Microeconomics

Dr. Ahmed Said Ahmed

Lecturer of Public Finance & Microeconomics
Alexandria University – Faculty of Commerce

Lecture (1)

October 17th, 2020

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 Chapter (2)
The economic problem: scarcity and choice

Economics and the Economic Problem

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 Definition of economics
• Is a social science concerned with how
individuals & society use or allocate their
scarce (limited) resources to satisfy their
unlimited human wants (needs).
• We distinguish between:
1- Resources (inputs).
2- Human wants (needs).
3- Production.
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 1- Resources (inputs):
• Resources are factors of production used to
produce goods & services.
• Resources consist of:
a) Natural resources: such as land & raw
materials (oil, minerals).
b) Human resources: labor both mental (doctors &
lawyers) and physical (workers).
c) Capital resources: such as factories & machines
used to produce goods & services.
d) Entrepreneurs: people who create businesses.
They organize the factors of production.
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 2- Human wants (needs):

• Human wants (needs): consists of all

goods (tangible) & services (intangible)
that people would like to consume.

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 3- Production:

• Production: is the process of

transforming inputs into outputs.
• Any economic system faces 3 questions
about production:
• What to produce & by what quantities?
• How to produce?
• How the production is distributed?
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 Q1: true or false with correcting the false sentences:

1) Inputs in production processes are called resources

(√)
2) Resources are used to create goods and services (√).
3) Outputs include goods but not services (Ⅹ)→ Outputs
include goods and services.

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 Microeconomics vs Macroeconomics

Microeconomics Macroeconomics
Is the study of individual Is the study of economics
economic units aggregates (the economy as
a whole)
Such as: consumer, such as: National income,
producer, market of a Inflation, Unemployment,
certain good. Economic growth, GDP.

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 Q2: choose the right answer:

1- microeconomics deals with:

a. The working of the entire economy or large sectors of it.
b. Economic growth.
c. Individual decision makers in the economy
d. Gross domestic product.

2- which of the following is not a microeconomic issue:

a. How a rise in price of sugar affects the market of sodas.
b. How federal government budget deficit affects
interest rates.
c. What determines the amount a firm will produce.
d. The cause of a decline in the price of peanut butter.

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 The economic problem:
• Economic problem has 3 sides:
1) Relative scarcity.
2) choice.
3) Opportunity cost.

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1) Relative scarcity:
• It means that resources are not enough to satisfy
all human wants.
• All societies (poor & rich) face the problem of
scarcity but at different degrees.
• scarcity requires that people must make a choice.

2) Choice:
As resources are scarce, all societies face the
problem of deciding what to produce and the
quantity to be produced.

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3) Opportunity cost:
Choice implies the existence of opportunity cost.

• The Opportunity cost of obtaining a unit of a

certain good is measured by the number of the
sacrificed units from another good.
• The opp. Cost is the best alternative you give up
when you make any choice decision.

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Opportunity cost of (x) =

𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒈𝒊𝒗𝒆𝒏 𝒖𝒑 𝒖𝒏𝒊𝒕𝒔 𝒇𝒓𝒐𝒎 (𝒚) ∆𝒚

= =
𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒓𝒆𝒄𝒊𝒆𝒗𝒆𝒅 𝒖𝒏𝒊𝒕𝒔 𝒇𝒓𝒐𝒎 (𝒙) ∆𝒙

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 example:

• if you are given the following table:

Good (x) Good (y)

10 30
12 20

1. Calculate the opportunity cost of good (x) and

explain its meaning.
2. Calculate the opportunity cost of good (y) and
explain its meaning.
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 Answer

1- the opportunity cost of good (x) = 10 = 5

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It means that: to increase (x) by 1 unit we have
to sacrifice 5 units from (y).
2- the opportunity cost of (y) = 2 = 0.2
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It means that: to increase (y) by 1 unit we have
to sacrifice 0.2 units from (x).
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 Q3: choose the right answer:

1- scarcity is:
a. Our inability to satisfy all our wants.
b. A situation that exists during economic
recession but not during economic booms.
c. Eliminated by choices.
d. An economic problem only for poor people.

2- scarcity requires that people must:

a- cooperate b- compete
c- trade d- make a choice.
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 Q4: true or false with giving reasons:
1) Relative scarcity means that resources are limited (false)
→ Relative scarcity means that resources are not enough to
satisfy all human wants.
2) The problem of scarcity is a problem that exists in poor (or
developing) countries only (false)
→ The problem of scarcity exists in all countries poor
(developing) & rich (developed)
3) The problem of scarcity is a problem that exists in the past
only (false)
→ The problem of scarcity will never be solved and it will exists
in every time, in the past or in the present or even in the
future.
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4) Scarcity is the fundamental problem of the economy (√)
5) Economics studies the logic of choices made from among
available possibilities (√).
6) Opportunity cost is the value of the next best alternative
that is given up (√).
7) Although finished goods are scarce, the inputs to produce
them are not scarce (Ⅹ) both of finished goods and inputs are
scarce.
8) The problem of scarcity is a problem that existed in the
past only (Ⅹ) .
9) Individuals face scarcity, whole society do not (Ⅹ).
10) All actions and purchases, even those of wealthy people,
involve a sacrifice (√).
11) Rational decision making must always be based on the
concept of opportunity cost(√) .
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