Introduction to Microeconomics
ECO1101
By
Michael Ndaferankhande
(Bsoc Econ, M.A. Econ)
Chapter One
Economics: The World
Around You
Definition of Economics and Scarcity of
Resources
• Economists generally define economics as the study of how
individuals and societies use limited resources to satisfy unlimited
wants.
• To see how this concept works, think about your own situation.
• Do you have enough time available for everything that you wish to
do?
• Can you afford every item that you would like to own?
• Economists argue that virtually everyone wants more of something.
Definition
• Even the wealthiest individuals in society do not seem to be exempt
from this phenomenon.
• This problem of limited resources and unlimited wants also applies to
society as a whole.
• Can you think of any societies in which all wants are satisfied?
• Most societies would prefer to have better health care, higher quality
education, less poverty, a cleaner environment, etc.
• Unfortunately, there are not enough resources available to satisfy all
of these goals.
Scarcity of Resources
• This problem affect economic unit at all levels from the household,
firms to government.
• Thus, economists argue that the fundamental economic problem is
scarcity.
• Since there are not enough resources available to satisfy everyone’s
wants, individuals and societies have to choose among available
alternatives.
• An alternative, and equivalent, definition of economics is that
economics is the study of how such choices are made.
Microeconomics vs. Macroeconomics
• Microeconomics involves the study of individual economic agents and
individual markets.
- Study of behaviour of a consumer
- Price of a commodity
- Behaviour of a firm
• Macroeconomics involves the study of economic aggregates.
- Study of price level (inflation), Gross Domestic Product (GDP),
employment, etc
Economic Goods, Free Goods, and Economic
Bad
• Goods are items that satisfy human wants and provide utility
• A good is said to be an economic good (also known as a scarce good)
if the quantity of the good demanded exceeds the quantity supplied
at a zero price.
• In other words, a good is an economic good if people want more of it
than would be available if the good were available for free.
• A product or service which can command a price when sold. A good
with some benefit to society and a degree of scarcity and therefore
an opportunity cost.
Economic goods
• These goods are limited in supply
• The goods command the price. To obtain such goods, one has to pay
any price.
• These are man made
• Scarce resources are used to produce such goods.
• A good is said to be a free good if the quantity of the good supplied
exceeds the quantity demanded at a zero price.
• In other words, a good is a free good if there is more than enough available
for everyone even when the good is free.
• Economists argue that there are relatively few, e.g. air. Good with no
opportunity cost. Do not command a price, are available for free of cost.
• Free gifts of nature and can not be traded.
• An item is said to be an economic bad if people are willing to pay to avoid
the item.
• Examples of economic bad include things like garbage, pollution, and
illness.
Resources and Scarcity
• Goods that are used to produce other goods or services are called
economic resources (and are also known as inputs or factors of
production).
• These resources are often categorized into the following groups:
1. Land,
2. Labor,
3. Capital, and
4. Entrepreneurial ability
Land and Labor
• The category of "land" includes all natural resources.
• These natural resources include the land itself, as well as any
minerals, oil deposits, timber, or water that exists on or below the
ground.
• This category is sometimes described as including only the "free gifts
of nature," those resources that exist independent of human action.
• The labor input consists of the physical and intellectual services
provided by human beings.
Capital and Entrepreneurship
• The resource called "capital" consists of the machinery
and equipment used to produce output.
• Note that the use of the term "capital“ differs from the everyday use
of this term. Stocks, bonds, and other financial assets are not capital
under this definition of the term.
• Entrepreneurial ability refers to the ability to organize production
and bear risks.
Resource Payment
• All these resources attract payment for their use which are the
resource payment associated with each resource is listed in the table
below:
Economic Resource
Resource Payment
Land
Rent
Labour
Wages
Capital
Interest
Entrepreneurship
Profits
Rational Self-interest
• As noted above, scarcity results in the need to choose among
competing alternatives.
• Economists argue that individuals pursue their rational self-interest
when making choices.
• This means that individuals are assumed to select the alternative(s)
that they believe will make them happiest, given the information that
they possess at the time of the decision.
• Note that the term "self-interest" means something quite different
than "selfish.“
• Self-interested people may donate their time to charitable
organizations, give gifts to loved ones, contribute to charities and
engage in other similarly altruistic activities.
• Economists assume, though, that altruistic people select these
actions because they find these activities more enjoyable than
available alternative activities.
Economic Methodology
• Economic discussions may involve both positive and normative analysis.
• Positive analysis involves attempts to describe how the economy
functions. Connects cause & effects, based on tested facts, objective
• Normative economics relies on value judgments to evaluate or
recommend alternative policies. Not based on tested facts, tells what
should be/have been and is subjective.
• Economists rely on the ceteris paribus assumption in constructing models.
• This assumption, translated roughly as "other things constant," allows
economists to simplify reality so that it may be more readily understood.
Graphical Analysis in Economics
• Graphs are extensively used in economic analysis to represent the
relationships that exist among economic variables.
• Two simple types of relationships that may exist are direct and inverse
relationships.
A direct relationship
• A direct relationship is said to exist between two variables X and Y if
an increase in X is always associated with an increase in Y and a
decrease in X is associated with a decrease in Y.
• A graph of such a relationship will be upward sloping, as in the
diagram below.
• A direct relationship may be linear (as in the diagram above), or it
may be nonlinear (as in the diagrams below).
An inverse relationship
• An inverse relationship is said to exist between the variables X and Y
if an increase in X is always associated with a decrease in Y and a
decrease in X is associated with an increase in Y.
• A graph of an inverse relationship will be downward sloping.
• An inverse relationship may also be either linear or nonlinear (as
illustrated below).
∆𝑌
• A linear relationship possesses a constant slope, defined as:
∆𝑋
• If an equation can be written in the form: 𝑌 = 𝑚𝑋 + 𝑏
• m=slope and
• b=y-intercept
• In the equation Y= mX + b
Y is dependent on X which is independent
Y is an endogenous variable where as X is an exogenous variable
• END OF INTRODUCTION