INTRODUCTION TO

MICROECONOMICS
Chapter 1
WHAT IS ECONOMICS???

• Is the study of proper

allocation of scarce resources
to satisfy the unlimited needs
and wants of men.
 WHY STUDY ECONOMICS???

• To learn a way of thinking

• To understand society
• To understand global affairs; and
• To be an informed voters
BASIC QUESTIONS OF THE
ECONOMIC SYSTEM

•What gets produced?

•How is it produced?
•Who gets what is produced?
 FACTORS OF PRODUCTION

Land Labor Capital Entrepreneurship

 LAND
• pertains to all natural physical resources,
including all raw materials used in the
manufacture of goods and services.
• usually a limited resource for many
economies.
 LABOR
represents the human capital available
to transform raw or national resources
into consumer goods.
 refers to the workers involved in
production.
 CAPITAL
represent the monetary resources companies use to
purchase natural resources, land and other capital
goods.
 also represents the major physical assets individuals
and companies use when producing goods or
services. These assets include buildings, production
facilities, equipment, vehicles and other similar
items.
 ENTREPRENEURSHIP
usually have an idea for creating a valuable good or
service and assume the risk involved with
transforming economic resources into consumer
products.
 managerial functions of gathering, allocating and
distributing economic resources or consumer products
to individuals and other businesses in the economy.
THE CIRCULAR FLOW
MODEL
 RESOURCE MARKET
• The markets in which the resources used to produce
products are exchanged.
• Labor Market – HH supply work for wages
• Capital Market – HH supply savings for interest or
claims.
• Land Market – HH supply land or real property in
exchange for rent.
PRODUCT MARKET

•The markets in which

goods and services are
exchanged.
WHAT IS MICROECONOMICS?

• The branch of economics that

examines the functioning of
individual industries and the behavior
of individual decision-making units –
that is, business firms and households.
 IMPORTANCE OF STUDYING
MICROECONOMICS

• Understand the market

• Predict and explain the changes of market prices.
• Personal and managerial decisions
• Evaluate public policies

• Benefits
• Helps to make better decision in business and in life.
POSITIVE ECONOMICS
VS.
NORMATIVE
ECONOMICS
 POSITIVE ECONOMICS

• is the study of economics based on

objective analysis (Investopedia,2017) and
also based on facts.
• statements do not have to be correct, but
they must be able to be tested and proved
or disproved.
 NORMATIVE ECONOMICS

• is a perspective on economics that reflects

normative judgments or opinionated
reactions toward economic projects,
statements, and scenarios. (Investopedia,
2017)
• subjective and value based.
 Positive Economics Normative Economics
Talks about what is, what was, Talks about should, think, ought
or will be to
allows us to test the statement cannot be tested of true or false
with data
Ex. People tend to shop at SM Ex. Everyone should shop at
more when they get a pay raise SM
• Government-provided • Government should provide
healthcare increases public basic healthcare to all
expenditures citizens
Opportunity Principle of Spillover or
Marginal
Cost Diminishing Externality
Principle
Return Principle

FOUR PRINCIPLES OF ECONOMICS

 OPPORTUNITY COST
 is the value of what is foregone in
order to have something else.
 refers to a benefit that a person
could have received, but gave up, to
take another course of action.
 MARGINAL PRINCIPLE
• the examination of the costs and benefits of
a marginal (small) change in the production
of goods or an additional unit of an input or
good.
• Marginal Benefit
• Marginal Cost
 MARGINAL MARGINAL
BENEFIT COST

• also known as is the increase in

marginal revenue, total cost as a result
is the increase in of a change in
total benefits as a output of a good by
result of a change one unit.
in output of a good
by one unit.
 MARGINAL PRINCIPLE COSTS
• Fixed Cost - is a cost that remains constant
• Variable Cost - is dependent on the production output level of goods
and services.
• Implicit Cost (intangible) - means that when a company allocates its
resources, it always forgoes the ability to earn money off the use of the
resources elsewhere.
• Explicit Cost tangible) - explicit costs would be items such as wage
expenses, rent or lease costs as it is easy to see the source of the cash
outflow and the business activities to which the expense is attributed.
 PRINCIPLE OF DIMINISHING RETURN

• is a law of economics that states an increasing

number of new employees causes the marginal
product of another employee to be smaller
than the marginal product of the previous
employee at some point. (Investopedia, 2017)
 SPILLOVER OR EXTERNALITIES

•is a consequence of an economic

activity experienced by unrelated
third parties; it can be either
positive or negative.
PRODUCTION POSSIBILITY FRONTIER
(PPF)

 is a curve depicting all maximum output

possibilities for two goods, given a set of
inputs consisting of resources and other
factors.
 The PPF assumes that all inputs are used
efficiently.
• points A, B and C -
represent the most
efficient use of
resources by the
economy.
• Point X represents
an inefficient use of
resources.
• Point Y represents
the goals that the
economy cannot
attain with its present
levels of resources.
 INEFFICIENCY
• means that scarce resources are not being
put to their best use.
• means that the economy is producing less
than the maximum possible output of
goods and services, from its resources.
ECONOMIC GROWTH

• An increase in the total output of

an economy. It occurs when a
society acquires new resources or
when it learns to produce more
using existing resources.
 ECONOMIC SYSTEM

Command Market Mixed

Economy Economy Economy
 COMMAND ECONOMY

• is a system where the government,

rather than the free market, determines
what goods should be produced, how
much should be produced and the price
at which the goods are offered for sale.
COMMAND ECONOMY CIRCULAR FLOW
 MARKET ECONOMY
• is an economic system in which
economic decisions and the pricing of
goods and services are guided solely by
the aggregate interactions of a country's
individual citizens and businesses.
 MIXED ECONOMY
•has elements of traditional, command,
market systems
• most common type of economic system
•Traditional, command, market
economies adopt elements from others