UNIVERSITY OF EDUCATION, WINNEBA

SCHOOL OF BUSINESS

DEPARTMENT OF APPLIED FINANCE AND POLICY MANAGEMENT

FIRST SEMESTER 2021/2022 ACADEMIC YEAR

BBA 111 PRINCIPLES OF MICROECONOMICS

INTRODUCTION TO MICROECONOMICS

HAJIA RAMATU USSIF (Ph.D)

 PRESENTATION OUTLINE

Introduction to Microeconomics
The Nature and Scope of Economics
Definitions of Economics
Economics – As Science
Economics As an Art
Branches of Economics
Positive Economics Versus Normative Economics
The Ten Basic Principles of Economics
Fundamental Concepts

BBA 111 Lecture One

 INTRODUCTION TO
MICROECONOMICS

BBA 111 Lecture One

 The Nature and Scope of Economics

 There are several things people want or desire to have in life. These
could include having access to basic necessities such as food , shelter,
water, clothing, good health care, and so on.

 Since human wants are many, individuals make choices as they try to
achieve their wants / desires and needs.

 BB BBA 111 Lecture One

 The Nature and Scope of Economics

 The society also desire to have quality education, good roads,

hospitals, clean environment, good security among others.

 Similarly, businesses or firms also want to have access to enough

resources to produce goods and services. So, they make choices on
what to produce, for whom to produce, the method of production to
adopt and so on.
BBA 111 Lecture One
 Introduction to Microeconomics
Students often times also find themselves torn between
different ways of making use of their time and money. For
instance, when to learn, sleep, have leisure as well as when to
have entertainment.

All the choices made by individuals, society, businesses and

the nation as a whole are necessary because we live in a world
of scarcity of resources.

BBA 111 Lecture One

 Introduction to Microeconomics
Scarcity: A situation in which unlimited wants exceed the limited
resources available to fulfill these wants.

The main issue is that, human beings by nature want more of virtually
everything which results in two main economic problems of:
a. Unlimited human wants
b. Scarcity of resources to satisfy these numerous wants.

BBA 111 Lecture One

 Introduction…

 To resolve/ address the main economic problem of how to manage

scarce resources to satisfy the many wants of individuals, firms and
society, the study of Economics comes into the being.

 It studies how individuals, businesses, and the society as a whole

manage the available scarce resources to satisfy the unlimited
wants.

BBA 111 Lecture One

 Introduction…

 Economics establishes the relationship between what the society

wants or desires and the limited resources to satisfy these wants.

 Therefore, Economics, is a subject that talks about how scarce

resources are managed compared to the demand for them.

BBA 111 Lecture One

 Introduction…
 Economists therefore study how people make decisions: how much they
work, what they buy, how much they save, and how they invest their
savings.
 Economists also study how buyers and sellers of a good come together to
determine the price at which a good is sold and the quantity that is sold.

 Economists again analyze forces and trends that affect the economy as a
whole, including the growth in average income, the number of the
population that cannot find work, and the rate at which prices are rising.
BBA 111 Lecture One
 Definitions of Economics

 Over time, the subject of Economics has evolved and for that matter several
economists have defined it in different ways based on their understanding from
different perspectives.
 For instance;
 a. Adam Smith (1723 -1790) defines Economics as “An Enquiry into Nature and
Causes of Wealth of Nations (1976).
 He explained how a nation’s wealth is created through production, distribution,
consumption and exchange of wealth.
BBA 111 Lecture One
 Definitions of Economics

 Smith considered wealth acquisition as the main goal of human activity, and
states that the individual is only interested in promoting his own self-
interest.

 He says that, it is not from the benevolence of the butcher, the brewer, or
the baker that we expect our dinner, but from their regard to their own
interest.

BBA 111 Lecture One

 Definitions of Economics
 Smith suggests that the individual in an attempt to promote his or her own
interest is led by an “invisible hand” to promote the interests of the society.
Even though this individual has no genuine desire to promote the society’s
interests.
 Adam Smith’s definition was criticized on the grounds that he defined
Economics based on only wealth and not in terms of human welfare.
 Wealth was considered only to be a means to an end, with the end being the
BBA 111 Lecture One
 Definitions of Economics

 b. Alfred Marshall (1842-1924) in his famous book “ Principle of

Economics” (1890) defines Economics as “ the study of mankind in
the ordinary business of life”.
 His definition examines;
 i. the economic aspect of human life by stating that Economics is a
study of mankind in the ordinary business of life.

BBA 111 Lecture One

 Definitions of Economics

 ii. Economics studies both individual and social actions which are aimed at
promoting the economic welfare of people.
 iii. Marshall again distinguishes material things such as houses, cars, books,
jewellery etc from non material things such as love, leisure, technology,
skills of labour.
 Marshall’s definition considered mainly material things that are capable of
improving
BBAthe
111welfare of human beings.
Lecture One
 Definitions of Economics

 He ignored non material things such as leisure, services of lecturers/

teachers, doctors, engineers, nurses, accountants and even the
environmental conditions which also contribute to improve the welfare of
people. As a result, his definition was also criticized.

BBA 111 Lecture One

 Definitions of Economics
 Lionel Robbins is one of the economists whose definition of Economics
has received a global acceptance in modern times. He defines Economics as
“a social science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses.”
 Robbins’ definition:
 i. focuses on studying human behaviour which is erratic and dynamic in
nature.
 ii. talks about ends which he refers to as aims, goals and objectives of
man in the satisfaction of his unlimited wants.

BAA 111 Lecture One

 Definitions of Economics
 Scarce means which highlights the idea that resources are limited relative to the
demand for them. There is scarcity of a good if its demand is greater than its
supply.

 Scarce resources have Alternative Uses. This implies that the available resources
can be put to varied uses.

 Robbins definition was also criticized mainly because: He does not make any
distinction between goods conducive to human welfare and goods that are not
conducive to human welfare. He failed to cover the concept of economic growth
and development.
BBA 111 Lecture One
 Definitions of Economics
 d. Paul Samuelson is another economist whose definition has been widely
accepted in recent times. He defines economics as:

 “the study of how men and society choose, with or without the use of money, to
employ scarce productive resources which could have alternative uses, to
produce various commodities over time, and distribute them for consumption,
now and in the future among various people and groups of society.”

BBA 111 Lecture One

 Definitions of Economics
 He stresses the problem of scarcity of means in relation to unlimited wants
and that the means could be put to alternative uses. He again covers aspects
like production, distribution and consumption.

 Apart from the above given definitions, there are other Economists who
continue to define the subject based on their viewpoints.

BBA 111 Lecture One

 Economics – As Science
 Economics is a Science: Science is the systematic way of studying phenomena
with the view to understanding nature, mainly through observation and
experimentation or investigation.
 With economics as a science, the subject investigates the possibility of deducing
generalizations as regards the economic motives of human beings.
 Basically, economics as a subject follows the systematic scientific processes just
like the other sciences in its investigations.

BBB 111 Lecture One

 Economics – As Science
 Economics is, however, considered a social science because it studies human
behaviour.
 For example how resources are managed and organized could be at the
individual, household, community, societal or national levels.

BBA 111 Lecture One

 Economics – As an Art
 Economics is an Art: An art is a system of rules for the attainment of a given
end.

 Science teaches us to know while an art teaches us to do. Applying this

definition, we find that Economics offers practical guidance in solving
economic problems.

BBA 111 Lecture One

 Branches of Economics
 The study of economics is divided into two main branches. These are
Microeconomics and Macroeconomics.
a. Microeconomics:
 The word micro means small, single or a unit. This branch of Economics studies
the economic behaviour of the single or individual units within the economy.
 The single or individual units refer to individuals, consumers, households, firms or
businesses and market.
How does a market work?
• What level of output does a firm produce?
• How does a consumer determine how much of a good he will buy?
BBA 111 Lecture One
 Branches of Economics
b. Macroeconomics:
The word macro also means ‘big, large or whole’. This means that macroeconomics
studies the economy as a whole and therefore takes into consideration the aggregate
components of that economy.
 It involves the study of the behaviour of broad economic aggregates such as
aggregate output, aggregate consumption, unemployment, inflation, national income,
aggregate demand, aggregate supply, exchange rate, and economic growth in an
economy as a whole.
The common goals of macroeconomic policy include full employment, price stability
and economic growth.

BBA 111 Lecture One

 Branches of Economics

Macroeconomics also answers questions such as:

Why is the unemployment rate high?

What are the causes and effects of inflation?

How do changes in the money supply affect the economy?

BBA 111 Lecture One

 Positive Economics Versus Normative Economics

a. Positive Economic Analysis:

 It describes ‘what is’ and simply provides results of economic analysis of a problem.
Positive economics is therefore based on facts and analyze economic phenomena
from an objective or scientific point of view.
 Examples of positive economic statements are as follows:
 An increase in school enrolment will increase the literacy rate of the country.
 Prices in Ghana are constantly rising.
 There will be unemployment if the economy does not grow.
 Ghana is a developing economy.

BBA 111 Lecture One

 Positive Economics Versus Normative Economics

b. Normative Economic Analysis:

It describes ‘what should be’ or ‘what ought to be’ and analyze economic phenomena
from a subjective and value judgement viewpoint.
Thus, normative economics originates from people’s perspectives, feelings or opinions
involved in the decision-making process. Examples of normative statements in
economics are outlined below:
The government should provide quality free education.
The country ought to reduce its imports to appreciate the Ghanaian cedi.
Agricultural income should also be taxed.
Ghana’sBBA 111 Lecture
economic One
development should be more centred on the rural areas.
 Methodology of Economics

Economics as a science adopts two methods for the discovery of its laws and principles
and they are deductive method and inductive method. These methods are two forms of
logic and help establish truth.
Deductive Method: Deduction infers reasoning from general to particular, that is, it
commences with certain principles that are self-evident or based on strict observations.
For instance, ‘Ghanaian traders earn profit in their businesses’ is a general statement
which is accepted even without verifying it with the traders.

BBA 111 Lecture One

 Methodology of Economics

 Inductive Method: This is the process of reasoning from particular to general, that is, it
commences with the observation of certain facts and thereafter formulates laws and
theorems on the basis of observed facts.

• For example, data on household poverty in Ghana is collected; classified, analyzed and
important conclusions are drawn out from the results.

BBA 111 Lecture One

 The Ten Basic Principles of Economics:

 1. Decisions made by economic agents always involve tradeoffs and opportunity costs.

 2. The true cost of a commodity is what one gives up to acquire that commodity

 3. Economic agents make decisions at the margin.

 4. Economic agents always respond to incentives

 5. Everyone is made better off through trade.

BBA 111 Lecture One

 The Ten Basic Principles of Economics

 6. Markets are efficient coordinating tools for synchronizing economic activities.

 7. Government intervention can improve market outcomes.

 8. A country’s ability to produce commodities determines its standards of living.

 9. General Price level increases when government prints too much money.

 10. Society faces a short-run tradeoff between inflation and unemployment.

BBA 111 Lecture One

 Principles of Economics Explained

 Economic agents always respond to incentives:

An incentive in a reward that encourages an action or a punishment that

discourages an action. When the price of an apple rises, for instance, people
decide to eat more oranges and fewer apples, because the cost of buying an
apple is higher. At the same time, apple producers decide to hire more
workers and harvest more apples, because the benefit of selling an apple is
also higher.

BBA 111 Lecture One

 Principles of Economics Explained

 Everyone is made better off through trade;

Trade allows each person to specialize in the activities he or she does best,
whether it is farming, sewing, or home building. Through trading people can
buy a greater variety of goods and services at lower cost. Trade allows
countries to specialize in what they do best and to enjoy a greater variety of
goods and services.

BBA 111 Lecture One

 Principles of Economics Explained

 Markets are efficient coordinating tools for synchronizing economic

activities.
 Government intervention can improve market outcomes.

 A country’s ability to produce commodities determines its standards of

living.

BBA 111 Lecture One

 Principles of Economics Explained

 General Price level increases when government prints too much money:

• When a government creates large quantities of the nation’s money, the

value of the money falls. Because high inflation imposes various costs on
society, keeping inflation at low levels is much preferred goal of most
countries.
 Society faces a short-run tradeoff between inflation and unemployment.

BBA 111 Lecture One

 Review Questions

 What is the subject matter of economics? Explain why economics is a science

and art?
 Outline the steps involved in undertaking a scientific study and compare with
the study in economics.
 Identify the reasons why economics is sometimes described as an inexact or
soft science?

BBA 111 Lecture One

 Review Questions

 Use real life examples to illustrate the following economic principlesː- i)Agents
always respond to incentives ii) Decisions of agents are taken at the margins.
 Explain these three key economic ideas: i. People are rational; ii. People respond to
economic incentives; iii. Optimal decisions are made at the margin.
 Carefully delineate descriptive economics, economic theory and applied
economics.

BBA 111 Lecture One

 Review Questions

 Define economics and distinguish between microeconomics and macroeconomics

 Explain the two big questions of economics

 Explain the key ideas that define the economic way

of thinking
 How do economists go about their work as social scientists and policy advisers?

 Describe the jobs available for an economics major

BBA 111 Lecture One

 Fundamental Concepts

Scarcity; a situation in which unlimited wants exceed the limited resources available to
fulfill those wants. Simply put, individuals have numerous wants but limited resources so
they have to make choices as to which to satisfy.
Choice; choice is the art of selecting from an array of alternatives under conditions of
scarcity. In economics, people make choices predicated on the principle of rationality. In
other words, they seek the alternative which represents not only the optimum use of the
scarce resources but that which responds to their most pressing need or want.
Scale of Preference; is defined as the list of wants arranged in the order of their relative
importance or priority. The most pressing want comes first and the least pressing want
comes last.

BBA 111 Lecture One

 Fundamental Concepts

Opportunity Cost;
Opportunity cost arises due to scarcity and choice. Since there are unlimited wants
and not enough resources to satisfy them, there is the need to choose among the
alternatives.
Opportunity cost is therefore the next best alternative forgone in order to acquire
another want.
Suppose a student has to choose between two alternatives such as ‘attending a lecture’
or ‘watching a movie’ at the same hour, but this student actually attends the lecture,
then the opportunity cost of this action is watching a movie.

BBA 111 Lecture One

Fundamental Concepts

This simply means that the student gave up the opportunity to watch a
movie in order to attend the lecture. In this way, the opportunity cost is
the value of the lost opportunity, that is, the excitement of watching a
movie in the case of this student.

BBA 111 Lecture One

Conditions under which opportunity cost will be zero

Conditions under which opportunity cost will be zero are;

i.when resources are in abundance such that all needs are satisfied
without choice making.

ii. When a resource has only one use or has no alternative use or purpose

iii.Unemployed resource or where resources are not being utilized (idle

resource)

BBA 111 Lecture One

 Production Possibility Frontier and Opportunity Cost

 Due to the problem of scarcity of resources, an economy whose target is to attain

full employment cannot have an unlimited output of goods and services.
 Such economy must choose which goods and services to produce with its
available resources and which ones to forgo.
 The necessities and consequences of those choices can best be understood through
a production possibility model.

BBA 111 Lecture One

 Production Possibility Frontier and Opportunity Cost

 Full employment is when all available labour resources are being used in
the most efficient way possible.
 Full employment includes the highest amount of skilled and unskilled
labor that can be employed within an economy at any given time.

BBA 111 Lecture One

 Production Possibility Frontier and Opportunity Cost

 The PPF refers to the maximum combinations of goods and services which an economy
can produce efficiently using its available resources and given technology within a period
of time.
The following are the assumptions underlying the PPF:
 The economy devotes all its available resources and given technology to produce two
commodities.
 The economy has fixed amount of resources and a given level of technology.
 The economy employs the best-known techniques of production.
 Resources in the economy are fully employed.

BBA 111 Lecture One

 Production Possibilities Table and Curve

 A production possibilities table lists the different combinations of two products that
can be produced with a specific set of resources (and with full employment and
productive efficiency).

 a. full employment
 b. productive efficiency

 The PPF sets up a boundary between those goods and services that can be produced
from those that cannot.

BBA 111 Lecture One

Production Possibilities Table and Curve

BBA 111 Lecture One

 Production Possibilities and Opportunity Cost

 Any point on the frontier such as E and any point inside the PPF such as Z are
attainable.

 Points outside the PPF are unattainable.

 All points on the PPF are efficient.

 We achieve production efficiency if we cannot produce more of one good without

producing less of some other good.

BBA 111 Lecture One

 Production Possibilities and Opportunity Cost

 Any point inside the frontier, such as Z, is inefficient.

 At such a point, it is possible to produce more of one good without producing less of
the other good.
 At Z, resources are either unemployed or misallocated.

 Every choice along the PPF involves a tradeoff.

 On this PPF, we must give up some cola to get more pizzas or we must give up some
pizzas to get more cola.
BBA 111 Lecture One
 Production Possibilities and Opportunity Cost

 As we move down along the PPF,

 we produce more pizzas, but the quantity

of cola we can produce decreases.

 The opportunity cost of a pizza is the cola

forgone

BBA 111 Lecture One

 Production Possibilities and Opportunity Cost

In moving from E to F:
The quantity of pizzas increases by 1 million.

The quantity of cola decreases by 5 million cans.

The opportunity cost of the fifth 1 million pizzas is

5 million cans of cola.

One of these pizzas costs

5 cans of cola.
BBA 111 Lecture One
 Production Possibilities and Opportunity Cost

In moving from F to E:
The quantity of cola increases by 5 million cans.

The quantity of pizzas decreases by 1 million.

The opportunity cost of the first 5 million cans of cola is 1 million pizzas.

One of these cans of cola costs 1/5 of a pizza.

BBA 111 Lecture One

 Opportunity Cost is a Ratio

 The opportunity cost of producing a can of cola is the inverse of the opportunity
cost of producing a pizza.

 One pizza costs 5 cans of cola.

 One can of cola costs 1/5 of a pizza.

BBA 111 Lecture One

 Shifts of the PPF

 When there is a change in the economy’s resources or technology, PPF will

most likely change and shift.
 There are two major movements in the shift of a PPF. These are:
Parallel Shift and Biased/unparallel Shift
 1. A parallel shift:
indicates a bodily shift of the PPF either inwards or outwards.
• An outward shift of the PPF signifies a period of economic growth in such an economy
• An inward PPF shift represents an economic contraction or a period of recession.

BBA 111 Lecture One

 Shifts of the PPF

 An outward shift of the PPF signifies a period of economic growth in such an

economy. Economic growth is an increase in the production of goods and
services over a specific period. That is an increase in the GDP of an economy
over a period of time.

 It is an increase in the capacity of an economy to produce goods and services,

compared from one period of time to another. Economic growth creates more
profit for businesses.

BBA 111 Lecture One

 Shifts of the PPF

 An inward PPF shift represents an economic contraction or a period of recession.

 A recession is a period of declining economic performance/activity across an

entire economy that lasts for several months. This usually occurs when the GDP
of an economy declines for two consecutive quarters.
 Recessions generally occur when there is a widespread drop in spending (an
adverse demand shock).

BBA 111 Lecture One

 Parallel Shift of PPF
Y
Y
Outward Shift Inward Shift
𝑌2
𝑌2

𝑌1 𝑌1

0 𝑋1 𝑋2 X 0 𝑋1 𝑋2 X
Outward Shift of PPC from 𝑋1 𝑌1 to Inward Shift of PPC from 𝑋2 𝑌2 to
𝑋2 𝑌2 depicts availability of more 𝑋1 𝑌1 depicts depletion of resources or
resources or improvement in obsolete technology. This shows that
technology. This tends to show an the economy experiences recession or
economic growth. contraction.

BBA 111 Lecture One

 Shifts of the PPF

2. Bias Shift of PPF

This occurs when the PPF shifts in favour of one commodity rather than both
commodities.
That is, it can result from a technical change which makes the economy to be more
efficient in the production of one of the two commodities or may be caused by a
discovery or depletion of a certain resource which affects the production of one
commodity more than the other.

BBA 111 Lecture One

 Shifts of the PPF
Y
Y
Bias Shift in favour Bias Shift in favour
of commodity X of commodity Y
𝑌2

Y
𝑌1

0 𝑋1 𝑋2 X 0 X X
Here, the economy is more efficient in Here, the economy is more efficient in
the production of commodity X. the production of commodity Y.

BBA 111 Lecture One

 Review Questions

 Define the production possibilities frontier and use it to calculate opportunity cost

 Describe how PPF and opportunity are related.

 Explain how the concept of scarcity relates to choice

 With relevant examples explain scale of preference

 Describe the following concepts relating to production possibilities frontier;

 Efficient points ii. Attainable points iii. Inefficient points

 Unattainable points
BBA 111 Lecture One
 REFERENCES
 Anaman E.A., (2019). Introduction to Microeconomics. Abundant Grace Printing and Stationery.
 Begg, D, Fischer S and Dornbusch, R.(1994).Economics. 4th Edition, McGraw Hill Inc UK
 Chacoliades, M(1986) .Microeconomics.4th ed, Macmillan Publishing Hill Co. New York.
 Frank,H and Bernanke.(2004):Principles of Microeconomics;2nd Edition ,New York: McGraw-Hill.
 Lipsey, R and Crystal, A.(2007).Economics.11th Ed, Oxford University Press, Oxford.
 McConnell and Brue,S (2002).Economics: Principles, Problems and Policies. McGraw-Hill Higher Education, New York.
 Mankiw, Gregory (2005). Principles of Microeconomics. 9th Ed. Norton and Co. Inc., New York.3rd Ed. Prentice-Hall International
Inc., New Jersey.
 Ofori-Atta, Jones (1998) Introduction to Microeconomics. Woeli Publishers, Accra
 Pindyck, R.S. and Rubinfield, D.L.(1995).Microeconomics. 3rded. Prentice-Hall International Inc., New Jersey.
 Pomeyie, Paragon (2001).Microeconomics: An Introductory textbook. Wade Laurel Press, Accra.
 Essentials ofBBA
Economics, by P. Krugman,
111 Lecture One R. Wells and K. Graddy, Worth Publishers, Second Edition.
END OF FIRST LECTURE

BBA 111 Lecture One