CH.

1 MICROECONOMICS NOTES
Limits, Alternatives, and Choices

1.1The Economic Perspective

 Scarcity and Choice
- There is a scarcity of the supply in the economic resources needed to make
goods and services.
 Opportunity Costs: The amount of other products that must be forgone or
sacrificed to produce a unit of a given product.
- Society must sacrifice something in order to provide another thing.
o “there is no free lunch”, someone must bear the cost
 Purposeful Behavior: the decisions people make with some desired
outcome in mind.
- Human Behavior reflects “rational self-interest”
- Individuals and institutions look for things to increase their utility—pleasure,
happiness, satisfaction—from obtaining goods and services.
 Marginal Analysis: comparisons of marginal benefits and marginal costs
o Marginal – extra, additional, change in
- The decision to obtain a marginal benefit almost always includes the sacrifice
of marginal cost

1.2Theories, Principles, and Models: Simplified explanations of complex

economic realities.
- Explain and predict how individuals and institutions behave in
economic activities.
 Process of economic theory:
1. Observe real-world behavior and outcomes.
2. Formulate a hypothesis (cause and effect).
3. Test the hypothesis by comparing predictions to actual outcomes.
4. Accept, reject, or modify the hypothesis based on results.
5. If a hypothesis is well-tested and widely accepted, it becomes an
economic law or principle.
 Economic models: Simplified representations (e.g., of a market or
economy).
 Generalizations: Economic principles express tendencies of typical
behavior (e.g., consumers buy more when prices fall).
 Other-things-equal (ceteris paribus) assumption: Focus on the
relationship between key variables by assuming other factors remain
constant. (Like just price or just the sale of goods)
 Graphical expression: Many economic models are represented
graphically for clarity.
1.3 Microeconomics and Macroeconomics

 Microeconomics:
 Focuses on individual decision-making by customers, workers,
households, and firms.
 Studies specific details like product prices, firm revenues, household
incomes, or expenditures.
 Macroeconomics:
 Examines the economy as a whole.
 Focuses on economic growth, business cycles, interest rates, inflation,
and major economic aggregates (government, households,
businesses).
 Uses aggregates like total output, employment, income, and
expenditures to get an overview of the economy.
 Micro–Macro Distinction:
 Not always clear-cut; some topics overlap (e.g., unemployment is both
macro and micro).
 Positive Economics:
 Focuses on facts and cause-and-effect relationships.
 Avoids value judgments, focuses on what is.
 Normative Economics:
 Involves value judgments about what the economy should be like.
 Suggests policy recommendations, focuses on what ought to be.
 Key Difference:
 Positive economics = objective, fact-based.
 Normative economics = subjective, value-based.
1.4 Individual’s Economizing Problem
 Economizing Problem -- the need to make choices because economic
wants exceed economic means
 Limited Income – finite amount of income
o the average income of Americans in 2006 was $44,970. In the poorest
nations, it was less than $500.
 To combat limited income:
 o economize: to pick and choose goods and ser vices that
maximize our satisfaction.
 Budget Line: a schedule or curve that shows various combinations of two
products a consumer can purchase with a specific money income.
o Attainable and Unattainable Combinations
 Attainable: can afford to purchase
 Unattainable: cannot afford to purchase
o Trade-Offs and Opportunity Costs The
o Choice
o Income Changes
 Location of budget line changes with income
 Increase in income, moves budget line to right
 Decrease in income, moves budget line to left
1.5 Society’s Economizing Problem

 Scarce Resources: all natural, human, and manufactured resources that go

into the production of goods and services.
 Resource Categories (Factors of Production):
o Land
 all natural resources used in the production process (arable
land, forests, mineral and oil deposits, and water sources)
o Labor
 Physical and mental talents on individuals used in producing
goods and services.
o Capital
 Manufactured aids used in producing consumer goods and
services
 Factory, storage, transportation, and distribution facilities,
tools and machinery
 Purchase of capital and goods = investment
o Entrepreneurial Ability
 • The entrepreneur takes the initiative in combining the
resources of land, labor, and capital to produce a good or a
service. Both a sparkplug and a catalyst, the entrepreneur is the
driving force behind production and the agent who combines the
other resources in what is hoped will be a successful business
venture.
 • The entrepreneur makes the strategic business decisions that
set the course of an enterprise.
 • The entrepreneur is an innovator. He or she commercializes
new products, new production techniques, or even new forms of
business organization.
 • The entrepreneur is a risk bearer. The entrepreneur has no
guarantee of profit. The reward for the entrepreneur’s time,
 efforts, and abilities may be profits or losses. The entrepreneur
risks not only his or her invested funds but those of associates
and stockholders as well. Because land, labor, capital,
1.6 Production Possibilities Model
 Full employment: The economy is employing all its available resources.
 Fixed resources: The quantity and quality of the factors of production are
fixed.
 Fixed technology: The state of technology (the methods used to produce
output) is constant.
 Two goods: The economy is producing only two goods: pizzas and industrial
robots. Pizzas symbolize consumer goods , products that satisfy our wants
directly; industrial robots (for example, the kind used to weld automobile
frames) symbolize capital goods , products that satisfy our wants indirectly
by making possible more efficient production of consumer goods.
 Production Possibilities Table: Production Possibilities Table: Shows
different combinations of two products (capital goods and consumer goods)
that can be produced with a fixed set of resources, assuming full
employment.
o Example economy: Produces pizzas (consumer goods) and industrial
robots (capital goods).
o Alternative A: All resources devoted to industrial robots, no pizzas
produced.
o Alternative E: All resources devoted to pizzas, no industrial robots
produced.
o Alternatives B, C, D: Intermediate points where resources are allocated
between both products, producing a mix of pizzas and robots.
 Trade-offs: Moving from A to E increases pizza production but
decreases industrial robot production (and vice versa).
 Consumer goods (pizzas): Satisfy immediate wants; shifting resources toward
consumer goods (moving toward E) increases current satisfaction but reduces
future capital production, meaning fewer resources for future growth.
 Capital goods (industrial robots): Invest in future productivity; shifting
resources toward capital goods (moving toward A) increases future
production and consumption potential but sacrifices current consumption.
 Society's choice:
o Moving toward E: "More now, less later" (current consumption at the
cost of future growth).
o Moving toward A: "More later, less now" (investing in future production
by reducing current consumption).
 Generalization: A fully employed economy faces trade-offs; producing more
of one good requires sacrificing some of another. Scarce resources force
society to make choices between alternatives, meaning "there's no free pizza
or free robot."
  Production Possibilities Curve: Graphically represents the different
combinations of goods and services that an economy can produce with full
employment of resources and constant technology.

 Axes: Capital goods (e.g., industrial robots) on the vertical axis,

consumer goods (e.g., pizzas) on the horizontal axis.
 Points on the curve: Show the maximum attainable combinations of
the two goods. These points reflect the economy's efficient use of all
available resources.
 Points inside the curve: Represent inefficient resource use, meaning
the economy is not producing at full capacity. More of both goods
could be produced with better resource utilization.
 Points outside the curve: Unattainable with the current level of
resources and technology (e.g., point W represents greater output than
possible with current constraints).
 Movement along the curve requires trade-offs between the two goods.
 Fixed resources and technology: The PPC assumes no changes in
resource availability or technology, meaning production capacity is
constrained by current conditions.
 Laws of Increasing Opportunity Costs: As more of a good is produced,
the opportunity cost of producing each additional unit increases. This is
because resources are not equally efficient in producing every good, so more
resources must be diverted from other goods as production increases.

1.7 Unemployment, Growth, and the Future

 During Covid-19 2020 Recession

o 1 in 7 workers were without a job
o Production fell by 10 percent
 A Growing Economy
o Greater abundance of resources = greater potential output =
economic growth
o Graph moves outward to the right
 Advances in Technology
o Improvements in methods of production
 Computerized AI
 Improvements in resource quality
 Present Choices and Future Possibilities
o Goods for the future: capital goods, research, education, and
preventive medicine
o Goods for the present: food, clothing, and entertainment
 A Qualification: International Trade
o Allows a nation to get more of a desired good at less of a sacrifice
  Specialization and trade have the same effect as having more and better
resources or discovering improved pro duction techniques:
o both increase the quantities of capital and consumer goods
available to society.
o expansion of domestic production possibilities and
international trade are two separate routes for obtaining
greater output.

CH 1 Questions:

1. Which of the following is a result of having scarce economic resources for the
production of goods and services?
a. Fewer options that require choices

2. Suppose you are given a $100 gift card and you choose to spend it on a
number of goods. You will select a combination of goods that is best for you
and that maximizes your satisfaction. Your choices will involve which of the
following?
a. A comparison of marginal benefits and marginal costs for each
good considered
3. Which of the following are issues most explored in microeconomics?

a. Measuring the price of specific goods

b. Measuring total revenues of a firm
c. The expenditures of a government entity
4. Scarce resources means unlimited goods and services
5. Macroeconomics is the discipline that examines the performance and
behavior of an economy as a whole.
6. True or false: Positive economics encourages value judgments.
a. Reason: Positive economics avoids value judgments, instead
seeking to empirically describe the facts of the case.

7. Because consumers behave in a rationally self-interested manner, they

will purchase a good or service
a. when the marginal benefit is greater than the marginal cost
8. Your next-door neighbors want to go on a European vacation but
cannot afford it, so they decide to visit a local amusement park
instead. This is an example of
a. the economizing problem
9. Which of the following are ways of expressing the meaning of ceteris
paribus?
a. Assuming other things are equal
b. Assuming factors other than those being considered in a
particular analysis do not change
10. Which discipline studies the decision-making process of
customers, workers, households, and business firms on an individual
basis rather than as aggregates?
11. Which discipline studies the decision-making process of
customers, workers, households, and business firms on an individual
basis rather than as aggregates?
a. Microeconomics
12. Which discipline studies the economy as a whole or its basic
subdivisions or aggregates?
a. Macroeconomics
13. Positive economics avoids value judgments, tries to
establish scientific statements about economic behavior, and deals
with actual economic events.

14.A consumer's budget line or constraint shows various combinations of two

products that can be purchased with a specific amount of income

15.True or false: A trade-off occurs when some quantity of production of a good

is given up in order to produce another good.
16.An increase in income will
a. Shift the budget line to the right
17.All natural resources, human resources, and manufactured goods that go into
the production of goods and services are considered as society's
scarce economic resources.
18. Which of the following describes a budget line?
a. A curve showing various combinations of two products a
consumer can purchase with a specific amount of income.
19.In this figure, obtaining more books by giving up some movies is called a
trade-off whereas losing two books in order to gain 1 movie is referred to
as an opportunity cost.
20. A production possibilities table lists the different
combinations of two products that can be produced with a specific set
of resources, assuming full employment.
21.Land and mineral resources, transportation and communication facilities,
factories and farm buildings, equipment, tools and machinery are all
examples of
a. scarce economic resources
22. Which of the following illustrates the attainable combination of
two goods that can be produced given a specific set of resources?
a. Production possibilities curve
b. FALSE: budget line refers to "consumption" not "production" of
two goods given a specific amount of income. Income is not a
resource, it is a medium of exchange. Resources produce goods
and services.
23.From an economic standpoint, LAND includes all natural resources used in
the production process.
24.The outward bowing shape of the production possibilities curve is due to
a. LAW OF OPPORTUNITY COST
25.The optimal allocation of resources occurs when
a. the marginal benefit of the good equals the marginal cost
26.Economists do not include money as an economic resource because
a. Money produces nothing
27. A point that lies inside the production possibilities curve reflects
which of the following?
a. Failure to achieve full employment
28.Improvements in the methods of production allows for the creation of
a. more goods with available resources
29.A production possibilities curve (PPC) illustrates the attainable combination
a. of two goods that can be produced given a specific set of
resources
30. Suppose an economy produces consumer goods and capital
goods. Its current combination of production involves a higher level of
capital goods than consumer goods. Which of the following can be
inferred from this current choice on its production possibilities curve?
a. That its present choice in production may result in higher future
prospects for economic growth
31.Production possibilities graph increasing slope = increasing law of
opportunity costs
32. Specializing and participating in international trade allows an
economy to do which of the following?
a. Increase the quantities of capital and consumer goods available
to society
33. Which of the following can be stated as potentially true about
any economy?
a. Its current choice of position on its production possibilities curve
helps determine the curve's future location.
34. When a country engages in international specialization, it
focuses on producing which of the following?
a. Goods with the lowest opportunity costs
35. Specializing and participating in international trade allows an
economy to do which of the following?

a. Increase the quantities of capital and consumer goods available

to society
b. Circumvent the output limits imposed by its own production
possibilities curve