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1. BROWN’S TOWN
COMMUNITY COLLEGE
INTRODUCTION TO MICRECONOMICS – ECO1001
UNIT 1 – THE NATURE OF ECONOMICS

2. Definition of Economics
Economics is the study of the production, distribution and consumption of
wealth in human society. In this sense, economics is concerned with the
production of goods and services in an economy (calculated as GDP) and the
consumption of goods and services i.e. how much the population as a whole
spends and how much it saves.
Economics is the study of how individuals and societies choose to use the
scarce resources that nature and previous generations have provided.

3. Definition of Economics
Economics is traditionally divided into two main branches:
1. Microeconomics – this is concerned with the individual parts or units of
the economy e.g. households, firms and industries. It studies the
interrelationships between these units in determining the pattern of
production and distribution of goods and services.
2. Macroeconomics – is concerned with the economy as a whole, and
studies economic aggregates or grand totals e.g. the overall level of prices,
output and employment in the economy.

4. Definition of Economics
Question: Which of the following would be considered microeconomic or
macroeconomic issues?
1. Level of unemployment in Jamaica
2. Economic recession
3. Marie’s demand for ice-cream
4. Jamaica’s inflation rate
5. Honey Bun’s output of donuts in a month
6. Jamaica’s trade deficit

5. Definition of Economics
We can also distinguish between positive and normative economics and consequently
identify positive and normative statements.
Positive Statements – are statements that can be tested by reference to the facts e.g.
Jamaica’s inflation rate for 2019 was 3.91%, a 0.17% increase from 2018.
Normative Statements – are statements that cannot be tested purely by reference to
the facts. These statements involve value judgements and usually include the words
“ought”, “should” and “could” e.g. the Government should close the country’s
borders to reduce the spread of Covid-19.

6. Definition of Economics
Question: Which of the following are positive and which are normative
statements?
1. Jamaica’s inflation rate was higher in 2019 than in 2018.
2. Trinidad’s rate of economic growth is greater than Jamaica’s.
3. The reintroduction of the death penalty would reduce Jamaica’s crime rate.
4. Old age pensions should be increased.
5. Jamaica has a trade deficit on her balance of trade.

7. The Economic Problem of Scarcity
Human wants are virtually unlimited or infinite, yet the means of fulfilling human
wants are limited or finite. This is because the world only has a limited amount of
resources.
These resources or factors of production or inputs are of four broad types:
1. Land and raw materials or natural resources
2. Labour or human resources
3. Capital
4. Entrepreneurship or enterprise

8. The Economic Problem of Scarcity
So here is the reason for scarcity – there is an excess of human wants over
what can actually be produced.

9. The Economic Problem of Scarcity
Scarcity is the one central problem faced by all individuals and societies, and
forms the basis of the subject of economics.
With the issue of scarcity in mind, economics can also be defined as the human
science which studies the relationship between scarce resources and the various uses which
compete for these resources.

10. Scarcity, Choice & Opportunity Cost
Because resources are scarce, choices have to be made. There are three main
categories of choice that must be made in any society:
• What to produce? – what goods and services are going to be produced and
in what quantities.
• How to produce? – how are things going to be produced, given that there is
normally more than one way of producing things.
• For whom to produce?

11. Scarcity, Choice & Opportunity Cost
Choice involves sacrifice. For e.g. the more food you choose to buy, the less
money you will have to spend on other goods. The more food a nation
produces, the fewer resources will there be for producing other goods.
In other words, the production or consumption of one thing involves the
sacrifice of alternatives. This sacrifice is known as opportunity cost.
Opportunity Cost is the cost of any activity measured in terms of the best
alternative forgone.

12. Production Possibility Frontier (PPF)
The issues of scarcity, choice and opportunity costs can be explained using a
graph called a Production Possibility Curve or Production Possibility Frontier
or PPF for short.
This is a curve showing all the possible combinations of two goods that a
country can produce within a specified time period with all its resources fully
and efficiently employed.

13. Production Possibility Frontier (PPF)
Like many diagrams in economics, the PPF shows a simplified picture of reality
and is based on two main assumptions:
• There are just two types of goods that can be produced (because we only
have two axes on our graph).
• There is only one type of each good produced.

14. Production Possibility Frontier (PPF)

15. Production Possibility Frontier (PPF)
Note the following about the diagram:
• If the country devotes all its resources to making pizza, then it cannot produce any sugar
and vice versa.
• All points along the curve e.g. A, B & C shows the combinations of the two goods that can
be produced when all the nation’s resources are fully and efficiently employed.
• Production cannot take place beyond the curve for e.g. at point F. The nation does not have
enough resources to do this.
• If the nation’s resources are not fully employed or used in the most efficient way possible,
then the nation will produce at a point inside the curve, such as at points D and E.

16. Production Possibility Frontier (PPF)
A Production Possibility Frontier illustrates the microeconomic issues of:
• Choice – if the country chooses to produce more pizza, it would have to
sacrifice the production of some sugar.
• Opportunity Cost – the sacrifice of sugar is the opportunity cost of the extra
pizza.

17. Production Possibility Frontier (PPF)
• Increasing opportunity costs – by this we mean that as a country produces more of
one good, it has to sacrifice ever increasing amounts of the other. The reason for
this is that different factors of production have different properties. People have
different skills, land differs in different parts of the country etc. So as the nation
concentrates more and more on the production of one good, it has to start using
resources that are less and less suitable i.e. resources that would have been better
suited to producing other goods. So in our example, the production of more and
more sugar will involve a growing marginal cost i.e. ever increasing amounts of
pizza have to sacrificed for each additional unit of sugar produced.

18. Production Possibility Frontier (PPF)
Combination Cloth (in metres) Wheat (in bushels) Opportunity Cost
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0

19. Production Possibility Frontier (PPF)
We can use the information in the table to plot a PPF. When plotting diagrams:
1. Use graph paper to get a more accurate diagram.
2. Use a pencil to make it easier to make changes where necessary.
3. Give your diagram a name.
4. Label both the X and Y axis.
5. Use a constant scale when marking off the points along both axis.

20. Production Possibility Frontier (PPF)

21. Production Possibility Frontier (PPF)
A Production Possibility Frontier illustrates the macroeconomic issue of
growth.
Over time, the production possibilities of a nation are likely to increase. For
example, new raw materials may be discovered, technological advances are
likely to take place.
This growth in potential output is illustrated by an outward shift in the PPF.
This will then allow actual output to increase, and the point that was
unattainable now becomes attainable.

22. Production Possibility Frontier (PPF)

23. Production Possibility Frontier (PPF)
An outward shift of the PPF and a shift from PPF1 to PPF2 illustrates
economic growth. This is possible if:
• There is an increase in the amount of resources.
• There is an improvement in technology that allows the country to produce
more from their given amount of resources.

24. Economic Systems
The term economic systems refer to the way in which the resources of a
country are used to produce goods and services, and the manner in which these
goods and services are distributed for consumption.
We can distinguish three main types of economic systems:
• The Free-Market or Capitalist Economy – this is an economy where all
economic decisions are taken by individual households and firms, with no
government intervention e.g. the USA and the U.K.

25. Economic Systems
• The Planned or Command Economy – an economy where all economic
decisions are taken by the central authorities e.g. China and Cuba.
• Mixed Economy – an economy where economic decisions are made partly
by the government and partly through the market. In practice, all economies
are a mixture of free-market and command systems. It is therefore the
degree of government intervention that distinguishes different economic
systems. E.g. Jamaica and Barbados.

26. Law of Comparative Advantage
Specialization is the division of productive activities among persons and regions so
that no one individual or region is totally self-sufficient. For e.g. an individual may
specialize in law or medicine and a nation may specialize in the production of coffee
or cars.
Individuals specialize in the jobs they do, and with the money they earn from selling
their labour, they buy the goods and services they need i.e. goods that other people
have specialized in producing.
Firms specialize in producing certain goods. With the revenues they earn, they buy
input they need from other firms.

27. Law of Comparative Advantage
Countries also specialize. They produce more than they need of certain goods.
What is not consumed domestically is exported. The revenues earned from the
exports are used to import goods which are not produced in sufficient amounts
at home.
But which goods should a country specialize in? What should it export and
import? The answer is that it should specialize in those goods in which it has a
comparative advantage.

28. Law of Comparative Advantage
Countries have different endowments of factors of production. They differ in
labour skills, climate, raw materials etc. What this means is that the relative
costs of producing goods will vary from country to country.
For e.g. one country may be able to produce one car for the same cost as 600
tons of wheat whereas another country may be able to produce one car for the
same cost of 300 tons of wheat.
It is these differences in relative costs that form the basis of trade.

29. Law of Comparative Advantage
Let us distinguish between absolute advantage and comparative advantage.
Absolute advantage – occurs when one country can produce a good with less
resources than another country. For e.g. if France can produce wine with less
resources than the UK, then France has the absolute advantage in producing
wine.

30. Law of Comparative Advantage
Comparative Advantage – trade between two countries can still be beneficial
even if one country could produce all goods with less resources than the other,
providing the relative efficiency with which goods can be produced differs
between the two countries.
Countries have a comparative advantage in those goods that can be produced at
a lower opportunity cost than in other countries i.e. if it has to forgo less of
other goods in order to produce it.