Economics --- Microeconomics
Ch.1 Basic Economic Concepts
Ch.1.1 Nature of economics
Economics is a social science that studies, analyses and predicts human behaviour.
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Examines how individuals, firms, societies make decisions on how to allocate scarce resources to satisfy their
wants under constraints (constrained maximisation)
It is a study of how people make choices under the condition of scarcity
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Type
Microeconomics
Analyses ___
Behaviours of individuals and firms
Macroeconomics
Operation of the economy as a whole
Explain and predict
How individuals and firms make consumptions and
production decisions
1. How societies make economic decisions
2. How these decisions affect individuals and firms
Ch.1.2 Wants, Scarcity and Choice
1. Wants are human desires.
è Can be tangible or intangible
- Human wants: Unlimited
2. Scarcity refers to the situation in which the resources available are not enough to satisfy all people’s wants.
- Is the sources of all economic problems
- Human wants (Unlimited) > Resources (Limited)
- Relative concept
3. Choice
- Need to choose which wants to satisfy and which wants to give up
Ch.1.3 Relationship between Scarcity, Competition and Discrimination
Scarcity à Competition à Discrimination
Compete on the basis of
Price
Price competition
Non-price competition
Factors other than price
- Age, Sex, Race, Qualification, Friendship
People who ___ can get
Are willing and able to pay the market
price
Meet the criteria
People are said to be discriminated against by the rules of competition.
Ch.1.4 Opportunity Cost
1. The opportunity cost of a choice is the value of the highest-valued option forgone.
- Based on the order of preference
Chosen option
"
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2.
3.
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Will the change in the value of ___ affect the opportunity cost?
Highest-valued option forgone
Other option forgone
$
✔
$ (if affect order of preference)
✔
Full cost = Monetary cost (explicit cost) + Non-monetary cost (implicit cost)
Time cost can be expressed in terms of the income forgone
Past Expenditure is not a cost.
Does NOT affect current decision making / opportunity cost
" (if not)
✖
Ch.1.5 Relationship between Interest and Opportunity Cost
1. Interest is the cost of earlier availability of resources. It is the price or cost paid by the borrower for obtaining
goods or resources earlier as well as the premium and compensation received by the lender for deferring
consumption of goods or resources.
- Exist in both barter economies and monetary economies
Borrowers
Have a __ degree of positive time preference
Higher
Lenders
Lower
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Characteristics
Keener to consume at present
Willing to pay now
Willing to save
Willing to defer current consumption in return
of a certain amount of compensation
2. Interest ↑ à Interest Rate ↑ à Cost of current consumption ↑ à Current consumption ↓ à Saving ↑
- Interest is the opportunity cost of current consumption.
Ch.1.6 Free Goods and Economic Goods
Goods: ○
1 Tangible goods and ○
2 Intangible services
1. Free goods refer to those goods that people do not prefer more of as the quantity available is sufficient to
satisfy all human wants.
2. Economic goods refer to those goods that people prefer more of as the quantity available is not sufficient to
satisfy all human wants.
3. Some goods can be regarded as free goods in some contexts and economic goods in other contexts.
4. Goods that are free of charge are not necessarily free goods.
Ch.1.7 Circular Flow of Economic Activities
Firm is the basic unit of production.
Household is the basic unit of consumption.
Product market
Factor market
Market for exchanging
Final goods and services
Factors of production
Real flow
Money flow
Circular flow of
Goods and services
Money
Ch.1.8 Positive Statements and Normative Statements
Positive statements are statements that describes what is, with no value judgement. They are refutable by facts.
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Can be tested against objective facts
Normative statements are statements that describe what ought to be. They involve value judgement on what is
desirable or the best. They are not refutable by facts.
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Keywords: Should, Ought to, The best, Good