Microeconomics Ch 1

8/12/2019 Microeconomics Ch 1

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M i c r o e c o n o m i c

s

Dr. Karim Kobeissi


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Chapter 1: The Core Issues


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Economics, Microeconomics, andMacroeconomics

Economics: economics is the social science that studies howindividuals, frms, and nations make choices on allocating scarce

resources to satisy their unlimited wants Economics distinguishes!etween microeconomics and macroeconomics

- Microeconomics is the !ranch o economics that analy"es the

market !ehavior o individual consumers and frms in an attempt to

understand the decision#making process o frms and households Itis concerned with the interaction !etween individual !uyers andsellers and the actors that in$uence the choices made !y them

- Macroeconomics is the !ranch o economics that studies the

!ehavior o the economy as a whole and not %ust on specifc

companies, !ut entire industries and economies This looks ateconomy#wide phenomena, such as 'ross (ational )roduct *'+)and how it is a-ected !y changes in unemployment, national

income, rate o growth, and price levels


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E c o n o m i c s , T h e . a s i c C o n c e p t s

The si/ !asic concepts in the defnition o economics

are:

1. Economic Agents: )articipants in the economy

such as households, governments and !usiness

frms that engage in speciali"ation, production,

e/change, and consumption

0 Scarce Resources: )roductive resources *also

called actors o production such as land, la!or, and

capital, or which the limited amount availa!le is less


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Choice: .ecause resources are scarce, people

must decide how to use them

2 Specialization: 3gents produce a limited num!er

o things that they can make !etter than others

4 Exchange: .ecause agents produce only a ew

things, to consume other goods they must engage

in trade with other *specialist producers


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5 Economic System: 3n organi"ed way in which a

nation allocates its resources and share out goods

and services in the national community The

im!alance !etween wants and the a!ility to meet

them re6uires an economic system to provide or

orderly allocation o scarce resources In a

capitalist society, people own the productive

resources7 in a socialist economy, the government


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imite! Resources "s #nlimite! $ants

8uman wants *the amounts o goods that

would !e desired i they were ree are

unlimited !ut resources are limited

Thus, %he la& o' scarcity states that

wants always e/ceed society9s a!ility to

meet them Thereore, every society

aces %he Economic (roblem o

somehow choosing &hat to produce,

ho& to produce, and 'or &hom to

i i ! li i !


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imite! Resources "s #nlimite! $ants)con*

%he three basic +uestions in this !ecision are:

1 $hat: hat goods and services should !e

produced;

0 ,o&: hat com!inations o resources should !e

devoted to manuacturing the goods and services

produced;

-or $hom: when goods and services are produced,

who should get them;


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p p o r t u n i t y C o s t

hen we choose to use resources to produce

one thing, we must give up producing

something else with those resources This

trade#o- comes with a cost


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p p o r t u n i t y C o s t ) c o n *

The pportunity Cost o any action is the

loss o the ne/t !est alternative that the

action eliminates

3 -ree pro!uct has "ero opportunity cost!ecause no other product has to !e given

up in order to have more o the ree

product

3 Scarce pro!uct has a positive opportunity

cost, !ecause in order to have more o it

( ! ti ( ibiliti !


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(ro!uction/(ossibilities an!pportunity Cost

(ro!uction possibilities: the various

com!inations o fnal goods and services

that could !e produced in a given time

period with all availa!le resources and

technology

The (ro!uction/(ossibilities Cur0e )((C*

shows all the possi!le com!inations o

output that can !e produced when

resources are used to their ullest


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1 )oints on the rontier,such as *A & B), areattainable by theeconomy and areefcient.

0 )oints !eyond the rontier,such as *C), are notattainable due to scarcityo resources.

)oints within the rontier,such as *D), are attainablebut are inefcient sincethey occur when resources

are either unemployed orincorrectly allocated

(ro!uction/(ossibilities an! pportunityCost )con*


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The +i-erent Com!inations o


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The production#possi!ilitiescurve is conve/ !ecause o

the a& o' 4ncreasing

Costs5 which states that as

more o any product is

produced the opportunity cost

( ! i ( ibili i ! i


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pportunity costs increase since some

'actors o' pro!uction are better suite! topro!ucing one goo! than another. @ore/ample, consider moving rom point A to pointB on the production possibilities rontier. This

requires that resources be switched away romthe production o good and into the productiono !ood ". The #rst resources that are shited arethose that are relatively good at producing "

$and bad at producin! ). %entually, however,resources must !e moved that are not so good atproducing " $and not so bad at producin! ).'ence, since the resources are not as well suitedat producin! ", more must be switched. As aresult, the opportunity cost o producing more "

( ! ti ( ibiliti !


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(ro!uction/(ossibilities an!pportunity Cost

The (ro!uction/(ossibilities Cur0e *))C

illustrates two essential principles:

1* Scarce resources: there is a limit to the

amount we can produce in a given time with

availa!le resources and technology

6* pportunity costs:we can o!tain additional6uantities o one o the goods only !y reducing

production o another good


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EAciency and the )roduction#)ossi!ilities Curve

E7ciency:ma/imum output o a goodrom the resources used in production

Every point on the 'rontier o' thepro!uction possibilities cur0eis a

point o eAciency


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Economic 'rowth

Economic gro&th:an increase in output7an e/pansion o production possi!ilities Baises our standard o living


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Economic 'rowth

8

PPC1

PPC2

9oo!

9oo!

;

Either increase resource inputsorimprove technology, or !oth *.

to C ,$ to pro!uce=(ro?tably>7 produce an

accepta!le good or service while keepingproduction costs low

-R $,M to pro!uce= )roduce orthose who are !oth &illing an! able topay>or it

Th e M a r ke t M e c h a n i s m


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The 'overnment +irectives

3t its e/treme, government could dictateanswers to all three 6uestions


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3 Mi/ture o .oth

The market is highly eAcient in productiono wanted goods and services

The government acts as a maintainer o

!alance in the economy Makes sure the market does not go to e/cesses

either in underproduction or overproduction

Begulates production to ensure that goods and

services are sae 3cts to redress e/cessive ine6ualities *provide

support or groups who don9t get products inthe market system


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Market and 'overnment @ailure

I the market does not produce the mi/ ogoods that society desires, market ailureis said to occur This provides an openingor government to step in I government can move us closer to the mi/

society desires, the intervention is successul

8owever, government can do theopposite, or impose such high costs thatthe market simply ceases to produce

This is government ailure


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Types o Economic 3nalysis

)ositive analysis in economics ocuses onDwhat is and is !ased on acts @ore/ample: DThe unemployment rate is 1=G

(ormative analysis ocuses on Dwhat should!e and is !ased on opinions and

%udgments @or e/ample: Dtheunemployment rate is too high

Documents

Microeconomics Ch 1