BASIC
MICROECONOMICS
WHAT IS ECONOMICS ?
Economics is the study of how
society manages its resources and is
concerned with the efficient and
effective allocation of the said
resources.
 Efficiency means attaining maximum output with the least possible
input.
 Input does not only refer to money, but it may also refer to other
variables, such as raw materials, time, and effort, that a firm needs
to produce a certain commodity.
 rent is for land
 wages for the labor
 interest for capital
 profit for entrepreneurship.
 Output, meanwhile, is the result or the final product in a
production.
 Effectiveness can be attained by getting the desired outcome.
Scarcity
-It is a condition where wants and
needs of people are not satisfied
because of limited resources.
Principle of Opportunity-Cost Economics
-
It studies the logic of how people can make optimal
decisions from among competing alternative.
-
With limited resources, a decision to have more of
one thing is simultaneously a decision to have less
of something else. Hence, the relevant cost of any
decision is its opportunity cost. Optimal decision
making must be based on opportunity cost
calculation.
Opportunity Cost
The value of the next best alternative that is given
up.
- Goods that have high opportunity cost will also
have high money cost and vice versa.
-
Production Possibilities Frontier
 represents the points at which an economy
is most efficiently producing its goods and
services, limiting the economy to two
commodities.
Production Possibilities Frontier
Bushels
of
Bushels
Soybeans of Wheat
A 40,000
0
B 30,000
38,000
C 20,000
52,000
D 10,000
60,000
E
0
65,000
Bushels of
Soybeans
Opportunity Bushels of Opportunity
Cost
Wheat
Cost
A
40,000
0
B
30,000
-10,000
38,000
38,000
C
20,000
-20,000
52,000
14,000
D
10,000
-30,000
60,000
8,000
E
0
65,000
Principle of Increasing Cost
 States that as the production of a good
expands, the opportunity cost of producing
another unit generally increases.
A
B
C
D
E
F
BLACK
SHOES
50
40
30
20
10
0
BROWN
SHOES
0
10
20
30
40
50
Three Coordination Task of Economy
1. Decision-making during scarcity
2. Rational behavior
3. Marginal analysis
Adam Smith
-Founder of modern economics, first
marveled at how division of labor raised
efficiency and productivity when he
visited a pin factory.
Division of Labor
- means breaking up a task into a
number of smaller, more specialized
tasks so that each worker can become
more adept at a particular job.
Absolute Advantage
 the ability to produce more or better goods or
services than others with the same or fewer
inputs.
Weekly Production Possibilities for
Kim and Matt
Kim
Matt
Coconuts
32
12
Fish
16
12
Comparative Advantage
 is an economy's ability to produce a
particular good or service at a lower
opportunity cost than its trading partners.
COCONUT
FISH
KIM
32
16
MATT
12
12
KIM OPPORTUNITY COST
1 (lb) of Fish= 2(lbs) of Coconut
MATT OPPORTUNITY COST
1 (lb) of Fish= 1(lbs) of Coconut
Comparative Advantage
That’s the graphical depiction of the benefits of
specialization and trade; it allows both people to consume
bundles of goods that they aren’t capable of producing on
their own. This is why economists generally believe that
specialization and trade is a win-win proposition, whether
between individuals or between countries.