Microeconomics Subject

1. Chapter 1
Introducing Economics
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2. Definition of Economics
The study of how society
chooses to allocate its
scarce resources to the
production of goods and
services in order to satisfy
unlimited wants
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3. Microeconomics vs.
Macroeconomics
• Microeconomics • Macroeconomics
The branch of The branch of
economics that economics that
studies decision- studies decision-
making by a making for the
single individual, economy as a
household, firm, whole
industry, or level
of government
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4. What is
Ceteris Paribus?
A Latin phrase that means
that while certain variables
can change, “all other
things remain unchanged”
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5. BASIC CONCEPTS:
• Scarcity - the fundamental
economic problem that human wants
exceed the availability of time,
goods, and resources.
• Choice – Because individuals
and society can never have everything
they desire, they therefore are forced
to make choices
• Opportunity cost – the second best
alternative foregone for a chosen
option. 5

6. Factors of Production
1. Land Resource - any natural resource
provided by nature
2. Labour - The mental and physical capacity
of workers to produce goods and services
3. Capital - The physical plants, machinery,
and equipment used to produce other
goods
(Financial capital - The money used to
purchase capital)
4. Entrepreneurs - The creative ability of
individuals to seek profits by combining
resources to produce innovative products 6

7. Labor
Labor
Land
Land Capital
Capital
Entrepreneurshiporganizes
Entrepreneurship organizes
resourcesto produce goods
resources to produce goods
andservices
and services
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8. Graph
Graphs provide a means to clearly
show economic relationships in two-
dimensional space. Economic analysis
is often concerned with two variables
confined to the upper right-hand
(northeast) quadrant of the coordinate
number system.
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9. A shift in a curve occurs only
when the ceteris paribus
assumption is relaxed and a third
variable not on either axis of the
graph is allowed to change
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10. Marginal Analysis
- An examination of the
effects of additions to or
subtractions from a
current situation
10

11. Production Possibilities
Curve:
- A curve that shows the
maximum combinations of
two outputs that an
economy can produce,
given its available
resources and technology
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12. Technology:
The body of knowledge
and skills applied to
how goods are
produced
12

13. Production Possibilities Curve
A
Military Goods
Efficient
Unattainable
Inefficient
B
Consumer Goods 13

14. Production Possibilities Curve
• A production possibilities curve
illustrates an economy’s capacity to
produce goods, subject to the constraint
of scarcity.
• The production possibilities curve is a
graph of the maximum possible
combinations of two outputs that can
be produced in a given period of time,
subject to three conditions:
14

15. (1) All resources are fully
employed
(2) The resource base is not
allowed to vary during the time
period.
(3) Technology, which is the
body of knowledge applied to the
production of goods, remains
constant.
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16. Points “inside”, “along” and
“outside” the PPC
• Inefficient production occurs at any
point inside the production possibilities
curve.
• All points along the curve are efficient
points because each point represents a
maximum output possibility.
• All points outside the curve are
unattainable due to scarcity of resources.
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17. The shape of PPC
• PPC is usually concave to the origin
because of the law of increasing opportunity
costs that states that the opportunity cost
increases as the production of an output
expands.
•The explanation for the law of increasing
opportunity costs is that the suitability of
resources declines sharply as greater
amounts are transferred from producing one
output to producing another output.
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18. Economic Growth
• The ability of an economy to
produce greater levels of output,
represented by an outward shift of
its production possibilities curve as
a result of an increase in resources
or an advance in technology
18

19. Increase in Resources
Military Goods
B
A
Consumer Goods 19

20. Technological Advance in
Agriculture Manufacturing Sector
Manufacture 20

21. Balanced
Economic
growth
Increase in
Resources
21

22. Unbalanced
Economic
growth
Technological
advance
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23. Basic Economic Problems
- The fundamental economic questions facing any
economy are What, How, and For Whom to
produce goods.
- The WHAT question asks exactly which goods
are to be produced and in what quantities.
- The HOW question requires society to decide the
resource mix used to produce goods.
-The FOR WHOM problem concerns the division
of output among society’s citizens.
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