MICROECONOMICS (ECO 111)

Dr. Christina Shitima``

Course content
1. Introduction (Dr. Shitima)
2. Consumer Behaviour (Dr. Shitima/
Dr. Lihawa)
3. Theory of the Market (Dr. Mkuna)
4. The Theory of Production and the
Firm (Dr. Mkuna)
5. Market Structures (Dr. Dimoso)

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MICROECONOMICS (ECO 111)

LECTURE NOTES NO. 1

INTRODUCTION
1. Economics defined
 Economics is the study of the
ALLOCATION of SCARCE resources to
meet UNLIMITED human wants.
 Economics is the study of how people
 allocate their limited resources
 to produce and/ or consume goods and
services
 to satisfy their endless wants with the
objective of maximising their gains

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 Economics is the study of scarcity.
 Scarcity is the condition in which our wants
are greater than our limited resources.
 Since we are unable to have everything we
desire, we must make choices on how we
will use our resources.
 In economics we will study the choices of
individuals, firms, and governments.

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Basic Decision-Making Units in Markets

In economics we look at the following economic agents

 Firms (private sector)
 are the producing units in an economy which aim to maximize profit
 Must choose combination of inputs to produce goods e.g. how many
people and capital to hire

 Households
 are the consuming units in an economy which aims to maximize utility
 Must choose between alternatives e.g. use money to pay tuition fees
or capital to start a business

 Government (public sector)

 links producing units with the markets
 By using taxes, it provides social services to society
 Governments must choose how much to spend on welfare.

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1. Microeconomics & Macroeconomics

Two major branches

 Microeconomics
 is concerned with decision-making by
individual economic agents such as firms
and consumers. (Subject matter of this
course)
 Macroeconomics –
 is concerned with the aggregate
performance of the entire economic system.
(Subject matter of the next semester)
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Microeconomics

deals with the analysis of individual parts of the

economy. It concerns factors determining
 the behaviour of a consumer,
 the behaviour of a firm,
 the demand for a good,
 the supply of a good,
 the price of a good,
 the quantity of a good,
 the performance of a market, etc.
Macroeconomics
 deals with the analysis of the whole economy.
It concerns factors determining aggregate
variables such as
 national income,
 unemployment,
 inflation,
 the balance of payments, etc.
 As opposed to microeconomics which focuses
on the individual parts of the economy,
 macroeconomics looks at the big picture of the
economy.
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positive economics and normative
economics.
 Positive economics is concerned with
facts - avoid biasedness/ value judgements
 It tells us what was/ what is/ what will be.
 Consider the following statement:
 ‘An increase in price will lead to a fall in
sales.’
 In the above statement, both price and sales can
be measured, thus the statement can be
verified.
 Therefore, the statement is a positive statement.

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positive economics and normative
economics.
 It is important to take note that a
positive statement can be true or
false.
 What makes the statement a
positive statement is not that it is
true but that it is verifiable or
testable.

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positive economics and normative
economics.
 Normative economics is concerned with
value judgments (what ought to be)).
 It tells us what should be.
 normative economics is not verifiable.
 E.g ‘At present, unemployment is a more serious
problem than inflation.’
 In the above statement, although both
unemployment and inflation are measurable,
you cannot say with certainty that one problem
is serious than the other, hence the statement is
not verifiable.

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 2. Basic Economic Problem
 From the definition of economics, there is a
fundamental problem we must always deal with:
 This problem is usually posed as the Economic
Problem.
 The basic economic problem is about scarcity,
unlimited needs and choice
 since there are only a limited amount of resources
available to produce the unlimited amount of goods and
services we desire.

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 2. Basic Economic Problem
Decisions that societies make:
1) What goods and services to produce and
how much to produce?:
 What to produce is a problem of choice
between commodities
 how much to produce is a problem determining
the quantity of each commodity and service to
be produced.

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 2. Basic Economic Problem

Decisions that societies make:

2) How to produce?
 How to produce is the problem of choice of
techniques.
 how to determine an optimum combination of
inputs (labour &capital).

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 2. Basic Economic Problem
Decisions that societies make:
3) Distribution of goods and services
 The problem is determine how is the national output
shared among the households.

 Shall goods and services be distributed equally?

 If not equally: who should receive goods and services?

 By what principle shall distribution of goods and

services be distributed among individuals?

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 3. Scarcity & Choice and Opportunity Cost

 The fundamental economic problem:

scarcity of resources forces people to make choices
among available alternatives.
 Making a choice, normally involves a trade-off;
i.e. choosing more of one thing and giving up something else in
exchange. For example
 Housing: Choices about whether to rent or buy a home

 Working: Choosing between full-time work, or to take a

course in higher education lasting three years

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3. Scarcity & Choice and Opportunity Cost

Opportunity Cost (OC):

 measures the cost of any choice in terms of the
next best alternative foregone. Example:
 Opportunity cost of taking a full time bachelor
course in Economics at Mzumbe is
 The income that could have been earned if a
student was employed as a full time labor
 This means that a student has foregone income to
get a degree in Economics
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3. Scarcity & Choice and Opportunity Cost

Opportunity Cost: more examples:

 Government spending priorities:
 The OC of the government spending of 10 billion Tshs
on National Health Service might be that
 10 Tshs billion less is available for spending on
education
 or the transport network.

 Scarce farming land:

 The OC of using arable farmland to produce wheat is
that
 the land cannot be used in the production of potatoes.

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3. Scarcity & Choice and Opportunity Cost

 How does a problem of making choice arise?

1) Human wants are unlimited.
 Human wants, desires and needs are endless
(people always want something more).

2) Resources are scarce

 Resources to satisfy people’s wants are scarce
and limited.
Note: Because wants are unlimited but resources are finite,
choice is an unavoidable issue in economics.

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 4. Economic Resources
 Economic Resources - also called Inputs or
Factors of Production (FOP)
 are anything that can be used to produce an
economic good.
 Economists consider all inputs: natural,
human and manufactured.

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 4. Economic Resources
Specifically, we distinguish 4 categories of
inputs.
1) Land –
 Natural Resources (water, sunshine, air, mineral
deposits, etc.)
2) Labor –
 Human resources - all the capabilities (mental
and physical) and skills of humans.

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 4. Economic Resources
3) Capital –
 Physical capital: manufactured resources used
to produce other goods.
 NOTE: Capital is Not Money. In this course,
capital only refers to “goods that are used to
produce other goods.”
4) Entrepreneurship –
 Distinct from labor, it is the special ability to
undertake risk and organize a business.

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4. Economic Resources
A good –
 Anything that satisfies a human want, thereby
increasing happiness or satisfaction.
 Thus a good is any good or any service such as
clothing, food, car; service and haircut, bus ride.

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 Economic good -
 Any good that is scarce.
 A scarce good
 is a good where the quantity demanded exceeds the
amount available at a zero price.
 Positive price for the good  scarce good.
 A free good
 means everyone can enjoy as much as they want at a
zero price. Example: Air.

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5. Production Possibility Frontier
(PPF)

Also called Production Possibility Curve

(PPC), is a curve which shows
 the combinations of two goods and/ or services
that can be produced by using all of the
available resources efficiently.

 Locus of point showing the combinations of

outputs that firms can produce when inputs are
allocated efficiently among them

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5. Production Possibility Frontier (PPF)

Assumptions:
• 2 Firms/ producers (A and B);
• 2 inputs – Labour (L) and Capital (K)
• Fixed quantity of input; and
• 2 outputs (Goods) –
• Agricultural good (X) and
• Manufactured good and (Y)
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 PPF

Any point on PPC Point K means there are

shows efficient unemployed resources
allocation of i.e. the economy uses
resources. resources inefficiently
Resources are
fully utilized

Point J is unattainable because it lies beyond the PPF. A country would

require an increase in factor resources, or an improvement in technology.

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Trade offs and opportunity costs can be illustrated
using a PPF

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Trade offs and opportunity costs can be illustrated using a PPF

• increase in output of AG
from 60 to 80 (from point
A to B on the PPF),
• Requires the reduction of
resources away from
manufactured goods.
• Thus, the production of
MG will have to fall from
50 to 40,
• meaning there is an
opportunity cost of 10
manufactured goods.

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 The shape of the
PPF shows the
opportunity cost of
switching resources

i.e. we have to give

up more of Good 1
(MG)

to achieve gains
in the output of
good 2 (AG)

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 PPF Cont…….
 The production possibility frontier will shift when:
 There are improvements in productivity and
efficiency:
perhaps because of the introduction of new technology or
advances in the techniques of production
 Increase in the factor of production
perhaps due to an increase in the size of the workforce or a
rise in the amount of capital equipment available for
businesses

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 THE SUBJECT MATTER OF
ECONOMICS

Modern Economics is now divided into two

major Branches namely:

 microeconomics and

 macroeconomics

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 Review questions (not to be
attempted in seminar classes)
1. What is Economics?
2. What is Microeconomics? How does it differ from
Macroeconomics
3. What are the fundamental economic questions of
any society?
4. ‘Scarcity of resources is the mother of all
economic problems’. Discuss with examples
5. Show the relationship among the following
concepts; scarcity, choice and opportunity cost.

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