ECO-101 Micro Economic Lecture 1

1. MICRO ECONOMICS
Introduction

2. Economics
Economics is the social science that analyzes the
 Production
 Distribution
 and consumption of goods and services.
 The term economics comes from the Ancient
Greek word oikonomia, "management of a
household, administration")

3. Microeconomics

4. Economic Problem
Unlimited wants
Limited Resources

5. Economics, the Science of Scarcity
 The science of
how individuals and
societies deal with
the fact that wants
are greater than the
limited resources
available to satisfy
those wants.

6. Scarcity
 A case in which
our wants are
greater than
available
resources.

7. In This Lecture
1. Microeconomics &
Macroeconomics
2. Positive & Normative
Economics
3. Goods and Bads
4. Resources

8. In This Lecture (Continued)
 Scarcity
 Opportunity Costs
 Costs and Benefits
 Decisions Made at the
Margin
 Efficiency
 Unintended Effects
 Exchange

9. Microeconomics
 Microeconomics is the
part of economics
concerned with individual
units such as a
 Person
 a household
 a firm
 or an industry.

10. Microeconomic Questions
 How does a market work?
 What level of output does a firm produce?
 What price does a firm charge for the good it
produces?
 How does a consumer determine how much of a
good he or she will buy?
 Can government policy affect business behavior?
 Can government policy affect consumer behavior?

11. Macroeconomics
 Macroeconomics
deals with human
behavior and choices
as they relate to
highly aggregate
markets
 the goods and
 services market
 or the entire
economy.

12. Macroeconomic Questions
 How does the economy work?
 Why is the unemployment rate sometimes high
and sometimes low?
 What causes inflation?
 Why do some national economies grow faster
than other national economies?
 What might cause interest rates to be low one
year and high the next?
 How do changes in the money supply affect the
economy?
 How do changes in government spending and
taxes affect the economy?

13. Positive vs. Normative
Economics
 Positive - The study of “what is” in
 economic matters.
Cause Effect
 Normative –
 The study of “what should be” in
 economic matters
Judgment and Opinion

14. Positive Statements
 Examples:
 A rise in interest rates will cause a rise in the
exchange rate and an increase in the demand for
imported products
 Lower taxes may stimulate an increase in the
active labour supply
 A national minimum wage is likely to cause a
contraction in the demand for low-skilled labour
 The UK economy now has lower unemployment
than Germany
 The American stock market has boomed in recent
years

15. Normative Statements
 Examples:
 The decision to grant independence for the Bank
of England is unwise and should be reversed
 A national minimum wage is totally undesirable as
it does not help the poor and causes higher
unemployment and inflation
 The national minimum wage should be increased
to �5
 As a method of reducing poverty
Protectionism is the only proper way to improve
the living standards of workers whose jobs are
threatened by cheap imports

16. Goods and Services
Good - Anything from which individuals receive
utility or satisfaction.
 Durable
 Non Durable
Utility - The satisfaction one receives from a
good.
Services- A service is the intangible equivalent
of an economic good.

17. Five Big Microeconomics Questions
• What goods and services will be
produced?
• How will the goods and services be
produced?
• Who will get the goods and
services?
• How will the system accommodate
change?
• How will the system promote
progress?

19. Factors of Production
 There are four Factors of Production
1. Land
2. Labour
3. Capital
4. Entrepreneurship

20. Building A Definition of Economics
~ Resources ~
 Land - All natural resources,
such as minerals, forests,
water, and unimproved land.

21. Building A Definition of Economics
~ Resources ~
 Labor - The physical and
mental talents people
contribute to the production
process.
 Skilled
 Unskilled
 Semi Skilled

22. Building A Definition of Economics
~ Resources ~
 Capital - Produced goods
that can be used as inputs for
further production, such as
factories, machinery, tools,
computers, and buildings.

23. Building A Definition of Economics
~ Resources ~
 Entrepreneurship - The particular
talent that some people have for:
organizing the resources
of land, labor, and capital
to produce goods
seeking new business
opportunities, and
 developing new ways of
doing things.

24. Opportunity Costs
 The thing we have to forego to have
another.
 The higher the opportunity cost of
doing something, the less likely it will
be done.

25. Study or Play
Benefit
Cost

26. Consumer decisions
 Should you attend school for another year?
 Should you study an extra hour for an exam?
 Should you supersize your fries? Similarly,
should a business expand or reduce its
output?
 Should government increase or decrease its
funding for a missile defense system?

27. Scarcity, Choice and Opportunity Costs

28. Marginal Benefits
 Is additional benefits.
 The benefits connected to
consuming an additional unit of
a good or undertaking one more
unit of an activity.

29. Marginal Costs
 Is additional costs.
 The costs connected to
consuming an additional
unit of a good or
undertaking one more unit
of an activity.

30. Exchange/Trade
 The process of giving up one
thing for another.
 Question: Why do people enter
into exchanges?

31. Rationing Device
 A means for
deciding who gets
what of available
resources and
goods.

32. Purposeful Behavior
 Economics assumes that human behavior reflects
“rational
self-interest.”
 Individuals look for and pursue opportunities to
increase their utility —the pleasure, happiness,
or satisfaction obtained from consuming a good or
service.
 They allocate their time, energy, and money to
maximize their satisfaction.
 They weigh costs and benefits, their economic
decisions are
“purposeful” or “rational,” not “random” or

33. The Scientific Method: Observation, Theory, and
More Observation
 Uses abstract models to help explain how a
complex, real world operates.
 Develops theories, collects, and analyzes data
to evaluate the theories.

34.  Economists use models to simplify reality in
order to improve our understanding of the
world
 Two of the most basic economic models
include:
 The Circular Flow Diagram
 The Production Possibilities Frontier
Economic Models

35. Our First Model: The Circular-Flow
Diagram
The circular-flow diagram is a
visual model of the economy
that shows how dollars flow
through markets among
households and firms.

36. Figure 1 The Circular Flow
Copyright © 2004 South-Western
Spending
Goods and
services
bought
Revenue
Goods
and services
sold
Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
Factors of
production
Wages, rent,
and profit
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
•Buy and consume
goods and services
•Own and sell factors
of production
HOUSEHOLDS
•Households sell
•Firms buy
MARKETS
FOR
FACTORS OF PRODUCTION
•Firms sell
•Households buy
MARKETS
FOR
GOODS AND SERVICES

37. Our First Model: The Circular-Flow
Diagram
 Firms
 Produce and sell goods and services
 Hire and use factors of production
 Households
 Buy and consume goods and services
 Own and sell factors of production

38. Our First Model: The Circular-Flow Diagram
 Markets for Goods and Services
 Firms sell
 Households buy
 Markets for Factors of Production
 Households sell
 Firms buy

39. The Production Possibilities Frontier
 The production possibilities frontier is
a graph that shows the combinations
of output that the economy can
possibly produce given the available
factors of production and the
available production technology.

40. Figure 2 The Production Possibilities Frontier
Copyright©2003 Southwestern/Thomson Learning
Production
possibilities
frontier
A
B
C
Quantity of
Cars Produced
2,200
600
1,000
3000 700
2,000
3,000
1,000
Quantity of
Computers
Produced
D

41. Our Second Model: The Production Possibilities
Frontier
 Concepts Illustrated by the Production
Possibilities Frontier
 Efficiency
 Tradeoffs
 Opportunity Cost
 Economic Growth

42. Figure 3 A Shift in the Production Possibilities Frontier
Copyright © 2004 South-Western
E
Quantity of
Cars Produced
2,000
700
2,100
7500
4,000
3,000
1,000
Quantity of
Computers
Produced
A

43. Practice Question-1
5. State whether statements applies to
microeconomics or macroeconomics:
a. The unemployment rate in the United States was
5.2 percent in January 2005.
b. A U.S. software firm discharged 15 workers last
month and transferred the work to India.
c. An unexpected freeze in central Florida reduced
the citrus crop and caused the price of oranges to
rise.
d. U.S. output, adjusted for inflation, grew by 3.5
percent in 2005.

44. 2-
Below is a production possibilities table for
consumer goods (automobiles) and capital
goods (forklifts):

45. a. Show these data graphically. Upon what
specific
assumptions is this production possibilities curve
based?
b. If the economy is at point C , what is the cost
of one more automobile? Of one more forklift?
Explain how the production possibilities curve
reflects the law of increasing opportunity costs.

46. c. If the economy characterized by this
production possibilities table and curve were
producing 3 automobiles and 20 fork lifts, what
could you conclude about its use of its
available resources?
d. What would production at a point outside the
production possibilities curve indicate? What
must occur before the economy can attain
such a level of production?

47. e. Last week Wells Fargo Bank lowered its
interest rate on business loans by one-half of 1
percentage point.
f. The consumer price index rose by 3.4 percent
in 2005.

48. 3-
On average, households in China save
40 percent of their annual income each year,
whereas households in the United States
save less than 5 percent. Production
possibilities are growing at roughly 9 percent
annually
in China and 3.5 percent in the United
States. Use graphical analysis of “present
goods” versus “future goods” to explain the
differences in growth rates.