Principles of Microeconomics: ECO 101

The Central Concepts of Economics

Saima Alam Samantha
Definition of Economics
Economics is the study of how societies use scarce
resources to produce valuable goods and services and
distribute them among different individuals .

Scarcity and Efficiency: The Twin Themes of Economics

If we think about the definition, we find two key ideas that run through all of the
economics: that goods are scarce and that society must use its resources
efficiently.
Indeed, the concern of economics will not go away because of the fact of scarcity
and the desire for efficiency.
Definition of Economics
Scarcity
Our world is a world of scarcity and full of economic goods.

A situation of scarcity is one in which goods are limited relative to

desires.

If we add up all the wants, we will find that there are simply not
enough goods and services to satisfy even a small fraction of
everyone’s consumption desire.

That is there is unlimited wants.

Definition of Economics
Scarcity Contd.
If we can consider a world without scarcity, there will be infinite
quantities of every good could be produced or human desires were fully
satisfied.

In that case all goods would be free, like sand in the desert. All prices
would be zero, and markets would be unnecessary.

Indeed, without the presence of scarcity economics would no longer

be a useful subject.
Definition of Economics
Efficiency
Given unlimited wants, it is important that an economy make the best use of its
limited resources. That brings us to the important notion of efficiency.

Efficiency denotes the most effective use of a society’s resources in satisfying

people’s wants and needs.

Economic efficiency requires that an economy produce the highest

combination of quantity and quality of goods and services given its technology
and scarce resources.
An economy is producing efficiently when no individual’s economic welfare
can be improved unless someone else is made worse off.
Definition of Economics
The essence of economics is to acknowledge the reality of scarcity
and then figure out how to organize society in a way which
produces the most efficient use of resources using scientific
methods and tools.

Therefore, economics is the social science that studies the choices

that individuals, businesses, governments, and entire societies make
as they cope with scarcity and the incentives that influence and
reconcile those choices.
Microeconomics and Macroeconomics
Economics is today divided into two major subfields: Microeconomics and
Macroeconomics.

Microeconomics is the study of the choices that individuals and businesses

make, the way these choices interact in markets, and the influence of
governments.
This includes the theory of

Consumer behavior Factor pricing

Production and cost The most efficient allocation of output
and factors of production (called welfare
Commodity pricing
economics)
Microeconomics and Macroeconomics
Macroeconomics is the study of the performance of the national economy and
the global economy.

Basic macroeconomic topics are

Analyze the behavior of national aggregates (national income, aggregate

consumption, savings, investment, total employment, the general price level and
country’s balance of payment)
How these variables interact with each other and determine national output.
The consequences of international trade and other economic phenomena
constitutes the major themes of macroeconomics.
Positive and Normative Economics

As social scientists, economists seek to discover how the economic world works. In
pursuit of this goal, like all scientists, economists distinguish between
positive and normative statements.

A positive statement is about what is. It says what is currently believed about the
way the world operates.

A positive statement might be right or wrong, but we can test it by checking it

against the facts.
Positive and Normative Economics

“Our planet is warming because of the amount of coal that we’re burning” is a
positive statement.

We can test whether it is right or wrong.

A central task of economists is to test positive statements about how the

economic world works and to weed out those that are wrong.
Positive and Normative Economics
Normative Statements : A normative statement is about what ought to be.

A normative statement is a value judgment or personal opinion with which

others may disagree. Policy goals are normative statements.

For example, “We ought to cut our use of coal by 50 percent” is a normative
policy statement.

You may agree or disagree with it, but you can’t test it. It doesn’t assert a fact
that can be checked
Positive and Normative Economics
Example: Positive Economics

• If the government pay for healthcare, it will incur state costs.

• Raising the price of cigarettes leads people to smoke less.

Example: Normative Economics

•The government should pay for healthcare.

•The government should raise the tax on cigarettes to discourage people from
smoking.
Three Problems of Economic Organization

Goods and services are the objects that people value and produce to satisfy
human wants.

Goods are physical objects such as cell phones and automobiles.

Services are tasks performed for people such as cell-phone service and auto-
repair service.

Every society must have a way of determining what commodities are produced,
how these goods are made, and for whom they are produced.
Three Problems of Economic Organization

Indeed, these three fundamental questions of economic organization – what,

how and for whom – are crucial today as they were at dawn of human
civilization.

What commodities are produced and in what quantities? A society must

determine how much of each of the many possible goods and services it will
make and when they will be produced.

Will we produce pizzas or shirts today? A few high-quality shirts or many

cheap shirts?
Three Problems of Economic Organization

Will we use scarce resources to produce many consumption goods (like pizzas)?

Or will we produce fewer consumption goods and more investment goods (like
pizza-making machines), which will boost production and consumption
tomorrow?

How are goods produced? A society must determine who will do the
production, with what resources, and what production techniques the will use.

Who farms and who teaches? Is electricity generated from oil from coal, or
from sun? Will factories be run by people or robots?
Three Problems of Economic Organization

For whom are goods produced?

Who gets to eat the fruit of economic activity?

Is the distribution of income and wealth fair and equitable?
How national product divided among different households?
Are many people poor and a few rich?
Do high incomes go to teachers or athletes or autoworkers or venture
capitalists?
Will society provide minimal consumption to the poor, or must people work if
they are to eat?
Society’s Technological Possibilities

Each economy has a stock of limited resources. In deciding what and how
things should be produced, the economy is in reality deciding how to allocate
its resources among the thousands of different possible commodities and
services.

That is to answer these three questions, every society must make choices about
the economy’s inputs and outputs.
Society’s Technological Possibilities

Inputs are commodities or services that are used to produce goods and
services.
An economy uses its technology to combine inputs to produce outputs.

Output are the various useful goods or services that result from the production
process and are either consumed or employed in further production.
Society’s Technological Possibilities
Inputs are commodities or services that are used to produce goods and services.
An economy uses its technology to combine inputs to produce outputs.

Output are the various useful goods or services that result from the production
process and are either consumed or employed in further production.

Another term for inputs is factors of production. These can be classified into
three broad categories: land, labor, and capital.
Society’s Technological Possibilities
Land – or, more generally, natural resources – represents the gift of nature to our
societies. (land, space, water, minerals, forest, climate, we jointly call them “land”).

Labor consists of human time spent in production. This includes man-power, its
energy, talent, professional skills, and innovative ability and organizational skills.

Capital resources form durable goods of an economy, produced in order to

produce yet other goods. This includes machinery, equipments, tools, technology
and building.
Te accumulation of specialized capital goods is essential to the task of economic
development.