BASIC MICROECONOMICS

NELSON A. SOMO, MBA

Part I: Resource Utilization and Economics

Topics for Discussion:

 Four Basic Economic Questions
 Learning Objectives
 The Three Es in Economics
 Economics Defined
 Ceteris Paribus Assumption
 Scarcity: The Central Problem of Economics
 Microeconomics and Macroeconomics
 Factors of Production
 Important Economic Terms
 Circular Flow of Model
 Chapter Summary
 The Concept of Opportunity Cost
 Discussion Questions
 Basic Decision Problems
 Exercise
 Economics and Resource Allocation

Definition of Economics
- efficient allocation of the scarce means of production toward the satisfaction of human needs
and wants.

3 important concepts in the definition of Economics:

• Scarce means of production

• Efficient allocation
• Total satisfaction
 SCARCITY: The Central Problem of Economics

Scarcity is defined as a commodity or service being in short supply, relative to its demand. It can also be
looked into as the limited availability of economic resources relative to man’s unlimited demand for goods
and services.

Factors of Production:
- the economic resources which serve as inputs in the production process.

• Land
• Labor
• Capital
• Entrepreneurship
 Opportunity Cost

Opportunity cost refers to the foregone value of the next

best alternative. In particular, it is the value of what is given
up when one makes a choice.
 Opportunity Cost

Example:

If the price of coffee at Dunkin Donut is P40.00 per cup and one piece of
donut
is P20.00, then the relative price of coffee is 2 pieces of donut. Therefore, if a
consumer has only P40.00 and chooses to buy coffee with it, then we can say
that the opportunity cost of that cup of coffee was 2 pieces of donut, assuming
that the donuts were the next best alternative.
 The Four Basic Decision Problems

Some decision problems that households, firms, the government, and society must think about in
order to properly manage their resources:

• Consumption
• Production
• Distribution
• Growth Over Time
The Four Basic Economic Questions

To address the problem of scarcity and solve the basic decision problems,
the society must answer the four basic economic questions of:

1. What to produce?
2. How to produce?
3. How much to produce?
4. For whom to produce?
3 Es in Economics

In the production of goods and services, there are three Es that need to be
considered. These are:

• Efficiency
• Effectiveness
• Equity
 MICROECENOMICS AND MACROECONOMICS

DIFFERENCES MICROECONOMICS MACROECONOMICS

Study of economic actions of individuals and Studies the economy as a whole and not a
Definition small groups of individuals single unit but combination of all

Particular households, firms and industries National income, general price levels,
Concern with national output, unemployment and poverty

On demand side is to maximize utility Full employment, price stability, economic

Objective whereas on the supply side is to maximize growth and favorable balance of payments
profits at minimum cost
 MICROECONOMICS MACROECONOMICS

Studies individual income Studies national income

Analyzes demand and supply of labor Analyzes total employment in the economy

Deals with households and firms Deals with aggregate decisions

decisions

Studies individual prices Studies overall price levels

Analyzes demand and supply of goods Studies aggregate demand and aggregate
supply
 Types of Economic Systems

To address economic problems, several economic systems have been created and applied throughout
history. These are the following:

1. Traditional Economy
2. Command Economy
3. Market Economy
4. Socialism
5. Mixed Economy