin


Rational people




Incentive: Something that induces a person to act



Systematically & purposefully do the best they can to achieve
their objectives








Small incremental adjustments to a plan of action



Marginal benefits > Marginal costs

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Second model:
The production possibilities frontier-PPF

A graph
Combinations of output that the economy
can possibly produce
 Given the available



Factors of production
 Production technology


Buyers - consume less
Sellers - produce more

Public policy



Rational decision maker – take action only if


Higher price


Marginal changes




Principle 4: People respond to incentives

Change costs or benefits
Change people’s behavior

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The production possibilities frontier
Quantity of
Computers
Produced

C

F


3,000

A

2,200
2,000

B

Production
Possibilities
Frontier

D

1,000

E
0
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300

600 700


The production possibilities
frontier shows the
combinations of output - in
this case, cars and
computers - that the
economy can possibly
produce.
The economy can produce
any combination on or
inside the frontier.
Points outside the frontier
are not feasible given the
economy’s resources.

1,000 Quantity of
Cars
Produced

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Second model: The production possibilities
frontier


Bowed out production possibilities frontier

Opportunity cost



Resource specialization



Efficient levels of production
 Points on the PPF
 Trade-off: The only way to get more of one good
is to get less of the other good
 Inefficient levels of production
 Points inside PPF


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MATHEMATICS REVISION



A shift in the production possibilities frontier
Quantity of
Computers
Produced
4,000


A technological advance
in the computer industry
enables the economy to
produce more computers
for any given number of
cars. As a result, the
production possibilities
frontier shifts outward. If
the economy moves from
point A to point G, then the
production of both cars and
computers increases.

3,000
G

2,300
2,200

A

0

600 650

1,000 Quantity of
Cars Produced

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Revision (cont.)


Six types of relationship
Increasing
positive
slope

Slope of the curve

Decreasing
Positive
slope

y
28
8
20

1
35

Increasing
negative
slope

2-1
2


Decreasing
negative
slope

Slope= (28-20) = 8

1

x
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Math revision (Cont.)


Facts and impacts

Constant slope

Movement along the curve vs. shift of the curve
Movement along the curve:

 When x and y changes.
y
 Shift of the curve:
 When another variable
other than x and y change.
 A third variable shift the
z1
curve.



Constant
positive slope

Constant
negative slope

The line
shifts when
Z changes
Z2

x
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