Introduction to Microeconomics

(ECON 101)

Fall 2017

Wokia Kumase
Case Study
Assume that you have a daily income of $20 to spend on the following
items. Considering your personal preferences how are you going to
allocate your income to obtain maximum satisfaction.

ITEM PRICE
Coffee 2
Beer 5
Muffin 3
Movie 10
Burger 5
Hot dog 8
Restaurant 20
 All economic questions arise because we want more than we
can get.
The source of all economic problems is scarcity

Because we face scarcity, we must make choices.

o The choices we make depend on the incentives we face.

An incentive is a reward that encourages an action or a penalty that

discourages an action.

Economics is the social science that deals with the allocation of

limited resources to satisfy unlimited human wants.
Microeconomics: focuses on the choices that individuals and
businesses make
example: How will a change in price of beer affect your demand?

Macroeconomics: focus on the choices and performance of the national

economy aggregate values
example: How will a tax increase affect economic growth?
 Resources required for the production of goods/services
Factors of Production (FOP) are limited in supply.

Land: also includes natural resources.

Labour: physical and intellectual services of people.
Capital: production plant and equipment used in production.
Entrepreneurship: The organizer of land, labour and capital

Return to Factors of production

Land (rent), Labour (wages), Capital (interest), entrepreneur (profit)

Scarcity of FOP means that we face constrained choices about goods we can
produce and consume.

Agents of observation in an economic system can be simplified into two groups

(Household and Firms)
 Economic Cycle

HH expenditure

goods/services
Households
Firms
factors of production

returns FOP

HH provide FOP and satisfy their desires through consumption by

using the returns from FOP to purchase goods/services provided by
firms.
The firms have a demand for FOP which they need for the production
of goods/services.
 The economic cycle raises three important questions: Allocation,
Distribution, Coordination
1. Allocation:
- How can we efficiently use the FOP?
- What should be produced?

2. Distribution:
- For whom?
- How are the produced goods/services to be distributed between the HHs? (equity)
- How are the returns from the FOP to be distributed to the owners of the FOP?

3. Coordination:
- Self-interest versus Social interest (equity vs efficiency)

How can the consumption plan of all HH be coordinated so that they maximise
utility from the goods available.
Should the production plan of all firms be coordinated to enable an efficient use
of FOP
Is a coordination of the production and consumption plan required so that supply
meets demand?
Solution:
Planned versus Market economy
 The economic way of thinking
A choice is a trade-off
You can think about every choice as a tradeoffan exchangegiving up one
thing to get something else.
Whatever you choose, you could have chosen something else. Your choice is a
tradeoff.

Making a rational choice

A rational choice is one that compares costs and benefits and achieves the
greatest benefit over cost for the person making the choice.
The idea of rational choice provides an answer to the first question: What goods
and services will be produced and in what quantities?
The answer is: Those that people rationally choose to buy!

Benefit what you gain

The benefit of something is the gain or pleasure that it brings and is determined
by preferences
Preferences are what a person likes and dislikes and the intensity of those
feelings.
 Cost What you must give up
The opportunity cost of something is the highest-valued alternative that must be
given up to get it.
Opportunity cost has two components:
1. The things you cant afford to buy if you purchase for example a concert ticket.
2. The things you cant do with your time if you go to the concert.

How much choosing at the margin

The choice is not all or nothing, but you must decide how many minutes to allocate
to each activity.
To make this decision, you compare the benefit of a little bit more study time with its
costyou make your choice at the margin.
The benefit from pursuing an incremental increase in an activity is its marginal
benefit.
The opportunity cost of pursuing an incremental increase in an activity is its
marginal cost.

Choices respond to incentives

A change in marginal cost or a change in marginal benefit changes the incentives
that we face and leads us to change our choice.
The central idea of economics is that we can predict how choices will change by
looking at changes in incentives.
Economist as social scientist

Normative statements merely reflects peoples values.

- What ought to be? And cannot be tested
e.g. Politicians view on abortion/capital punishment

Positive statements attempt to explain how an economic system works

or to predict what will happen.
- what has/is/will .
-Positve statements can be statistically evaluated.
 Identifying cause and effect
Economic Models are used to simplify and analyse complex
world situations.
Exogenous Variable: is a variable whose value is taken as a
given in a model.
Endogenous Variable: is a variable whose value is determined
within the model.

Economist as Policy advisers

 Review graphing data

Appendix: pages15 - 30