ECO2103Cp1 IntroductiontoMicroeconomicsAUG2023
ECO2103Cp1 IntroductiontoMicroeconomicsAUG2023
ECO2103
Chapter 1
Introduction to
Microeconomics
Chapter Outline and Learning Objectives
•
1.0 What is economics? Resources in Economics
•
1.2 Why Study Economics?
•
1.3 Basic Principles in Economics
•
1.4 The Scope of Economics
•
1.5 The Market System (Circular Flow Diagram)
•
1.5 Efficiency of Market Economies
•
1.6 Economic Systems and The Role of Government
•
Free market, central planning market and the mix economy market.
Does Apple Manufacture the iPhone in
the United States?
When Apple began selling
computers in the 1970s
and 80s, it manufactured
them in the United States.
But while Apple designed
the iPhone in the U.S.,
most iPhones are
assembled in China.
Why are many products
manufactured overseas?
Can we change this?
Should we?
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What is this class about?
People make choices as they try to attain their goals.
Choices are necessary because we live in a world of
scarcity.
Scarcity
Economics
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1.0 What is economics?
Economics
The study of how individuals and societies choose to use
the scarce resources that nature and previous
generations have provided.
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Scarcity: The Central Economic Problem
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Examples of scarcity and the trade-offs associated with making
choices:
Trade-off: The idea that, because of scarcity, producing more of
one good or service means producing less of another good or
service.
• You have a limited amount of time. Each hour on the job means one
less hour for study or play.
• A city has a limited amount of land. If the city uses an acre of land for
a park, it has one less acre for housing, retailers, or industry.
• You have limited income this year. If you spend $17 on a music CD,
that’s $17 less you have to spend on other products or to save.
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Some Typical “Economics” Questions
• We will learn how to answer questions like these:
– How are the prices of goods and services
determined?
– Why do firms engage in international trade, and how
do government policies, such as tariffs, affect
international trade?
– Why does government control the prices of some
goods and services, and what are the effects of those
controls?
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The Three Key Economic Questions: What,
How, and Who?
.
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FIGURE 1.1 The Three Basic Questions
Every society has some system or process that transforms its scarce
resources into useful goods and services.
In doing so, it must decide what gets produced, how it is produced, and
to whom it is distributed.
The primary resources that must be allocated are land, labor, and
capital.
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1. What Goods and Services Will Be
Produced?
Individuals, firms, and governments must decide on the
goods and services that should be produced.
An increase in the production of one good requires the
reduction in the production of some other good. This is a
trade-off, resulting from the scarcity of productive resources.
The highest-valued alternative that must be given up in order
to engage in some activity is known as the opportunity cost.
Example: The opportunity cost of increased funding for
space exploration might be giving up the opportunity to fund
cancer research.
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2. How Will the Goods and Services Be
Produced?
A firm might have several different methods for producing its goods and
services.
Example #1: A music producer can make a song sound good by:
• Hiring a great singer and using standard production techniques.
• Hiring a mediocre singer and using Auto-Tune to correct the
inaccuracies.
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Try this..
•
The 3 key economic questions include all of the following
EXCEPT
•
A) "What products do we produce?"
•
B) "How do we produce these products?"
•
C) "Where should these products be produced?"
•
D) "Who consumes the products?"
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1.2 Factors of Production
The resources used to produce goods and services; also known as production inputs, or
resources.
• Natural Resources
Resources provided by nature and used to produce goods and services.
• Labor
Human effort, including both physical and mental effort people, used to produce goods and
services.
• Physical Capital
The stock of equipment, machines, structures, and infrastructure that is used to produce goods
and services.
• Human Capital
The knowledge and skills acquired by a worker through education and experience and used to
produce goods and services.
• Entrepreneurship
The effort used to coordinate the factors of production—natural resources, labor, physical capital,
and human capital—to produce and sell products.
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1.2 Factors of Production
• Entrepreneurs
–Employs the other factors of
production
–Takes initiative
–Makes strategic business decisions
–Innovates
–Takes risk
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LO5
1.2 Why Study Economics?
1. To Learn a Way of Thinking
• Economics has three fundamental concepts:
– Opportunity cost
– Marginalism
– Efficient markets - No free lunch
2. To Understand Society
3. To Be an Informed Citizen
•
Understanding what happens in a recession and what the government can
and cannot do to help in a recovery is an essential part of being an informed
citizen.
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BASIC PRINCIPLES IN ECONOMICS
1. THE PRINCIPLE OF OPPORTUNITY COST
• Opportunity cost
The best alternative that we forgo, or give up, when we make a choice or
decision. (What you sacrifice to get something).
We can use the principle of opportunity cost to compute the cost of the lawn business.
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Your turn..
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2. THE MARGINAL PRINCIPLE (1 of 2)
MARGINAL PRINCIPLE
Increase the level of an activity as long as its marginal benefit
exceeds its marginal cost. Choose the level at which the marginal
benefit equals the marginal cost.
• Marginal benefit
The additional benefit resulting from a small increase in some
activity.
• Marginal cost
The additional cost resulting from a small increase in some activity.
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2.1 THE MARGINAL PRINCIPLE (2 of 2)
Sequels?
The marginal benefit of
movies in a series decreases
because revenue falls off with
each additional movie, while
the marginal cost increases
because actors demand
higher salaries.
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Try this..
•
The principle that individuals and firms pick the activity level
where the incremental benefit of that activity equals the
incremental cost of that activity is known as the
•
A) marginal principle.
•
B) principle of opportunity cost.
•
C) principle of diminishing returns.
•
D) spillover principle.
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Try this..
•
The principle that individuals and firms pick the activity level
where the incremental benefit of that activity equals the
incremental cost of that activity is known as the
•
A) marginal principle.
•
B) principle of opportunity cost.
•
C) principle of diminishing returns.
•
D) spillover principle.
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•
The marginal principle implies that an individual should produce
or consume where
•
A) marginal benefit exceeds marginal cost.
•
B) marginal benefit is less than marginal cost.
•
C) marginal benefit equals marginal cost.
•
D) total benefit equals total cost.
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•
The marginal principle implies that an individual should produce
or consume where
•
A) marginal benefit exceeds marginal cost.
•
B) marginal benefit is less than marginal cost.
•
C) marginal benefit equals marginal cost.
•
D) total benefit equals total cost.
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To Learn a Way of Thinking (3 of 3)
Efficient Markets—No Free Lunch
• efficient market A market in which profit opportunities are
eliminated almost instantaneously.
• The study of economics teaches us a way of thinking and
helps us make decisions.
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Positive and Normative Economics
• Positive economics
• Economic statements that are factual.
• Answers the question “What is?” or “What will be?”
• An approach to economics that seeks to understand behavior
and the operation of systems without making judgments. It
describes what exists and how it works.
• Normative economics
• Economic statements that involve value judgments.
• Answers the question “What ought to be?”
• An approach to economics that analyzes outcomes of
economic behavior, evaluates them as good or bad, and may
prescribe courses of action. Also called policy economics.
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LO3
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The Scope of Economics (1 of 2)
Microeconomics and Macroeconomics
• microeconomics The branch of economics that examines the
functioning of individual industries and the behavior of individual
decision-making units—that is, firms and households.
• Microeconomics looks at the individual unit—the household, the firm,
the industry. It sees and examines the “trees.
Microeconomics is the study of
• how households and firms make choices,
• how they interact in markets, and
• how the government attempts to influence their choices.
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The Scope of Economics (1 of 2)
Microeconomics and Macroeconomics
• macroeconomics The branch of economics that examines the
economic behavior of aggregates—income, employment, output, and
so on—on a national scale.
• Macroeconomics looks at the whole, the aggregate. It sees and
analyzes the “forest.”
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Table 1.1 Issues in Microeconomics and
Macroeconomics
Examples of Microeconomic Issues Examples of Macroeconomic Issues
• How firms decide what prices to charge • Why, over the long run, some economies
for the products they sell have grown much faster than others
• Which government policy would most • What determines the inflation rate
efficiently reduce opioid addiction
• What determines the value of the U.S.
• The costs and benefits of the federal dollar in exchange for other currencies
government’s process for approving the
sale of a new prescription drug • Whether government intervention can
reduce the severity of recessions
• The most efficient way to reduce air
pollution
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TABLE 1.1 Examples of Microeconomic and Macroeconomic
Concerns
Division
of Economics Production Prices Income Employment
Microeconomics Production/output Prices of individual Distribution of Employment by
in individual goods and services income and individual
industries and Price of medical care wealth businesses and
businesses Price of gasoline Wages in the industries
How much steel Food prices auto industry Jobs in the steel
How much office Apartment rents Minimum wage industry
space Executive Number of
How many cars salaries employees in a firm
Poverty Number of
accountants
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2.3 The Market System
Explain the basics of how a market system works.
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The circular flow of goods and incomes
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What do economists study?
• The circular flow of income
– firms and households
– goods markets
▪real flows: goods and services
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The circular flow of goods and incomes
Goods and services
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What do economists study?
• The circular flow of income
– firms and households
– goods markets
▪real flows: goods and services
▪money flows: consumer expenditure
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The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
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What do economists study?
• The circular flow of income
– firms and households
– goods markets
▪real flows: goods and services
▪money flows: consumer expenditure
– factor markets
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What do economists study?
• The circular flow of income
– firms and households
– goods markets
▪real flows: goods and services
▪money flows: consumer expenditure
– factor markets
▪real flows: services of labour and other factors
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The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
Services Copyright
of factors© 2019,of production
2017, (labour,
2015 Pearson Education, etc)
Inc. All Rights Reserved.
What do economists study?
• The circular flow of income
– firms and households
– goods markets
▪real flows: goods and services
▪money flows: consumer expenditure
– factor markets
▪real flows: services of labour and other factors
▪money flows: wages and other incomes
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The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
Wages, rent
dividends, etc.
£
Services Copyright
of factors of production (labour, etc)
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Figure 2.6 The Circular-Flow Diagram (1 of 2)
Circular-flow diagram: A model
that illustrates how participants in
markets are linked.
• Households provide factors of
production to firms.
• Firms provide goods and
services to households.
• Firms pay money to households
for the factors of production.
• Households pay money to firms
for the goods and services.
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Figure 2.6 The Circular-Flow Diagram (2 of 2)
Like all economic models, the
circular-flow diagram is a
simplified version of reality:
• No government
• No financial system
• No foreign buyers and sellers
of goods
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Economic Systems and the
Role of Government
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Classifying economic systems
Totally Totally
planned free-market
economy economy
Socialist Capitalist
Economy Economy
System System
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Classifying economic systems
Mid-1980s
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Classifying economic systems
Mid-1980s
Mid-2010s
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BASIC ECONOMIC PROBLEMS
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BASIC ECONOMIC PROBLEMS (cont.)
Economic Decisions in the Socialist Economic System
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BASIC ECONOMIC PROBLEMS (cont.)
Characteristics
(a) The resources are owned by Advantages
private sectors. (a) Freedom of choice
(b) No government intervention in Disadvantages
(b) People have right to own
making economic decisions. (a) Wide disparity between the
wealth.
(c) Individual firms are free to make rich and the poor
(c) The harder people work, the
the economic decisions. (b) Misallocation of resources
more they will receive.
(d) Price mechanism is used as an (c) Human welfare is ignored
indicator. (d) There is mobility of labour.
(d) Social cost and negative
(e) Producer objective – maximize (e) Competition leads to the
externalities
profit production of quality goods
Consumer objective – maximize and services.
satisfaction
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Capitalist Economy System
Laissez-Faire Economies: The Free Market
• laissez-faire economy Literally from the French: “allow [them] to
do.” An economy in which individual people and firms pursue their
own self-interest without any central direction or regulation.
• Mechanism: Decisions on price and quantity are made on the basis
of demand and supply alone.
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Economic Systems and the Role of
Government
Consumer Sovereignty
• consumer sovereignty The idea that consumers ultimately
dictate what will be produced (or not produced) by choosing
what to purchase (and what not to purchase).
• The mix of output is dictated by consumers who “vote” by
buying or not buying.
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BASIC ECONOMIC PROBLEMS (cont.)
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BASIC ECONOMIC PROBLEMS (cont.)
The Mixed Economy System
Mixture between Capitalist and Socialist Economy System
E.g.: Malaysia, Singapore, Great Britain
• Resources are owned by both the government and
the private sectors
• Government will provide public goods and merit
goods which private sectors are unwilling to
Characteristics produce.
• Individuals and firms are free to own wealth and
need to pay tax to the government.
• Individuals and firms can make economic
decisions.
• There is a variety of goods and services produced
by private sectors and the government provides
public goods at affordable prices.
• The economic activities are more stable and
Advantages organized.
• There would be a narrow gap between the rich and
the poor.
• The social costs are minimized.
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BASIC ECONOMIC PROBLEMS (cont.)
Economic Decisions in the Mixed Economic System
What and how much to produce?
Determined by market demand and supply.
The public sectors provide public goods at affordable price and private
sectors produce variety of goods and services to maximize their profits.
How to produce?
The producer will choose the most efficient and cost-effective method.
Government will enact laws to combat inefficiencies from negative
externalities.
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Efficiency of Market Economies
Market economies tend to be more efficient than centrally-
planned economies.
Market economies promote:
• Productive efficiency, a situation in which a good or service
is produced at the lowest possible cost; and
• Allocative efficiency, a state of the economy in which
production is in accordance with consumer preferences; in
particular, every good or service is produced up to the point
where the last unit provides a marginal benefit to society equal
to the marginal cost of producing it.
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Source of Economic Efficiency
Productive efficiency comes about because of competition.
Allocative efficiency arises due to voluntary exchange.
Voluntary exchange: A situation that occurs in markets when
both the buyer and the seller of a product are made better off by
the transaction.
• Each transaction that takes place improves the well-being of
the buyer and seller; transactions continue until no further
improvement can take place.
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Let’s try this..
An economy in which a central authority draws up a plan that
establishes what will be produced and when, sets production
goals, and makes rules for distribution is a
A) free-market economy.
B) laissez-faire economy.
C) public-goods economy.
D) command economy.
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Let’s try this..
An economy in which a central authority draws up a plan that
establishes what will be produced and when, sets production
goals, and makes rules for distribution is a
A) free-market economy.
B) laissez-faire economy.
C) public-goods economy.
D) command economy.
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Another one..
An economy in which individual people and firms pursue their
own self-interest without any central direction or regulation is
a(n)
A) command economy.
B) laissez-faire economy.
C) invisible-hand economy.
D) private-sector economy.
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Another one..
An economy in which individual people and firms pursue their
own self-interest without any central direction or regulation is
a(n)
A) command economy.
B) laissez-faire economy.
C) invisible-hand economy.
D) private-sector economy.
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Yes, one more..
An institution through which buyers and sellers interact and
engage in exchange is
A) a central authority.
B) "laissez-faire."
C) a market.
D) a production frontier.
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Yes, one more..
An institution through which buyers and sellers interact and
engage in exchange is
A) a central authority.
B) "laissez-faire."
C) a market.
D) a production frontier.
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The second last..
Consumer sovereignty
A) is dependent on profits.
B) is the idea that consumers can buy whatever they want to.
C) is the idea that consumers determine what is produced in the
economy through their demands.
D) is only possible in a monarchy.
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The second last..
Consumer sovereignty
A) is dependent on profits.
B) is the idea that consumers can buy whatever they want to.
C) is the idea that consumers determine what is produced in
the economy through their demands.
D) is only possible in a monarchy.
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Finally..
In a ________, the amount of output that any one household
gets depends on its income and wealth.
A) Marxist economy
B) socialist economy
C) command system
D) free-market system
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Finally..
In a ________, the amount of output that any one household
gets depends on its income and wealth.
A) Marxist economy
B) socialist economy
C) command system
D) free-market system
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Apply the Concept: What Is Socialism? (1 of 2)
In his book Das Kapital, Karl
Marx argued that the market
system (capitalism) would be
replaced by a communist
economy controlled by workers.
Countries adopting communism
have instead become centrally
planned, with firm government
control.
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Apply the Concept: What Is Socialism? (2 of 2)
Social democratic parties
favor a large role for
government in the economy,
sometimes including
government ownership or
control of some large
industries.
This is not socialism in the
Marxist tradition; but its
proponents argue for an
increased role for
government in sectors like
health care and education.
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REVIEW TERMS AND CONCEPTS
• ceteris paribus, or all else equal • Economic system
• economics • Free market economy
• efficiency • Socialist economy system
• efficient market • Capitalist economy system
• macroeconomics
• Marginalism
• microeconomics
• normative economics
• opportunity cost
• positive economics
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Copyright
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