Subject: BASIC MICROECONOMICS

Introduction to Microeconomics and Basic Concepts

- Basic issues in Economics ( Scarcity, Efficiency, and Alternatives)

Scarcity- the condition in which our wants are greater than the limited resources available to satisfy those wants.
What is WANTS? Anything that provides utility or satisfaction.

What is UTILITY?
The satisfaction one receives from a good.
What is Good and what is Bad?
GOOD- anything from which individuals receive utility or satisfaction
BAD- anything from which individuals receive disutility or dissatisfaction
DISUTILITY- the dissatisfaction one receives from a Bad.

FACTORS of PRODUCTION
Land- Labor- Capital
LAND- all natural resources, such as minerals, water, forests, and unimproved land.
- Land is paid by rent
LABOR- the physical and mental talents people contribute to the production process.
- Labor is paid by wages
CAPITAL- Produced Goods that can be used as inputs for further production, such as, factories, machinery, tools,
computers, and buildings.
- Capital is paid by interest
ENTREPRENEURSHIP- the particular talents that some people have for:
- Organizing the resources of land, labor and capital to produce goods.
- Seeking new business opportunities
- Developing new ways of doing things.
- ( entrepreneurial talent is paid by profits)

Allocative Efficiency- is measured using a concept known as Pareto Superiority (or Optimality)

Pareto Optimal- Is that allocation where no person could be made better off without inflicting harm on another.
Pareto Superior- is that allocation where the benefit received by one person is more than the harm inflicted on another
(benefit approach)
Full employment- for a system to be economically efficient then full employment is also required.

Economic System rarely exists in a pure form. The following classifications of system is based on the dominant
characteristics of those system.

A. Pure Capitalism- private ownership of production capacity, without government interference, and motivated by
self interest.

Laissez Faire- the absence of the government in free market.

Cost of Freedom- inequity and several ills associated with the lack of protection afforded by government.

B. Command- government makes the decisions. – with force of law

C. Traditional- based on social mores or ethics, non legislative bases.
D. Socialism- maximizes individual welfare based on perceived (awareness/ mahalata) needs.
E. Communism- everyone shares equally in the output of society (according to their needs).privste owning does
not exist.
F. Mixed System- contains elements of more than one system. It is mixed of (capitalism, command, and socialism
are the major elements, with some communism and tradition.)
 3 Economic Problems on Resource Allocation

What to Produce? It helps to understand which goods or services are required in the society.
How to Produce? Choosing different ways or techniques of production.
For whom to Produce? It is concerned with the distribution aspects of goods and services.

It is related to the buying capacity of the consumers in the market.

Purchasing Power- this is the buying capacity of consumers.

INSTITUTIONS FOR ALLOCATION OF RESOURCES.

Capitalist Economy
- Means of production are owned and controlled by and for the benefit of private individuals.
- resources are allocated by voluntary trading among business and consumers.

Market Economy
- Private ownership of property
- Very unequal distribution of income
- Absence of role of government

Planned Economy
- Economic decisions are highly centralized
- The state owns and controls the means of production and distribution.
- Decision are made according to government plans.
“ No economy is completely centralized or decentralized; all economies are a combination of both”

Mixed Economy
- Ownership of property both by private and public sector.
- Freedom of enterprise in private sector but no freedom in public sector.
- Competition exist only in private sector.

ECONOMICS Redefined- economics is the science that studies human behavior in regards to the allocation of scarce
resources so that consumers attains the maximum level of satisfaction.
Need for Rationing Device- a means for deciding who gets what of available resources and goods.
( if you are willing and able to pay the price, the good is yours)

OPPORTUNITY COST and MONEY COST

Because we live in a market economy where (almost) everything has its price, students often wonder about the
connection or difference between an opportunity cost and its market price. The two cost are usually closely tied to one
another because of the way in which a market economy sets prices.

Opportunity cost- used in decision making to help individuals and organizations to make better choices, primarily by
considering the alternatives.
Money Cost- is the cost of acquiring a good or service with available cash. (when you go to the store and buy a shirt, the
price tag displays the money cost.)

SUPPLY and DEMAND

Because prices play a central role in a market economy, we begin our study of demand by focusing on how
quantity demanded depends on price.
(The Quantity Demanded is the number of units of a good that consumers are willing and can afford to buy over a
specified period of time)
Supply- the total amount of a good that all producers are willing to sell.
Demand- total amount of good that all consumers are willing to buy.
Demand Curve- relationship between the quantity of a good demanded and the price consumers are willing to pay,
holding all else constant.
( demand curves almost always slope downwards)
Supply Curve- it shows how a change in the price of a good or service affects the quantity a seller supply.

Factors that Influence Demand

1. Price
2. Number of consumers
3. Consumers income or wealth
4. Consumer tastes
5. Prices of other goods

How do other Goods Influence the price of the Good we’re Considering?
 Substitute- a good that could replace the good under consideration.
 Complement- a good that you consume with the good under consideration.

Factors that Influence Supply (upward sloping)

1. Price
2. Suppliers cost
3. Number of sellers
4. Sellers outside options

Equilibrium
- It is a point at which consumers quantity demanded equals producer’s quantity supplied. (balance of opposing
forces)
Equilibrium Price
- Also called a market clearing price
- Price at which quantity supplied equals quantity demanded.
Shortage- is an excess of quantity demanded over quantity supplied.

The Law of Supply and Demand

The law of supply and demand states that in a free market the forces of supply and demand generally push the price
toward the level at which quantity supplied and quantity demanded are equal.

What is the law of supply and demand?

- The law of supply and demand combines two fundamental economic principles describing how changes in the
price of a resource, commodity, or product affect its supply and demand.
- As the price increases, supply rises while demand declines. Conversely, as the price drops supply constricts while
demand grows.

Law of Demand- the higher the price, the lower the level of demand.
Income effect- changes in demand levels as a function of a product’s price relative to buyer’s income or resources.
Law of Supply- the higher the price, the higher the quantity supplied.

Price Elasticity- the degree to which price changes affects the product’s demand or supply.
Products with a high price elasticity of demand will see wider fluctuations in demand based on the price. In contrast,
basic necessities will be relatively inelastic in price because people can’t easily do without them, meaning demand will
change less relative to change in the price.
 The Firm and the Industry Under Perfect Competition
Perfect Competition
-Occurs in an industry when that industry is made up of small firms producing homogeneous products, when
there is no impediment to the entry or exit of firms, and when full information is available.

A market is said to operate under perfect competition when the following four conditions are satisfied:
1. Numerous Small Firms and Customers- competitive markets contain so many buyers and sellers that each one
constitutes a negligible portion of the whole.
2. Homogeneity of Product- the product offered by and any seller is identical to that supplied by any other seller.
Because products are homogeneous, consumers do not care from which firm they buy and only look for the
lowest price, so competition is more powerful.
3. Freedom of Entry and Exit- new firms desiring to enter the market face no impediments that previous entrants
can avoid, so new firms can easily come in and compete with older firms. Similarly, if production and sale of the
good prove unprofitable, no barriers prevent firms from leaving the market.
4. Perfect Information- each firm and each customer is well informed about available products and prices. They
know whether one supplier is selling price than another.

The Perfectly Competitive Firm

We must deal separately with the behavior of individual firms and the behavior of the industry that is comprised
of those firms.
Pricing- one basic difference between the firm and the industry under competition.
Price Taker- under perfect competition, the firm has no choice but to accept the price that has been determined in the
market.
Variable Cost- is any cost of the firm’s operations that depends on the firms level of output.

Theory of Consumer Behavior

“ choices lies on what do we want and what we afford”
Utility as Satisfaction
Level of satisfaction is measured as utility and the unit of satisfaction is called utils. Remember that the higher
the utils, the higher the level of satisfaction.
Utility can be measured in two methods, the ordinal and cardinal method.
Ordinal Method- is done when an individual ranks the utility for commodity.
Cardinal Method- is the process in which individual give the intensity of utils he derives in 1 unit of goods.

Budget Constraints
It refers to the constraints that consumer face as a result of limited incomes.
Budget Line- refers to all combinations of goods for which the total amount of money spent is equal to income.

Theory of Production and Cost

What is theory of production and cost?
The theory involves some of the most fundamentals principles of economics.it is an effort to explain the principle, by
which a business firms decides how much of each commodity that it sells, it will produce and how much of labor , raw
materials, fixed capital good, etc. it will use.
Relativity of Production Cost
A business firms are economic resources called inputs, and sells the goods it produces called outputs.
Fixed Input- a factor of production that can be changed in the short-run
Variable input-a factor of production that depends upon the level of production. Variable input change depends upon
how much we choose to produce.

Profit
The firm’s main goal or objective is the maximizes profit.
Total Revenue
Is the income a business receives from the sale of all the goods produced.
 Economic Profit versus Accounting Profit
Economic Profit
Is more or less similar to accounting profit.
Accounting Profit
Can be learned as the actual gains and losses by the business in a particular year.

The Various Measures of Cost

Variable Costs and Fixed Costs

Fixed Cost- are cost that are independent of output. This remain constant throughout the relevant range and are usually
considered sunk for the relevant range

Example of Fixed Costs includes:

 Building rent
 Insurance payments
 Subscriptions fees utilities payments

Variable Cost- are cost that vary with output. Generally variable costs increase at a constant rate relative to labor and
capital. Variable costs may include wages, utilities, materials used in production.

Example of variable cost are:

 Sales commissions
 Shipping costs
 Hourly labor costs
 Raw material

Hypothetical Cost Schedule

Short Run- in the short run one factor