BACC 201 – Basic Microeconomics

Part I. Introduction

Economics – is the science that deals with the allocation of limited resources to satisfy
unlimited human wants.

Examples of Human Wants

1. Food
2. Clothing
3. Shelter
4. anything that enhances the quality of life

Scarcity – is the basic fact of life that there exists only a finite amount of human and
nonhuman resources which the best technical knowledge is capable of using to produce only
limited maximum amounts of each economic goods.

• it is the fact of life which makes a man’s material wants never fully satisfied because
the resources are limited while his/her wants are almost unlimited.
• We cannot have everything in life. This where scarcity factors in. Our
unlimited wants are confronted by a limited supply of goods, time, money and
opportunities.

Opportunity cost – is the value of benefit forgone, in a situation in which choice needs
to be made between several mutually exclusive alternatives given limited resources.

• It is the value of what you have to give up in order to choose something else.
• It means if you choose one activity, you are giving up the opportunity to do a
different option.

Microeconomics – it is the study of the behavior of individuals and firms in making

decisions regarding the allocation of scarce resources and the interactions among
these individuals and firms.

Paul Samuelson – father of modern economics. Consumers – constrained by their limited

wealth/income.

Firms (producers) – are aiming to maximize profit.

Four Fundamental Microeconomics Questions

1. What goods and services should be produced?

2. How to produce those goods and services?
3. Who gets the goods and services?4. How many to produce?

Importance of Microeconomics

• To understand the operation of an economy

• To provide tools for economic policies
• Efficient utilization of resources
• Useful in international trade and decision-making
• Optimal resource allocation
BACC 201 – Basic Microeconomics

Two Branches of Economics

1. Microeconomics. The prefix micro is derived from the Greek word microswitch
means “small”. It studies the economic behavior of individual economic decision
makers, such as consumers, a worker, a firm or a manager. It also analyzes the
behavior of individual households, industries, markets. Labor unions or trade
associations.

2. Macroeconomics. The prefix macro is derived from the Greek word microswitch
means “large”. It analyzes how an entire national economy performs. A course in
macroeconomics would examine aggregate levels of income and employment,
the levels of interest rates and prices, the rate of inflation, and the nature of business
cycles in a national economy

What is a market?

• Basic structure of an economy

• Any place where the sellers of a particular good or service can meet with the buyers
of that good or service where there is a potential transaction to take place.
• As long as there is an exchange of goods and services, then that setting may qualify
to be called a market.
• Price – is the amount of money that has to be paid in order to acquire a good or
service.
• A market can be described, as a system that sets the prices of goods and services.
• Prices are assumed to come about almost entirely as a result of interactions between
forces of demand and supply. Therefore, it is the market that sets the price.

Circular Flow Diagram – shows the flow of income, expenditure and money in a simple
model of the economy. Such flow is circular, going to and from the households and business.

Households – composed of individuals in a community who supply industries with labor.

Firms – refer to factories and industries that seek to earn profits from the sale of goods of
services they produced.

Market Sectors

Goods and services market – households and the government purchase

goods and services from firms.

Labor market – firms and the government purchase labor from households. In this market,
household supply labor, and firms and government demand labor.

Money market – households purchase stocks and bonds from firms.