Basic Microeconomics

WHAT IS ECONOMICS? METHODS OF ECONOMICS

Social Science that deals with the proper
allocation of scarce resources to satisfy the
unlimited wants and needs of man.
Needs- essential for human survival
Wants- goods that give more satisfaction
Positive- economic analysis that explains
what happens in the economy and why.
- “What is”
Normative- economic statement that makes
judgement.

WASLOW’S HIERARCHY OF - “What ought to be”

NEEDS SCIENTIFIC METHOD OF

1. Self-actualization ECONOMICS
2. Esteem 1. Data Gathering- obtained through
historical records and interviews of past
3. Love and belonging
performances.
4. Safety needs
2. Economic Analysis- synthesize gathered
5. Physiological needs data.

EXCONOMIC RESOURCES 3. Economic Conclusions- reasoning to

generate conclusions.
AND FACTOR PAYMENT
CATEGORY OF REASONING
Land = Rent
Inductive- particular to general
Labor = Wages
Deductive- general to particular
Capital = Interest
Entrepreneurial skills = Profit TYPES OF ECONOMIC
SYSTEM
2 BRANCHES OF
ECONOMICS 1. Market Economy
2. Command Economy
Microeconomics- deals with the behavior of
individual components 3. Mixed Economy

Macroeconomics- deals with the behavior of 4. Traditional Economy

economy as a whole
Market Economy- most businesses are Shift to the left = decrease in demand
owned and operatewd by individuals in the
Demand Schedule- tabular presentation
free market system.
Demand Function- mathematical
- “Capitalism”
expression
Command Economy- the government exerts
- Qd = a-Bp
control over the allocation and distribution
of goods. Determinants of Demand:
- “Communism” 1. Population
Mixed Economy- free markets co-exist with 2. Price of the goods/services
government intervention, and private
enterprises co-exist with public enterprises. 3. Income of buyers

Traditional Economy- relies on customs, Normal Goods- demand increases as income

history, and time-honored beliefs. rises
Inferior Goods- demand decreases as
BASIC PROBLEMS IN income rises
ECONOMICS 4. Price of related goods/services
“Scarcity” Complementary Goods- goods that go
together
1. What to produce?
Substitute Goods- substitute for a product at
2. How to produce?
lower prices
3. For whom?
5. Tastes or preferences of buyers
DEMAND 6. Consumer expectations
The amount or quantity of a good or service SUPPLY
that consumer wish to purchase at each
conceivable price. Amount or quantity of a good or service that
producers wish to produce at each
Law of Demand- inverse relationship
conceivable price.
between the price and the quantity
demanded. Law of Supply- direct relationship between
the price and quantity supplied.
Price Increases = quantity decreases (vice
versa) Price Increases = quantity increases
Ceteris Paribus- other things equal Demand Curve- graphical representation
Demand Curve- graphical representation - Upward sloping
- Downward sloping Horizontal Axis = quantity supplied
- Shift to the right = increase in demand Vertical Axis = price
Supply Schedule- tabular presentation PRODUCTION POSSIBILITY
Demand Function- mathematical FRONTIER
expression
Graph that shows all the combinations of
- Qs = c+Dp
goods and services that can be produced if
Determinants of Supply: all of society's resources are used efficiently.
1. Number of firms/sellers - Y Axis- quantity of capital goods produced
2. Cost of production - X Axis = quantity of consumer goods
3. Technology TRADE-OFF
4. Expectation for future prices
Any situation where making one choice
5. Government taxes/subsidies means losing something else, usually
forgoing a benefit or opportunity/to get
DEMAND/SUPPLY something that we like.
ANALYSIS - “Top choice”

Income Effect- change in the consumption OPPORTUNITY COST

of goods by consumers based on their
income. The best alternative that we give up when
we decide.
Substitution Effect- consumers replace
cheaper items with more expensive ones - “Second choice"
when their financial conditions change.
SCARCITY
Market Equilibrium- market supply and
demand balance each other and in result, Refers to the limited availability of a
price becomes become stable. resource in comparison to the limitless
wants and needs.
Equilibrium Price- producers are supplying
the exact amount of a good or service
MARGINAL COST
demanded by consumers.
Surplus- supply is greater than demand Change in total production cost that comes
from making or producing one additional
Shortage- demand is greater than supply unit.
Price Floor- minimum price set by the - MC = △C/ △Q
government
Price Ceiling- maximum price set by the
government
UTILITY CONSUMER THEORY
Utility refers to the amount of satisfaction
that a consumer gains from a particular good The study of how people decide to spend
or service. their money based on their individual
preferences and budget constraints.
Total Utility- refers to the complete amount
of satisfaction gained. CONSUMER BEHAVIOR
Util- an imaginary unit of measurement
representing the amount of utility a good Defined as those acts of consumers directly
provides. involved in obtaining, using, and disposing
of economic goods and services, including
Types of Utility:
the decision processes that precede and
1. Form Utility determine these acts.

2. Task Utility Schiffman and Kanuk (1997) define

3. Time Utility consumer behaviour as “the behaviour that
consumers display in searching for
4. Place Utility purchasing, using, evaluating and disposing
of products, services and ideas.”
5. Possession Utility
Marginal Utility- refers to the satisfaction Determinants of Consumer Behavior:
gained from an extra unit consumed.
1. Psychological
If the marginal utility of the last item is
positive – then total utility will be 2. Social
increasing.
3. Cultural
If the marginal utility of the last
consumption is negative – total utility will 4. Personal
be falling.
5. Economic
Law of Diminishing Marginal Utility- as a
person consumes an item or a product, the EQUI-MARGINAL
satisfaction or utility that they derive from
the product wanes as they consume more
PRINCIPLE
and more of that product.
It states that consumers will choose a
Marginal Utility Formula combination of goods to maximize their
total utility.
Marginal Utility = △TU/△Q
MU/P (a) = MU/P (b)

Law of Equi-marginal Return- states that

profit from a limited amount of variable
input is maximized when that input is used
in such a way that marginal return from
that input is equal in all the enterprises.

BUDGET LINE

Graphical delineation of all possible

combinations of the two commodities that
can be bought with provided income and
cost so that the price of each of these
combinations is equivalent to the monetary
earnings of the customer.

INDIFFERENCE CURVE

It shows a combination of two goods that

give a consumer equal satisfaction and
utility thereby making the consumer
indifferent.

Characteristics of Indifference Curve:

1. It never cross

2. The farther out an indifference curve lies,

the higher the utility it indicates

3. Indifference curves always slope

downwards

4. Convex

Convexity of Indifference Curve- implies

that the marginal rate of substitution of X for
Y falls as more of X is substituted for Y. As
you consume more of one good you will
consume less of the other.