This document provides an introduction to microeconomics and the basic economic problem of scarcity. It discusses how economics studies decision-making under scarcity and uncertainty. Microeconomics examines individual consumers, firms, and markets. The document also outlines key microeconomic concepts like opportunity cost, factors of production, and different types of economies. It explains how free markets can allocate resources efficiently but also the role of the state in mixed market economies.

1. Introduction to Microeconomics and the
Basic Economic Problem
EdExcel 1.1

2. Economics as a Social Science
• Economics studies the choices people
take under the conditions of scarcity and
uncertainty
• Because Economics is a social science we
can never be sure of the way in which
people and businesses will respond to
the changing circumstances around them
• Traditional economic theory has
assumed that consumers seek to
maximise their own satisfaction and that
businesses aim to maximise profit
• But new theories including Behavioural
Economics suggest alternatives and
focus on the social aspect of our
behaviour in day to day life
Consumer Behaviour
Business behaviour

3. Introduction to Microeconomics
• Microeconomics is the study of
economics at the level of the
individual firm, industry or
consumer/household.
• We study how prices and wages are
determined in markets; how
consumers decide what to buy; how
businesses determine what is
produced and how it is supplied.
• Microeconomics also involves
analysing the effects of government
regulations, subsidies, taxes and
maximum and minimum prices on the
prices and quantities of goods and
services.
Consumer Behaviour
Business behaviour

4. Real World: The Economics of Food Banks in Britain
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Number of people receiving three days' worth of
emergency food by Trussell Trust food banks in UKFood bank use in Britain has grown
rapidly. Several factors may explain this:
1. Higher global food prices have
made food less affordable for low-
income households
2. High levels of long term
unemployment since the recession
have hit family budgets
3. Declining real incomes for many
people on lower wages
4. Welfare reforms including a
maximum welfare cap and tighter
rules for claiming benefits
5. More food banks have been set up
in the UK – perhaps this is a
question of supply responding to
rising demand?
In the UK, food banks are run
by a range of volunteer-based
organisations, redistributing
food donated by consumers,
retailers and the food industry

5. Positive and Normative Statements
• Positive statements:
– Positive statements are objective statements that can be tested,
amended or rejected by referring to to available evidence.
– Positive economics deals with objective explanation and the testing and
rejection of theories.
– A false statement is also a positive one!
– For example: The falling price of crude oil on world markets will lead to a
fall in demand for fuel efficient cars
• Normative statements:
– Normative statements are subjective statements – i.e. they carry value
judgments about what ought to be
– For example: A high level of unemployment is more harmful to the
economy than a high rate of inflation
Most economic decisions and policy are influenced by value judgements, which
vary from person to person, resulting in fierce debate between political parties

6. Assumptions about the Objectives of Agents
• For most of the AS microeconomics
course we assume that
1. Rational consumers wish to maximize
their satisfaction or utility from
consumption by correctly choosing how
to spend their limited income.
2. Producers/firms wish to maximize
profits, by producing at lowest cost the
goods and services that are desired by
consumers. Profit = total revenue –
total costs.
3. Government wishes to improve the
economic and social welfare of citizens.
Do we always
engage in rational
behaviour?
Are all businesses
looking to maximise
their profits?
Behavioural economics theories challenge the
assumption of rationality in our decisions

7. Opportunity Cost
• Opportunity cost measures the cost of a choice made in terms of
the next best alternative foregone or sacrificed.
1. Work-leisure choices: The opportunity cost of deciding not to
work an extra ten hours a week is the lost wages given up.
2. Government spending priorities: The opportunity cost of the
government spending an extra £10 billion on investment in
National Health Service might be that £10 billion less is
available for spending on education or defence equipment.
3. Investing today for consumption tomorrow: The opportunity
cost of an economy investing resources in new capital goods is
the production of consumer goods given up for today.
4. Use of scarce farming land: The opportunity cost of using
farmland to grow wheat for bio-fuel means that there is less
wheat available for food production, causing food prices to rise.

8. Factors of Production (Factor Inputs)
Factors of production are the inputs available to supply goods and
services in an economy.
Land Labour
Enterprise Capital
Natural resources
available for
production
The human input
into the production
process
Goods used in the
supply of other
products e.g. tech
Entrepreneurs
organise factors of
production and
take risks

9. Factor Inputs and Factor Rewards
Factor rewards describe the incomes that flow to each of the main
factors of production when there are brought into productive use.
Land Labour
Enterprise Capital
Rental income to
owners of land
Wages and salaries
from employment
Profits
Interest from
savings + dividends
from shares

10. Different Ways of Rationing Scarce Resources
By Market Price By Consumer
Income
By Assessment of
Need
By Household
Postcode
By Education Level By Age By Gender By Nationality
Rationing is a way of allocating scarce goods and services when
market demand out-weighs the available supply.

11. Capital and Consumer Goods
• Capital goods
– Goods that are used to make consumer goods and services
– Capital inputs include fixed plant and machinery, hardware,
software, new factories and other buildings
• Consumer goods and services
– Goods and services which satisfy our needs and wants directly
– There is a sub-division between:
– i) Consumer durables: Products that provide a steady flow of
satisfaction / utility over their working life (e.g. a washing machine
or using a smartphone).
– ii) Consumer non-durables: Products that are used up in the act of
consumption e.g. drinking a coffee or turning on the heating)
– iii) Consumer services: E.g. a hair cut or ticket to a show

12. Non-Renewable Resources
• Non-renewable resources:
– Non-renewable resources are
finite in supply
– With plastics, crude oil, coal,
natural gas and other fossil fuels,
no mechanisms exist at present to
replenish them.
– The rate of extraction of finite
resources depends in part on the
current market price – for
example, businesses with rights to
extract will have a greater
incentive to do so when prices are
high because of the profit motive
Deforestation is an
example of the Tragedy
of the Commons
Have we reached peak
oil? If so, why are global
oil prices falling?

13. Renewable Resources and Free Goods
• Renewable resources:
– Renewable resources (in theory) are
replaceable over time providing that
the rate of extraction of the resource is
less than the natural rate at which the
resource renews itself
– Examples of renewable resources are
solar energy, oxygen, biomass, fish
stocks and forestry
• Free Goods
– Free goods do not use up any factor
inputs when supplied
– Free goods have a zero opportunity
cost i.e. the marginal cost of supplying
an extra unit of a free good is zero
Renewable resources
Free goods

14. Free Market, Mixed and Command Economies
An economic system is a network of organisations used to resolve
the problem of what, how much, how and for whom to produce
Freemarket
• Markets
allocate
resources
• Driven by the
profit motive
• Limited role
for state
• Private sector
dominates
Mixedeconomy
• Mix of state
and private
ownership
• Government
intervention
in markets
• Mix will vary
from country
to country
Commandeconomy
• Most
resources are
state owned
• Planning
allocates
resources
• Little role for
market prices

15. Advantages of Free Market Competition
Free markets operate without government intervention
• Competitive markets help to bring about
1. An efficient allocation of scarce resources – resources tend to go
where the market return is highest
2. Competitive prices for consumers and suppliers look to increase and
protect their market share
3. Competition drives innovation and invention in markets which can
bring higher profits for businesses and better products for
consumers
4. The profit motive stimulates capital investment which encourages
economies of scale and lower prices in the long run
5. Competition in the form of international trade in goods and services
helps to reduce domestic monopoly power and increases choice

16. The Role of the State in a Mixed Economy
A mixed economy has a mix of private and public (Govt) sectors
• Businesses wholly or part state-
owned – for example: Royal Bank of
Scotland, Network Rail
State-Owned
Industries
• Broad range of welfare benefits
• Universal e.g. state pension
• Means-tested e.g. housing benefit
Welfare State
• Spending on education & health
• Capital spending on infrastructure
Government spending
on public services

17. Introduction to Microeconomics and the
Basic Economic Problem
EdExcel Economics 1.1.1