Microeconomics

Microeconomics Dr.
Noha Zaitoun
1- Define Economics ?
2- What is Scarcity, Choice, and Cost?

3-Opportunity Cost ?
4-The Production Possibilities Curve
5- The Circular Flow of income

• Economics is a social science that
examines
“how people choose among the
alternatives available to them”.
Defining • It is social
because it involves people and their
Economics behavior.
• It is a science
“because it uses, as much as
possible, a scientific approach in its
investigation of choices”.
Two Main Branches of Economic Analysis
MICROECONOMICS MACROECONOMICS
Microeconomics
is a branch of mainstream
economics that studies
the behavior of
individuals and firms
in making decisions
regarding the allocation
of scarce resources and the
interactions among these
individuals and firms.
Macroeconomics
is a branch of economics
dealing with
performance, structure,
behavior, and decision-
making
of an economy as a
whole.
Labour
Factors of Land
Production Capital
Entrepreneur (technology)
• Refers to natural resources that are
Land used in the production of goods and
services
• is the work that goes into production

• Work effort used in the production of
labor goods and services.
• Some examples are the number of
workers and number of hours
worked
• is the tools and buildings used to
produce things
Capital • Examples of capital would be
machinery, technology, and tools such
as computers; hammers; factories;
robots; trucks, and trains used to
transport goods; and other equipment
employed in the production of a good
or service.
Entrepreneurship • is the know-how of putting it all together.

• The ability to combine the other
productive resources into goods and
service
• All choices mean that one
alternative is selected over
Scarcity, another.
Choice, • Selecting among
alternatives involves three
and Cost ideas central to Economics:
“Scarcity, Choice, and
Opportunity Cost”.
Scarcity
Wants and
Resources Comparative
desires
are limited scarcity
are unlimited
1- What should be produced?
Produce one thing requires giving up another

Scarcity and 2- How should goods and services be produced?
the Skilled or unskilled workers?
Fundamental In own country or foreign plants?
New or recycled raw materials?

Economic 3- For whom should goods and services be produced?
Questions For who deserve or who pay?
one person or group?

• Opportunity cost
is the value of the best alternative forgone in
making any choice.
Profits and Economic Costs

Opportunity • profit = total revenue - total cost
Cost Total revenue

is the amount received from the sale of the
product
Total cost
includes (1) Out-of-pocket costs and
(2) Opportunity cost of all inputs
or factors of production.
= (Explicit + Implicit) costs
is a payment you make with your own
money, whether or not it is reimbursed.
It could be a business expense, such as
paying for a flight that is reimbursed by
your employer,
or a health expense that you pay before
your total outlay reaches the insurance
deductible.
•Explicit costs
are out-of-pocket costs for a firm—for example, payments for wages
and salaries, rent, or materials.
Implicit costs
are a specific type of opportunity cost: the cost of resources already owned by the
firm that could have been put to some other use.
For example, an entrepreneur who owns a business could use her labor to earn
income at a job
What is the difference between:
Accounting Profit Economic Profit
is a metric that is of importance to the is a metric that is of importance to the
accountant. economist.
is defined in terms of net income that the is the surplus that remains with the business
business generates or earns during the after total opportunity costs are deducted
accounting or financial year. from the revenues earned.
are from certain assumptions and estimations
is regarded as relevant regarding accounts
and generally cannot be relevant as the
and financial perspective.
metric is just a precision.
indicates the efficiency level of the business in

reflect the true profitability of the business in
terms of how they utilize its resources to drive
accounting terms.
maximum value generation.
is the difference in total sales or revenues is the difference between the total revenue or
generated by the business with the explicit sales by the business and the sum of explicit
costs. and implicit costs.
• is the total revenues minus
explicit costs, including
depreciation.
Economic profit is total revenues minus total costs—
explicit plus implicit costs.
The circular flow model
illustrates how a market economy
works.
In the model, households and
firms engage in mutually
beneficial exchanges of resources
and products in the market.
Households
are the owners of the factors of production and sell labor in
exchange for a wage, land in exchange for rent, and capital in
exchange for interest.
Firms sell goods and services in exchange for money.
imports imports
exports exports
Spending on G/S
Goods and Services
Investment Savings
Firms Households
Factors of Production
Wage, Rent, Interest Rate, Profit
Taxes Taxes
subsidies subsidies
Term Definition
A place where buyers and sellers meet to engage in mutually
Market beneficial, voluntary exchanges of goods, services, or productive
resources
The owners of resources—supplied to firms in the resource
Households market—and the buyers of goods and services—demanded from
firms in the product market
Business entities that demand land, labor, and capital from
Firms households in the resource market and produce goods and
services, which they supply to households in the product market
Resource Where households supply land, labor, capital, and
market entrepreneurship/technology to firms in exchange for money
Product Where firms supply goods and services to households in exchange
market for money
Term Definition
Economic A system of allocating the means of production and the
system goods and services produced in an economy
The payment firms make to households in exchange for their

Wages labor
Rent The payment firms make to households in exchange for land

The payment firms make to households in exchange for
Interest capital
Profit The payment to entrepreneurs who start or own businesses

Agent Sells In exchange for To whom In market
Households sell Land For rent To firms In factor markets
Households sell Labor For wage To firms In factor markets
Households sell Capital For interest To firms In factor markets
Firms sell Goods and services For money To households In product markets
In the model,
money flows in one direction—
counterclockwise—
and goods, services, and
resources flow in the opposite
direction—clockwise.
In a market economy,
one of the main functions that

money serves is to facilitate the
exchange of goods in the product
market and the exchange
resources in the resource market.
Injections and Leakages in the Circular flow of Income
Leakages in the
Circular flow of
Income
• Saving, taxes, and imports

are the three leakages.
because they are "leaked" out of

the core circular flow of
consumption, production, and
income.
Injections in the
Circular flow of
Income
• Investment, government
purchases, and exports
are the three injections.

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Microeconomics Dr.

2- What is Scarcity, Choice, and Cost?

4-The Production Possibilities Curve

5- The Circular Flow of income

• is the work that goes into production

Entrepreneurship • is the know-how of putting it all together.

Produce one thing requires giving up another

the Skilled or unskilled workers?

Fundamental In own country or foreign plants?

New or recycled raw materials?

one person or group?

Profits and Economic Costs

Cost Total revenue

indicates the efficiency level of the business in

The payment firms make to households in exchange for their

Rent The payment firms make to households in exchange for land

Profit The payment to entrepreneurs who start or own businesses

one of the main functions that

• Saving, taxes, and imports

because they are "leaked" out of

are the three injections.

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