Fundamentals of Economics, Chapter-1, Baiust (EEE)

1. 1
MicroeconomicsMicroeconomics
The Nature of
Economics

2. 2
What is Economics?
 The study of how men allocate L_________
resources to satisfy their u_____________
wants.

3. 3
What is Economics?

4. 4
Want and Demand
 Want:
– A desire
– A particular want can be perfectly satisfied
 Demand:
– Want + p_________________ power

5. 5
A want A demand
Want or Demand?

6. 6
Scarcity and Opportunity Cost
Unlimited wants Limited resources
scarcity
choice
Opportunity cost (OC)

7. 7
Remarks on Scarcity
 Scarcity is a r______________ concept
 Scarcity exists when limited resources are
insufficient to satisfy all unlimited wants
 Scarcity is simply a condition that we want
more than we have
 Scarcity is a universal problem
 Scarcity can be reduced but not be
eliminated

8. 8
Is Sea Water Scarce?
 No!
Because we
do NOT
want more
than we
have.

9. 9
Opportunity Cost (OC)
 OC is the h_____________ valued (or best)
option f_____________
 We choose the highest valued/best option
and forgo the second best option, which
becomes our OC in a making decision

10. 10
Opportunity Cost (OC)
 What is OC for Dorothy to choose the doll?

11. 11
Opportunity Cost (OC)
 Full cost
= out-of-pocket cost + income forgone
= explicit cost + implicit cost

12. 12
Resources
 Things that used to satisfy our wants
 Types:
– Natural resources
– Human resources
– Man-made resources

13. 13
Scarcity
 We want more than we have
Unlimited wants Limited resources
To be successful in his job;
To have more leisure time
Money;
Time

14. 14
Choice
 Because we cannot satisfy all our wants with
limited resources, we have to make choice.

15. 15
Opportunity cost
 Next best alternative forgone

16. 16
Limited resources Unlimited wants
Scarcity
Choice
Opportunity cost
Scarcity, Choice & OC

17. 17
Remarks on Opportunity Cost
 Only the highest valued option forgone is
regarded as cost

18. 18
Would the cost change if:
1. the watch does not function as
well as expected?
2. The book is now half-priced?
Remarks on Opportunity Cost
 Cost changes only if the highest valued
option forgone changes.

19. 19
How does the cost change if the songs on
the CD is not as good as expected?
Remarks on Opportunity Cost
 Change in value ≠ change in cost
Exercise 6: TB/P.12/Q 1.3
Exercise 7: TB/P.12/MCQ 5
Closer Look: TB/P.2/1.9

20. 20
Economic Goods
 A good is economic good if its quantity
available is i____________________ to
satisfy all our wants
 Scarce resources are used in production
 More of it is p_______________
 Quantity demanded (Qd) is larger than
quantity supplied (Qs) at zero price
 Commanding a positive price
– Examples: air conditioner & sport shoes

21. 21
Free Goods
 A good is free good if its quantity available is
s________________ to satisfy all our wants
 No scarce resources are used in production
 More of it is NOT preferred
 Quantity demanded is smaller than quantity
supplied at zero price
 Commanding zero price
 Examples:
– Sea water & air on the earth

22. 22
Sea water Tap water
Free Goods? Economic Goods?
Exercise 8: TB/P.13/MCQ 6
Exercise 9: TB/P.14/MCQ 7
Closer Look: TB/P.15/1.10

23. 23
Free vs. Economic Goods
Free Goods Economic Goods
Produced without using
scarce resources
Produced with scarce
resources
More of it is NOT
preferred
More of it is preferred
Zero production OC Positive production OC
Zero price Positive price
Qd < Qs at zero price Qd > Qs at zero price

24. 24
Consumer Goods
A consumer good is any good which
satisfies human wants directly
They are produced for direct
consumption
Examples:
– air-conditioners used in classrooms
– bread consumed by housewives

25. 25
Capital/Producer Goods
A capital good is any good that is used
for producing other goods or services
They are produced for indirect
consumption
Examples:
– air-conditioners used at home
– bread used as part of decoration in a
bread shop

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Consumer or Capital Goods?
Consum
er Goods

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Consumer or Capital Goods?
Capital Goods

28. 28
Consumer vs. Capital Goods
Whether a good is consumer good or
capital good is NOT classified by its
nature, but by how and where it is
being used.

29. 29
Basic Economic Problems
 What to produce?
– What kinds of product to be produced?
– What quantity of it should be produced?
 How to produce?
– Which production method to be used?
 For whom to produce?
– How to distribute the quantity?
– What criteria should be chosen?
Exercise 10: TB/P.16/MCQ 8

30. 30
Traditional Economy
 Economic decisions are made by referring to
customs and traditions
 The three basic economic problems are
being solved by following the practices of
previous generations/ancestors.

31. 31
Market Economy
 What to produce?
– Product prices serve as signals to direct the
producers to find out what to produce
– Higher price ensures the most profitable kind of
products

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What to produce?

33. 33
Market Economy
 How to produce?
– Factor prices serve as signals to direct the
producers to identify the cheapest method of
production
– Lower price ensures the least costly method of
production or ensures the most profitable
production

34. 34

35. 35
Market Economy
 For whom to produce?
– Prices determine who gets what and in what
quantity
– Goods are distributed to those who are able and
willing to pay the highest price for it

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For whom to produce?

37. 37
Market Economy
 Most/All economic decisions are made by
individuals
 Most of the productive resources are
p________________ owned

38. 38
Planned/Command Economy
 Most/All economic decisions are made by the
central authority
 Most of the productive resources are socially
owned and under the control of the central
government

39. 39
Mixed Economy
 NO pure planned or market economy
 All the economies are mixed economy which
contains both the features of planned and
market economy
 Resources are allocated by
– market forces, commands and orders from the
authority, and traditions and customs
Exercise 12 & 13: TB/P.20/MCQ 11 & TB/P.20/Q 1.6

40. 40
Thank You 