MICRO ECONOMICS
CHAPTER 5
 UTILITY = Defined as the
power of goods and services
to satisfy wants.
EXAMPLES OF THE CAUSE AND SOURCE
OF UTILITY ARE:
1. Security
2. Pride
3. Power
4. Pleasure
5. Comfort
6. Ease of use
 CARDINAL UTILITY = Measurement
Of utility by assigning numerical
values referred to as utils.
 ORDINAL UTILITY = measures utility
in terms of ranks such as
indicating levels from most
satisfying to least satisfying,
best to worst and highest to
lowest.
THE CONCEPT OF TOTAL UTILITY
It is the aggregate amount of satisfaction
or fulfillment that a consumer receives
through the consumption of a specific good
or service.  satisfaction as that of the substituted
THE CONCEPT OF MARGINAL
UTILITY
The satisfaction an individual receive
from consuming one additional units of
goods or service.
 LAW OF DIMINISHING MARGINAL
UTILITY
 Law states that the amount
of extra or marginal utility
CHAPTER 6
 PRODUCTION = The
creation of any good or
declines as a person consumes
more and more of a goods.
 CONSUMER EQUILIBRIUM = The most
preferred combination of goods to buy.
 UTILITY MAXIMIZATION = the
concept that individuals and organizations
seek to attain the highest level of satisfaction
from their economic decisions.
 INDIFFERENCE ANALYSIS = when the
consumer is faced with a set of alternative
bundles of goods he is able to rank them in
all order of preference. When confronted by
any two bundles for instance he is able to
say whether he prefers one to the other or
whether he is indifferent between them
(which means he regards them as equally
desirable or equivalent).
 SUBSTITUTION / SUBSTITUTE
GOODS = Commodities which can be used
or consumed in place of other goods
TYPES OF SUBSTITUTES:
 CLOSE SUBSTITUTES - Provides
an almost or equal level of
good or service.
 WEAK SUBSTITUTES - Provides
a lower level of satisfaction than the
substituted good or service.
service for the purpose of
selling to buyers.
THE VARIOUS INPUTS CONSIST OF:
1. CAPITAL - Including raw material
ingredients,supplies,tools,
machinery,equipment and physical facilities.
2. LABOR - which combine and process the
various materials
3. LAND - where the space alloted for
processing is located.
4. ENTREPRENEURIAL OR
MANAGERIAL TALENT - which
perform function like
supervision,planning,control, function like
supervision coordination and leadership.
CATEGORIES OF PRODUCTION
ACTIVITIES:
1. UNIQUE PRODUCT PRODUCTION
= is the type of production activity has as its
output “made to order” products and
services.
2. RIGID MASS PRODUCTION
= This production activity involves the
manufacture of uniform products in large
quantity using a well-defined, proven, and
usually inflexible technology.
3. FLEXIBLE MASS PRODUCTION
In this type of production activity,
processing is done in two stages. The first
stage involves mass production of
standardized components.In the second
stage,the components are assembled into
final products that appear dfferent from one
another.
4. PROCESS OR FLOW PRODUCTION
= A continuous flow of output is the feature
of process or flow production.
5. PRODUCTION FUNCTIONS = The
relationship between the amount of inputs
required and amount of output that can be
obtained is referred to as the production
function.
 FIXED INPUT is one whose quantity
cannot be readily changed when market
conditions indicate that a change in output is
desirable.
EXAMPLE: buildings, machinery
 A variable input is one whose quantity can
be readily changed when a changed in
output is desired.
EXAMPLES are direct labor, raw materials
and supplies.
o SHORT RUN refers to that time frame in
which the input of one or more productive
agents is fixed.
o LONG RUN is that period of time in which
all inputs are variable.
 TOTAL OUTPUT = refers to the total
amount of output produced in physical units.
 AVERAGE PRODUCT = refers to the total
output divided by the quantity of the
variable input under consideration.
 MARGINAL PRODUCT = is the
additional output attibuted to the increase in
the quantiity of the variables input under
consideration.
 LAW OF DIMINISHING RETURNS
 As more of the same input is employed in
the production of a particular good,the
corresponding increase in total output tends
to become smaller and smaller if the amount
of the other inputs required n the
production process are kept constant.
CHAPTER 7
 LABOR = It refers to the exertion of
human effort to acquire income.
 includes physical and mental
exertion.
CHARACTERISTICS OF LABOR
1. Labor is perishable
2. Labour is Inseparable
3. Labour is Heterogeneous
4. Labour has Poor Bargaining Power
5. Not Easily Mobile
6. Supply of Labour is relatively Inelastic
KINDS OF LABOR
 1. manual labor = This type of labor mostly
involves the exertion of physical effort
specifically the use of brain and muscle.
2. clerical labor = This type is considered as
next higher in order than manual labor.
Most are clerical work with less physical
and mental effort.
3. professional labor = This job requires a
higher degree of intelligence than those
of a clerk.
4. professional labor = This job requires a
higher degree of intelligence than those
of a clerk.
5. the labor of management = Managers of
all kinds and type perform their functions.
6. the labor of the entrepreneur = The
entrepreneur is one of who organizes the
business and sees to it that the business
becomes stable
7. labor of inventors = A very important
ingredient of economic inventors.
Development is the output of the
inventors.
 SUPPLY OF LABOR = amount of labour,
measured in person-hours, offered for
hire during a given time-period.
 SUPPLY OF LABOR SPEND THEIR
TIME ON THE FOLLOWING
ACTIVITIES:
(1) market activity
(2) nonmarket activity
 MARKET ACTIVITY is when households
spend their time supplying labor to
market.
 Nonmarket activity is when time is spent
on leisure and other nonmarket
production like education and training.
It is modified by two offsetting effects of a higher
wage rate:
(1) substitution effect = Households will
naturally provide some time for nonmarket
activities.
(2) income effect = Household's wage rate is
higher, more income will be available to the
household for spending.
DEMAND FOR LABOR
 The quantity of labor demanded is the
total number of man hours (or man days)
hired by all firms in an economy.
 REAL WAGE RATE(RWR) = It is the
purchasing power of a given nominal
wage (money).
PROBLEMS OF LABOR
(1) Unemployment
(2) Underemployment
= It occurs when a person works either part-time
or full-time but which in both cases receive very
little pay.
(3) Industrial and Labor
= Strikes and lockouts are actions that bring
misery to both the employer and workers. It may
result to physical harm and death to some
people.
(4) Economic Insecurities
= Workers worry about having a permanent
source of income. They are concerned about
layoffs and dismissal, illnesses, accidents and
even death.
TYPES OF UNEMPLOYMENT
 Seasonal Unemployment = For instance,
there is great demand for worker during
planting and harvesting seasons.
 Frictional Unemployment = A person may
get dissatisfied with his job, resigns, and
starts looking for a new one. Those days
that he is not yet working is called
frictional unemployment.
 Structural Unemployment = When there
are available and willing workers but their
skills and training are not those required
by the business firms.
 Cyclical Unemployment = When the
demand for worker is less than the
supply, some will be unemployed.
INVESTMENT IN HUMAN CAPITAL
(1) Education
(2) Training
CHAPTER 8  RENT
(2) LABOUR
KINDS OF RENT
 Wages
 ECONOMIC RENT – refers to the actual (3) CAPITAL
payment made for the use of land only.  Interest
 CONTRACT RENT – total payment made (4) ENTREPRENEUR
by the tenant to the landlord for using his  Profit
land in production process. (ECONOMIC
RENT + QUASI RENT)
 QUASI RENT – surplus earned by man-
made factors of production such as
buildings, machines etc. other than land.

 INTEREST - Interest is a payment for the

immediate use of a sum of money.
 PROFIT – excess of income over his
expenditure.
 Net income of a business after all the
other costs such as rent, wages and
interest have been deducted from the
total income.
- PROF. HANSEN CHAPTER 9
“PROFITS ARE RESIDUAL INCOME LEFT  MARKET STRUCTURE - An economic
AFTER ALL THE PAYMENTS HAVE BEEN model that allows economists to examine
MADE’’. competition among businesses in the same
industry.
 MARKET - An area where buyers
 ECONOMIC PROFIT - Economic or pure exchange money for a good or service or are
profit is the excess of revenues over all in contract with sellers whishing to
explicit and implicit cost. exchange goods and services for money.

 CONCEPT OF PROFIT KINDS OF MARKET STRUCTURES

 GROSS PROFIT is difference total (1) Pure of perfect types
revenue and total cost of the production.  Pure of perfect competition
 NET PROFIT is the income received by the  Pure or perfect
producer after deducting explicit as well as monopoly/monopoly
implicit costs. (2) Imperfect types
 Monopolistic competition
PROFIT THEORY  Oligopoly
Rent – F.A Walker
Wage – Taussig Pure or perfect competition
Dynamic – J.B Clark
 Large number of small firms
Uncertainty – Knight
compete against each other.
Innovation – Schumpeter
Pure or perfect Monopoly
FACTORS IN PRODUCTION
 A single firm controls the entire
(1) LAND
market of a specific industry.
Monopolistic competition
 Unlike perfect competition, firms
in monopolistic competition sell
similar products but slightly
differentiated.
Oligopoly
 A market structure that is
dominated by only a small number
of firms resulting a state of limited
competition.