MICRO Ppt Chapter One (1)

Chapter One
Introduction:
Basic Concepts in
Economics
1.1.Definition and Scope of Economics
There are two fundamental facts that provide the
foundation for the field of economics: Human or
society’s material wants are unlimited and
Economic resources are scarce or limited in
supply.
Thus, Economics is defined as a social science,
which studies how societies allocate scarce
resources, so as to satisfy society’s wants.
Cont…
B/c economic resources are available in
limited quantity. The problem, therefore, is
finding the best way of allocating these
scarce resources.
The scope of economics is economizing of
resources in the whole sector of the
economy .
1.2.Branches of economics
The two main branches of economics are

microeconomics and macroeconomics.
Microeconomics concerned with individual
markets and small aspects of the economy.
Macroeconomics studies the behavior of
economy, concerned with the aggregate
economy- such as the Gross National Product,
inflation, economics growth, trade etc.
Cont…
 Moreover, macroeconomics is about the
economy in general. But microeconomics is
about smaller and more specific things such as
how families and households spend their money
and how businesses operate.
 Similarity: In both microeconomics and
macroeconomics, the most important tools are
the ideas of demand and supply.
Cont…
 Difference: Microeconomics actually deals with the
aspects like individual demand, individual supply,
individual income, individual employment, individual
savings, and individual investment.
 Macro-economics, on the other hand, is a study of broad
economic events that are largely beyond the control of
individual decision makers and yet affect nearly all
firms, households and other institutions in the economy.
1.3. Basic Economic Concepts:
Productive Resources, Scarcity, Choice and
Opportunity Cost
 The quantity of factors of production (Labor, Capital,
Entrepreneurship, and Land) and the goods and services they help
produce is not infinite.
 The existing resources are inadequate to satisfy the unlimited
desires of people. wants are insatiable, because no matter how
much people have, they always want more of them. Since not all
wants can be satisfied, individuals have to pick and choose
among the possibilities open to them.
Cont…
 Scarcity forces individuals to economize on their use of resources. Every
decision to produce or to consume something means that we must forego
producing or consuming something else.
 The cost of engaging in certain activity, say, going to cinema, includes
cost of the ticket and the value of what is given up in order to participate
in that activity.
 The time spent watching movie could have been spent in other activities,
such as work.
 You are therefore giving up the opportunity of working in order to watch
movie. The value of this foregone opportunity is called opportunity cost.
Cont…
 Definition: opportunity cost is the value of the next best
opportunity given up in order to enjoy a particular good or
service.
 Example: Suppose a person earns hourly wage of Birr 20 had he
decided to work rather than go to the cinema.
 For the individual, the opportunity cost of enjoying a 1 hour and
45 minutes movie is Birr 35.
Absolute and Comparative Advantage
Absolute Advantage
 The producer that requires a smaller quantity of inputs
to produce a good is said to be have an absolute
advantage.
 Example; let’s take two countries (Country1
&country2), which are in the manufacturing of cars.
 Assuming country 1 produces 3 cars per hour with 10
employees and country 2 produces 5 cars with 10
employees.
Cont…
Countries Production of cars/hour No of employees
Country1 3 10
country2 5 10
So in this case country2has an absolute advantage over country1 as

country2 can produce a number of cars per hour than country 1with
the same numbers of employees.
Cont…
Comparative Advantage
 Comparative advantage refers to the ability of a party to produce
a particular good or service at a lower opportunity cost than
another.
 Example;
Yield per hectare

Region 1 Region 2
Maize 100 60
Barley 40 30
Cont…
 Opportunity cost of producing maize for Region 1
40/100= 0.4. This means to increase the production of maize by one

qt 0.4 qt of barley has to be given up.
 Opportunity cost of producing maize for Region 2
30/60= 0.5. This means to increase the production of maize by one

qt 0.5 qt of barley has to be given up.
 Therefor region 1 has a comparative advantage for maize
production. B/c the cost of production of maize for region 1 is
less than the opportunity cost of producing maize for Region 2.
Cont…
 Opportunity cost of producing barley for Region 1
100/40= 2.5. This means to increase the production of barley by one qt

2.5 qt of maize has to be given up.
 Opportunity cost of producing barley for Region 2
60/30= 2. This means to increase the production of barley by one qt 2qt

of maize has to be given up.
 Therefor region 2 has a comparative advantage for barley
production. B/c the opportunity cost of production of barley for
region2 is less than the opportunity cost of producing barley for
Region 1.
Production Possibility Curve
 A production possibility curve(PPC) is a curve

showing all the possible combinations of two
commodities which can be produced in a country
with its given resources .
 To see the production possibilities open to a firm,
consider the choice between the production of
food and clothing.
Cont…
 It is possible to increase the production of both only if

there are some unused resources. That is, if there is
some unemployed labor, unused land, idle capital etc.,
the production of both food and clothing could be
increased.
 But if factors of production are fully employed, it is not
possible to have more of both.
 Assuming that factors of production are fully
employed, there are only two goods food and clothing.
Cont…
 There are three regions in the figure.
 If resources are fully employed, the firm will be able to produce
combinations of food and clothing on the PPC such as point a.
 If there are some unused resources (if there is underutilization)
the firm will produce combinations to the left of the PPC such
points like b.
 Production above the PPC at points like c is impossible for any
given quantity of factors of production, and therefore is called
unattainable region.
 For any given quantity of factors of production, the
attainable region of production is that on and below the
PPC.
 The production possibility curve illustrates three
concepts: scarcity, choice, and opportunity cost.
 Scarcity is indicated by the unattainable combinations
above the PPC;
 choice, by the need to choose among the alternative
attainable points along the PPC; and opportunity cost,
by the negative slope of the PPC.
Cont…
1.5. Economic Systems
 To solve the basic economic problem, every society must answer these
three basic questions:
A) What to produce?
 Since resources are limited, the economic system cannot produce all
types of goods and services.
 Even any particular good or service cannot be produced in an infinitely
large quantity. Only finite amounts of a limited number of goods and
services can be produced.
 Therefore, there arises this decision problem. The economy must decide
which goods and services to produce and which goods and services to
exclude from production.
Cont…
2)How to produce?
 It describes a particular way of producing different goods and
services (technique of production).
 A particular quantity of a particular good or service can be
produced in many different ways.
 The economy must choose a particular way of producing the
specified amount of the good. Moreover, this must be done for
each of the different goods and services that the economy wants
to produce.
Cont…
3)For whom to produce?

 It focuses on the distribution of goods and services that the
economy produces.
 After the commodities have been produced, there remains the
task of deciding how they will be distributed.
 Who will get (to consume) the produced commodities? That will,
obviously, be used to satisfy human wants.
Cont…
 An economic system is the set of rules that define how an
economy’s resources are to be owned and how decisions about
their use are to be made.
 Economic systems differ in terms of how they answer the
fundamental economic questions.
 There are three types of economic system: Namely, command
economy, free market economy and mixed economy.
Cont…
Command Economy
 In a command economy, governmental planning groups make the
basic economic decisions.
 They determine such things as which goods and services to
produce, their prices, and wage rates.
 The government will decide what is made, how it is made, how
much is made and how distribution takes place.
 Price levels are not determined by the forces of supply and
demand but are fixed by the government.
Cont…
Free Market Economy
 It is an economic system where government interference is not
found. In a market economy, economic decisions are guided by
the changes in prices that occur as individual buyers and sellers
interact in the market place.
Mixed Economy:
 An economic system which contains elements of both free
market and command system. There are no economies in the
world which are entirely „market‟ or planned, all will contain
elements of both systems.

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Chapter One

The two main branches of economics are

Countries Production of cars/hour No of employees

So in this case country2has an absolute advantage over country1 as

Yield per hectare

 Opportunity cost of producing maize for Region 1

40/100= 0.4. This means to increase the production of maize by one

30/60= 0.5. This means to increase the production of maize by one

100/40= 2.5. This means to increase the production of barley by one qt

60/30= 2. This means to increase the production of barley by one qt 2qt

 A production possibility curve(PPC) is a curve

 It is possible to increase the production of both only if

3)For whom to produce?

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