Introduction to Microeconomics

Economics: The study of how individuals and societies

allocate limited resources to satisfy unlimited wants.

Economics deals with resources, production, distribution

and consumption of goods or services in an economy.

Professor Robbins defines economics as a science which

studies human behaviour as a relationship between ends and
scarce means which have alternative uses.
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 SCARCITY
• limited supply in relation to demand for a commodity.
• Economics is concerned with selection of resources under conditions
of scarcity.

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 SCARCITY AND CHOICE
Naural resources, human resources and capital resources are not available in sufficient
quantity. Now, we need to decide :
What to produce?
Have to choose which goods and services to produce, with the limited available
resources.
Individual has to decide how much to consume and how much to save.
How to produce?
Combination of resources and quantity of each.
Best combination is the full employment of the available resources.
Techniques of production can be labour intensive or capital intensive.
For whom to produce?
Distribution of goods and services between different population.
For example: Higher income group, middle income group, lower income group.

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 How these economic systems deal with the fundamental issues
of what, how and for whom to produce?

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 Positive Economics vs Normative Economics

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 Circular flow of Economic Activity

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 PRODUCTION POSSIBILITY CURVE
• PPC/PPB/PPF defines the set of possible combinations of goods and
services a society can produce given the resources available.
Outside of PPF: unattainable
Inside of PPF: wasteful, inefficient/unemployment.

4 Key Assumptions
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (Ceteris Paribus)
• Fixed Technology

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 Production Possibility Schedule

Production Possibilities Rice (in tons) Cloth (in ‘000 meters)

A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0

Production Possibility Curve

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 Two Types of Efficiency
Productive Efficiency-
• Products are being produced in the least costly way.
• This is any point ON the Production Possibilities Curve
Allocative Efficiency-
• The products being produced are the ones most
desired by society.
• This optimal point on the PPC depends on the desires
of society.

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 Production Possibilities
4 Key Assumptions Revisited
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (4 Factors)
• Fixed Technology
What if there is a change?
3 Shifters of the PPC
1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade
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 Production Possibilities
What happens if
there is an increase
in population?
Robots

Pizzas
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 Production Possibilities
What happens if
there is an increase
in population?
Robots

Pizzas
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 Production Possibilities
What if there is a
technology improvement
in pizza ovens

Robots

Pizzas
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 Production Possibilities
What if there is a
technology improvement
in pizza ovens

Robots

Pizzas
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 Capital Goods and Future Growth
Countries that produce more capital goods will have
more growth in the future.
Panama – Favors Mexico – Favors
Consumer Goods Capital Goods
Current
PPC Future
PPC
Capital Goods

Future

Capital Goods
PPC
Current
PPC

Consumer goods Consumer goods

Panama Mexico
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Why?
1. Increasing Marginal Opportunity Cost
2. Imperfect Substitution

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 Utility
Utility gives a relative measure of usefulness, pleasure and satisfaction a
consumer receives when he/she consume a product.
Two basic kinds of utility:
– Total utility: total satisfaction gained from consuming a certain quantity
of a product
– Marginal utility: the extra utility gained from consuming one more unit
of a product
In the majority of cases, Marginal utility gained from extra units of a
product falls as consumption increases.

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 Opportunity Cost
• Opportunity cost measures cost in terms of what must be given up in
exchange for something.
• It is the value of the next-best alternative when a decision is made;
it's what is given up in order to have something else .
• Example: In a shopping mall, the opportunity cost of a shirt is the
number of pants you would have to give up to buy the shirt.

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Constant vs. Increasing (Marginal) Opportunity Cost

Corn Car

Rice Pizza
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 Calculating Opportunity Cost
Calculate the
Opportunity Cost of
going:
1. From A to B
2. From B to C
3. From C to D
4. From D to C

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