MICROECONOMICS

ECO 111L

LECTURE 1

Introduction
Lecture one : Concepts

 Economics
 Macroeconomics & microeconomics
 Scarcity
 Needs & wants
 Factors of production
 Goods and services

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Economics Defined

 Definition of economics

“Economics is the science of choice, exploring the choices made by

individuals and organizations.” (O’Sullivan 2012)

“is the social science that studies the choices that economic agents make as
they cope with scarcity” (Parkin et al 2014)

“Economics is the study of how society manages its scarce resources” (N

Gregory Mankiw)

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Macro vs Micro

 Economics is divided into 2 categories:

 1. Macroeconomics

 Study of the nation as a whole i.e. looking at the ‘big picture’

 Develop an overall view of the economy and study aggregate economic

behavior
 Focuses on issues such as inflation, economic growth, unemployment,

and distribution of wealth.

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 Macro VS Micro

2. Microeconomics

 Focus is on individual parts of the economy

Study of choices made by households, firms government and their impact

on markets for goods and services
Individual elements of the economy are put under a microscope and
examined in detail

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Macro vs Micro

Macroeconomics Microeconomics
Look at consumer price index Price of a single product
Inflaton (ggeneral price level) Change in price of a specifc product
Total output for all good and services Producton of a partcular good e.g. eggs
Total demand for all goods and services Demand for a partcular good e.g. bread
Collecton of decisions by frms Decision of an individual frm

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The Economic Problem

 The economic problem is SCARCITY

Scarcity refers to a situation whereby the resources that

are available at a particular point in time are not enough to
satisfy all the needs of individuals, let alone all their wants

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Important economic questions

The economic problem leads to the 3 central questions:

 WHAT should be produced? (problem of allocation)

 HOW should it be produced? (problem of production)
 FOR WHOM? (problem of distribution)

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Needs and Wants Defined

 What is the diference between wants and

needs?

 How can we diferentiate between wants

and needs?

 Which do you think is more important?

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Needs and Wants Defined

Wants Needs
These are human desires These are necessites, required for
survival
Unlimited Not unlimited
Differ wiith from individual to individual The same for most people
Lack of is not harmful Lack of leads to illness, death, suffering
Optonal items Extremely necessary to survive

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Link between scarcity, needs and wants

 The scarcity problem means people must divide their

limited resources to cater to their needs and their wants.

 An economy is made up of economic agents trying to

satisfy their needs and wants using the resources
available.

 Economic agents are assumed to be rational and always

look to maximize satisfaction given their limited
resources

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Factors of Production

 What are these resources?

 Commonly referred to as factors of production

 Factors of production are the scarce resources that are used to produce
goods and services.
 They are classified into natural resources, labor, capital, and
entrepreneurship

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Factors of Production

 Natural resources and labor are further classified as primary

factors of production, whilst secondary factors consist of capital
and entrepreneurship

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Factors of Production

 1. Natural resources
 These are resources nature gives to humans, e.g. land,

water, minerals, vegetation, etc.

 They are also seen as non-renewable resources
 The fxed nature of their supply means how they are used

up is a concern. Thus, environmentalists always highlight

the importance of these resources

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Factors of Production

 2. Labour
 Comes from the physical and mental efort put forth by

humans to produce goods and provide services

 The collective of all labour is referred to as the labour

force
 The quality of the labour force is dependent on the level

of human skill, knowledge, training, health and education

of the labour force itself

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Factors of Production

 3. Capital
 These are manufactured goods made by humans to

produce more goods and services. These include tools,

buildings, machinery, etc.
 These are referred to as capital goods
 Capital when considered as a factor of production is not

‘money’, money is a medium of exchange.

 Capital goods are afected by depreciations

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Factors of Production

 4. Entrepreneurship
 Refers to people who identify opportunities and then

coordinate and combine other factors of production to

produce goods and provide services
 They are risk takers and expect to gain proft from taking

risks to produce
 Created from the word entreprendre which is latin for “to

undertake”

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Factors of Production

 What do the owners of the factors of production gain?

Income that accrues to them

 Land – rent - own land and rent it out

 Labour- wages - work for someone
 Capital – interest - lend equipment to others
 Entrepreneurship – proft - starting a business

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Factors of Production

 Factors of production help in answering the problem

associated with “how should it be produced”

 i.e. We utilize factors of production to produce goods and

services

 Labour intensive – largely utilize labour

 Capital intensive – largely utilize capital

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Goods and Services

 The factors of production help in the production of goods

and provision of services.

 Goods and services are used by individuals to satisfy

their wants and needs.

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Goods and Services

 Classifcation of goods and services:

 1. Consumer goods and capital goods

 2. Final and intermediate goods
 3. Private and public goods
 4. Economic goods and free goods

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Consumer and Capital goods

 Consumer goods-consumed by individuals to satisfy their

needs and wants. E.g. food, wine, clothing, shoes,
furniture

Consumer goods can be:

 Non-durable: used once only e.g. bread, petrol
 Semi-durable: last for a limited time e.g. clothes, tyres
 Durable : last for a few years e.g. furniture, appliances

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Consumer and Capital goods

 Capital goods- goods used in the production of other

goods e.g. machinery, equipment

 Decision must be made between current and future

production i.e. should we produce more consumer goods
now, or more capital goods? More capital goods means
higher production of consumer goods in the future

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Final goods and services and intermediate goods and services

 Final goods - used and consumed by individuals, e.g. chips,

bread

 Intermediate goods - used in the production of other goods,

which are later sold
 They are purchased and processed before being used by

the end user e.g. four at a bakery

 BUT four purchased by an individual to bake to consume is

a fnal good

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Private and Public goods

 Private goods are consumed by individuals and are

exclusive of other economic agents in nature e.g.
clothes, food

 Public goods are consumed by the community, they do

not exclude anyone from consuming e.g. a public park,
roads, streetlights

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Economic and Free goods

 Economic Goods- produced at a cost from scarce

resources and, therefore are scarce in nature
 Free goods are not scarce and therefore have no price

e.g. air, sunshine

 BUT e.g. pure air – pollution? Becoming scarce
 Is free education considered an economic or free good?

Why?

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Homogenous goods and heterogeneous goods

 Homogenous goods are items that are exactly alike

 Think about what homogenous goods are and try to come up

with examples? (e.g. ounce of gold)

 Heterogenous goods on the other hand are items that are

diferentiated i.e. not the same

 E.g. Shirts, shoes - all come in diferent brands

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Illustrating scarcity, choice and opportunity cost: the production possibilities
curve

Scarcity, choice, and opportunity cost can be illustrated utilizing the PPC curve.
• The PPC curve shows the combinations of any two goods or services that are
attainable when an economy’s resources are fully and efficiently employed.
Consider a community that survives on two products, fish and potatoes:
• If all resources are concentrated on fish, they will produce 5 baskets of fish. If all
resources are used in producing potatoes, they will produce 100 kgs of potatoes.
• However, to achieve a balance diet they may choose a combination of the two
products.
• However, it is impossible to produce more of one good without decreasing the
creation of the other.

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Illustratng scarcity, choice and opportunity cost: the producton possibilites curve
Production possibilities for a oild cost community

Possibilites Fish Potatoes

(Baskets per day ) Kg per day
A 0 100
B 1 95
C 2 85
D 3 70
E 4 40
F 0 0

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Illustratng scarcity, choice and opportunity cost: the producton possibilites curve

A production possibilities curve for the Wild Coast community

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Illustrating scarcity, choice and opportunity cost: the production possibilities
curve

 Fish production is measured along the horizontal axis and potato

production on the vertical axis.
 The diferent combinations are represented by points A, B, C, D,
E and F in the diagram.
 Joining the diferent combinations gives us the curve, the
Production Possibility Curve.
 Moving along the PPC from A to B through to point F, the
production of fsh increases, whilst the production of potatoes
decreases.

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Illustrating scarcity, choice and opportunity cost: the production possibilities
curve

 To produce the frst basket of fsh, the community has

to sacrifce 5 kgs of potatoes (100 to 95).
 To produce the second basket of fsh the sacrifce is an
additional 10 kgs of potatoes (95 less 85).
 The opportunity cost of each additional basket of fsh
increases as we move along the PPC.
 The PPC bulges outward from the origin because of
increasing opportunity cost.

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Illustrating scarcity, choice and opportunity cost: the production possibilities
curve

 Points A, B, C, D, E and F represents attainable and

efcient combinations of potatoes and fsh.
 Point H in the diagram denote 70 kgs of potatoes and two
baskets of fsh.
 -This is attainable but inefcient because more potatoes
(85 kgs) can be produced at C without sacrifcing any
production of fsh.
 Points such as G are desirable but not attainable

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 The PPC can therefore illustrate scarcity, choice and opportunity cost.
 Scarcity- all points to the right such as G are unattainable.
 The PPC forms a frontier or boundary between what is possible and
impossible.
 Choice – Is illustrated by the need to choose among the available
combinations along the curve.
 Opportunity cost – is illustrated by the negative slope of the curve
which means more of one good can be obtained only by sacrifcing
the other good.
 In other words opportunity cost involves a trade-of between the two
goods.

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