Microeconomics


Lecturer: Yong EL
BEcon (Hons), MEcon, PhD (Econ)

SJ14103
All contents are strictly copyrighted.
Microeconomics Lecture 1
SJ14103 Preliminary Glossary and
Course Professor: Yong EL Microeconomic Fundamentals

Source: Etching created by Cadell and Davies (1811), John Horsburgh (1828) or R.C. Bell (1872)/Wikimedia
 Quick Info: Adam Smith
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Nationality and Main Interests

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• Scottish
• Economics, political philosophy, ethics

School of Thought

• Classical

One of His Notable Ideas and Books

• Idea: The ‘invisible hand’

• Book: The Wealth of Nations
 The ‘Invisible Hand’
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• The ‘invisible hand’ implies demand and supply in a market will
reach an equilibrium naturally without intervention by the
government.
• When there are no market regulation and restriction imposed by
the government, all markets will function freely and each market
will reach an equilibrium for quantity and price.
• Price and quantity at the state of equilibrium are each a component
of the equilibrium.
• Every economic agent acts out of self-interest and these behaviours
will be channelled by the free market system towards socially
desirable outcomes.

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 Preliminary Glossary of Microeconomics
• Consumer • Allocation of resources • Substitution effect 5
• Producer • Market • Income effect

• Price • Government • Isoquant

• Price mechanism • Utility • Isocost

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• Demand • Production • Marginal utility

• Demand function • Production cost • Marginal cost

• Demand curve • Opportunity cost • Marginal product

• Supply • Labour • Consumer surplus

• Supply function • Capital • Producer surplus

• Supply curve • Land • Market structures

• Equilibrium • Indifference curve • Monopoly

• Elasticity • Budget constraint • Perfect competition

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Consumer
• Consumer is an individual (economic agent/unit) who exchanges
income for goods and services.

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• Limited income is allocated by a consumer to buy goods and services.

• A consumer’s objective is to seek for maximum satisfaction.

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Producer
• Producer is a firm which produces goods and/or services
using limited factors of production.

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• Factors of production mean inputs of production. For
example, labour, capital, and land.

• A producer’s objective is to maximise profit.

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Price
• Price is the money value of a particular good or service.

• The money value of a good or service is set by market

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demand and supply.

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Price Mechanism
• Price mechanism explain how
changes in the price of a good or
service can alter the quantity

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demanded and supplied.

• Price is one of the determinants of

quantity demanded and quantity
supplied.

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Demand
• Demand means a consumer’s want/need to buy a good or service in
order to maximise satisfaction.

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• Goods and services can be distinguished by class. For example, luxury,
ordinary, normal, or inferior products/services.

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Demand Function
• Demand function tells how quantity demanded of a
good/service is dependent on certain factors.

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• For example, this function can determine quantitatively how
changes in the price of a good can change the quantity
demanded of the good.

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Demand Curve
• Demand curve is a curve line indicating the relationship
between quantity demanded of a good/service and a
determinant (usually is the price).

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• Demand curve is notated by ‘Dc’ in this course.

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Supply
• Supply means the distribution of goods or/and services by
producers/sellers for consumers/buyers in a market.

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• Goods and services can be luxury, normal, ordinary, or
inferior.

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Supply Function
• Supply function tells how quantity supplied of a good/service
is dependent on certain factors.

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• For example, this function can determine quantitatively how
changes in the price of a good can change the quantity
supplied of the good.

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Supply Curve
• Supply curve is a curve line indicating the relationship
between quantity supplied of a good/service and a
determinant (usually is the price).

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• Supply curve is notated by ‘Sc’ in this course.

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Equilibrium
• Equilibrium is a state of balance between supply and
demand.

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• This equilibrium between demand and supply will determine
the equilibrium price of a good/service in the market.

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Elasticity
• Elasticity is a measure of responsiveness of one variable to
changes in another variable.

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• Elasticity is used to study how responsive is quantity
demanded or supplied due to changes in another
determinant (such as price).

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Allocation of Resources
• Resources mean factors of production.

• For example, labour, capital, and land.

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• Firms/producers allocate resources in order to produce
goods or/and services.

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Market
• Market is a platform where trading between economic
agents/units takes place.

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• A market can be a physical location such as a fish market or
an online market (e.g., Shopee (shopping), stock market, and
foreign exchange).

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Government
• Government can interfere market performance through
several methods.

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• Taxes and subsidies are the usual methods used by
government on demand and supply in the market.

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Utility
• In economics, utility means the feeling of satisfaction.

• For example, utility maximisation means a consumer

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maximises his/her satisfaction.

• The unit of measurement is unit (some books use ‘util’).

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Production
• Production means the process of making goods or/and
services by a producer/firm.

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• Production can be plantation, manufacturing, or/and
services.

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Production Cost
• Production cost includes various forms of cost in producing
goods or/and services.

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• It can be the costs of using capital (rental), labour (wages),
or/and land (rental).

• Production cost can be variable or fixed.

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Opportunity Cost
• The cost of the second best of choice that an economic agent
must let go due to limited income (for a consumer) or
resources (for a firm).

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• Due to limited income and resources, we cannot buy and
produce everything.

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Labour
• Labour means human capital employed by firms to produce
goods or/and services. Labour is a factor of production.

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• For example, engineers and car designers employed by firms
to produce automobiles.

• The unit of measurement can be the quantity of workers,

unit, or labour hour. Labour is a variable input.

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Capital
• Capital means investment goods. It is a factor of production.

• For example, production machines, vehicles, and computers

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used by firms to produce goods or/and services.

• The unit of measurement is unit. Capital is usually a short-

run fixed input.

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Land
• Land means natural resources. It is a factor of production.

• The unit of measurement of land is unit.

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• For example, land space and mineral deposits used by firms
to produce goods or/and services.

• Land is a short-run fixed input.

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Indifference Curve
• Indifference curve is a locus of alternative combinations of
two goods/services where the consumer is equally satisfied.

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• It measures how much/many of one good/service the
consumer is willing to let go to obtain an additional amount
of another good/service.

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Budget Constraint
• Budget constraint means limited income facing a consumer.

• Every consumer has a limited budget for consumption and

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therefore consumers must allocate budget rationally in order
to maximise utility.

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Substitution Effect
• Substitution effect indicates the degree to which a
firm/consumer is willing to substitute one product for
another in response to a change in the price.

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• The degree of substitution effect is dependent on the type of
goods/services.

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Income Effect
• Income effect indicates the degree to which a consumer’s
purchasing power for a good/service changes following a
change in the price.

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• The degree of income effect is dependent on the type of
goods/services.

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Isoquant
• Isoquant means a locus of alternative combinations of two
inputs that yield the same quantity of an output.

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• The slope of isoquant measures the degree to which a firm is
willing to substitute one input for another in production.

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Isocost
• Isocost means a locus of alternative combinations of two
inputs (labour and capital) that yields the same level of cost.

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• Isocost represents the firm’s budget constraint for using
factors of production.

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Marginal Utility
• Marginal utility means a consumer’s extra amount of utility
when the consumer increases his/her consumption of a
good/service by an additional unit.

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• In what situation will your marginal utility become negative?

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Marginal Cost
• Marginal cost means an extra amount of production cost
when a firm increases its production of a good/service by an
additional unit.

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Marginal Product
• Marginal product means an extra amount of a good/service
produced when a firm increases its use of an input by an
additional unit.

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Consumer Surplus
• A consumer gains a surplus when he/she is willing to pay for
a good at a price per unit higher than the actual price per unit
in the market.

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Producer Surplus
• A producer gains a surplus when the price per unit he/she is
willing to sell for a particular good is lower than the actual
price in the market.

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Monopoly
• Monopoly is a type of market occupied and controlled by only
one firm exists in the industry.

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• A monopolist has market power to the set the market price.

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Perfect Competition
• Perfect competition is a type of market occupied by many
firms.

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• Perfectly competitive firms do not have market power to set
the market price.

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 Microeconomic Fundamentals
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• Basic microeconomic questions.
• Microeconomics: the foundation of
macroeconomics and specialised fields.

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Basic Microeconomic Questions
• How do consumers allocate limited budget to
achieve utility maximisation?

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 Consumer theory

• How do firms allocate limited resources to

achieve profit maximisation (or cost
minimisation)?
 Producer theory
 Microeconomics: the Foundation of 43
Macroeconomics and Specialised
Fields
Microeconomics

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Macroeconomics

Industrial Econ Environmental Econ Health Econ

Political Econ Cultural Econ Behavioural Econ

Development Econ Econ History Many others

 End of Lecture 1
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An inspirational quote for you:

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The best preparation for tomorrow is doing your
best today.
(H. Jackson Brown, Jr.)

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Prepared by Yong EL