University of Balamand

Faculty of Business Management

Survey of Economics

Microeconomics: Introductory Notes

 Economics is the study of how societies use productive resources which are scarce to
produce goods and distribute them among consumers who have infinite needs.

 Scarcity and unlimited wants  economics is the science of choice.

 The law of scarcity states that all economics goods are scarce, they are not free, we
must choose among them, hence not all our needs can be satisfied.

 Because of scarcity, we have the 3 basic economic questions:

- What to produce? (what and how much)
- How to produce?
- For whom to produce?
How are these questions answered by different countries constitutes the economic
problem which is what we will study in this course.

 Economic Systems:
there are different ways of organizing an economy and solving the economic
problem. The 2 extremes are:

 Command Economy – the most extreme being Communism:

The government makes all the decisions of what, how and for whom to
produce. Consumers don’t have a say in anything.

What: the government decides how much cars and shoes to produce.

How: the government assigns workers and other resources to these industries
to implement the decisions.

For whom: the communist ideal is “from each according to his ability, to each
according to his need.”

 Pure Capitalism – Market Economy (System of market and prices):

The market will determine:

What: according to the need of consumers. The mix of output is dictated by

the need and willingness of consumers to buy – suppliers will have to follow
the signals of these consumers to make a profit.  in market economics we
have consumer sovereignty.

How: according to what is available and the producers have to find the
optimal method of producing goods and services using minimum resources to
get maximum output  they need to be efficient to make profits.
University of Balamand
Faculty of Business Management
Survey of Economics

For whom: depending on the living standards of consumers.

1- Income
2- Wealth (previous incomes, inheritance…)

It’s a laissez-faire economy where everything is solved through “the invisible

hand of the market” with no government interventions. (Adam Smith)

In our modern economies, we don’t have a pure economic system – we have mixed
economies = laissez-faire + government interference (taxation, anti-trust laws,
environmental regulations…)

 Micro vs Macro:

 Micro: much older than Macro. Founded by Adam Smith in the 18th century
with his book “The Wealth of Nations” (1776). Micro deals with the behavior
of individual entities, such as markets for given goods, firms, households.

 Macro: came much later in 1936 (mainly because of the Wall-Street crash)
with John Keynes when he published the “General Theory of Employment,
Interest and Money.” Macro is concerned with the overall performance of the
economy.

 Positive / Normative:

 Positive economics: based on facts, statistics… deals with “what is, was or will
be.” It’s like a statement of fact – you don’t argue or give your opinion.
Example: the VAT in Lebanon is 10%.

 Normative economics: deals with “what should be.” – involves ethics,

opinions and value judgements.
Example: should welfare be eliminated?  no real answers are given or
settled by science.

Micro fits more in positive economics.

Macro fits more in normative economics.  this is where economists always argue.