Microeconomics Introduction Chapter 1 Prelim

1. MICROECONOMICS
Chapter 1 : Introduction

2. In your own understanding, is
their a difference between
economy and economics?

3. Economy
is a system that helps
to produce goods and
services and enables
people to earn their
living.

4. Making a money and
spending a money.

5. Economics
is a social science which studies the way a
society chooses to use its limited resources,
which have alternative uses, to produce goods
and services and to distribute them among
different group of people.

6. The economy refers to the production,
consumption, and distribution of goods and
services in a specific region, while economics
is the study of how individuals and societies
allocate resources to satisfy their wants and
needs.

7. Why study economics?

8. Scarcity means there
is not enough for
everyone.
How should we
allocate our scarce
resources?

9. 1. What goods and services should be produced?
2. How should these goods and services be
produced?
3. Who consumes these goods and services?
Every society must answer three questions:

10. end.

11. MICROECONOMICS
Chapter 1 : Introduction

12. Adam Smith
• He Is the Father of Economics.
• His book, “The Wealth of
Nations, published in 1776,
became known as “the bible in
economics”.

13. The two Greek roots of the word economic are “oikos” –
meaning household and “nomus” – meaning system or
management. Oikonomia or oikonomus therefore means
the “management of household”.
With the growth of the Greek Society until its development
into city states the word became known or was referred to
as “state management” . Consequently, the term,
“management of household” now pertains to the
microeconomics while the phrase “state management”
presently refers to macroeconomics.
Origin of the word Economics

14. Scarcity : THE CENTRAL PROBLEM OF ECONOMICS
Authors define scarcity in
different ways:
• It is a commodity or service
being in short supply,
related to its demand.
• Scarcity is said to exist
when at a zero price there
is a unit of demand, which
exceeds the available
supply.

15. What exactly are the
resources that we have
been referring to?

16. Factors of Production
1. Land
2. Labor
3. Capital
4. Entrepreneur

17. Land
• In broad terms, land refers to all natural
resources, which are God-given and found in
nature so these are not manmade.
• Land does not solely mean the soil or the
ground surface.
• It refers to all things and powers that are given
to free to mankind by nature.

18. Labor
• Labor is any form of human effort exerted in
the production of goods and services.
• Labor covers a wide range of skills, abilities
and characteristics.
• The supply of labor in a country is dependent
on the growth of its population as well as the
percentage of the population that is willing to
join in labor force.
• The compensation for labor rendered is called
salary or wage.

19. Capital
• It is a manmade product used in the
production of other goods and services.
• It includes the buildings, factories, machinery
and other physical facilities used in the
production process.
• Accordingly, a nation’s capital stock is
dependent on its level of saving. Savings
refers to that part of person’s or economy’s
income, which is not spent on consumption.

20. What first came to your
mind when we talked
about capital?

21. Capital
• We have to emphasize that money is not
actually considered as capital in economic as
it does not produce a good or services but it is
rather a form of assets that is used mainly as
medium of exchange.

22. Entrepreneurship
• An entrepreneur is a person who organizes,
manages, and assumes the risk of a firm,
taking a new idea or a new product and
turning it into a successful business.
• Often times, the entrepreneur is not presented
as a separate factor of productions but it is
classified as part of labor. However since they
performs a special type of work which is the
creation of goods and services, they are not be
considered as part of labor.

23. Circular Flow Model

24. end.

25. The concept of
Opportunity Cost

26. Opportunity Cost
• It refers to the foregone value of the next best
alternative.
• In particular, it is the value of what is given-up
when one makes a choice. The thing thus
given-up called the opportunity cost of one’s
choice.

27. Opportunity Cost

28. 4 Basic Decision
Problems

29. Basic Decision Problems
Consumption
- determine what types of goods and services
they want to utilize or consume and the
corresponding amounts thereof that they
should purchase and utilize.

30. Basic Decision Problems
Production
- The problem of production is generally a
concern of producers. Producers determine the
demand and how to allocate to meet these
demands.

31. Basic Decision Problems
Distribution
- The problem is primarily addressed to the
government. There must be a proper allocation
for the benefit of the whole society.

32. Basic Decision Problems
Growth Over Time
- Societies continue to live on. They also grow in
numbers. In short all the problems of choice,
consumption, production and distribution have
to be seen in the context of how they will affect
future events.

33. 4 Basic Economic
Questions

34. 4 Basic Economic Questions
1. What to produce?
2. How to produce?
3. How much to produce?
4. For whom to produce?

35. 3 E’s in Economics
1. Efficiency
2. Effectiveness
3. Equity

36. Efficiency
- refers to productivity and proper allocation of
economic resources. Being efficient in the
production and allocation of goods and
services saves time, money and increase a
firm’s output.
- For instance, in the production of a commodity,
a firm utilizing modern technology can
improve the quantity and quality of its product,
which ultimately translate into an increase in
revenue and profit.

37. Effectiveness
- It means attainment of goals and objectives.
Economic therefore is an important and
functional tool that can be utilized by other
fields. For instance, with the use of both
productions (through manual labor or through
technological advancements), whatever the
output is, it will be useful for the consumption
of the society and the rest of the world.

38. Equity
- It means justice and fairness. Thus, while
technological advancement may increase
production, it can also bear disadvantages to
employment workers. Due to the presence of
new equipment and machineries, manual labor
may not be necessary, and this can result in
the retrenchment or displacement of workers.

39. Positive and Normative
Economics

40. Positive Economics
- is an economic analysis that considers
economic conditions “as they are”, or
considers economic “as it is”. It uses objective
or scientific explanation in analyzing the
different transactions in the economy. It simply
answers that question “what is”.

41. Examples of Positive Statements
The economy is now experiencing a slowdown
because the world is experiencing a financial
and economic crisis.

42. Normative Economics
- is an economic analysis which judges
economic conditions “as it should be”. It is
that aspect of economics that is concerned
with human welfare. It deals with ethics,
personal value judgments and obligations
analyzing economic phenomena.
- it is also referred to as policy economic
because it deals with the formulation of
policies to regulate economic activities.

43. Examples of Normative Statements
In order to minimize the effect of global
recession, the Philippines government should
release a stimulus package geared towards
encouraging economic productivity.

44. Type of Economic System

45. Traditional Economy
is basically a subsistence economy. A family
produces goods only for its own consumption.
The decisions on what, how, how much, and for
whom to produce are made by the family head,
in accordance with traditional means of
production.

46. Examples of countries using
a Traditional Economy
1. Brazil
2. Canada
3. Alaska

47. Command Economy
- is a type of economy, wherein the manner of
production is dictated by the government. The
government decide on what, how, how much, and for
whom to produce.
- It is an economic system characterized by collective
ownership of most resources, and the existence of a
central planning agency of the state. In this system,
all productive enterprises are owned by the people
and administered by the state.

48. Examples of countries using
a Command Economy
1. North Korea

49. Market Economy
- the basic characteristics of market economy
is capitalism’s basic characteristics, which
means that the resources are privately-owned,
and that the people themselves make the
decisions.
- Under this economic system, factors of
production are owned and controlled by
individuals and people are free to produce
goods and services to meet the demand of
consumers, who, in turn, are also free to
choose goods according to their own likes.

50. Examples of countries using
a Market Economy

51. Socialism
- is an economic system wherein key
enterprises are owned by the state. In this
system, private ownership is recognized.
However, the state has control over a large
portion of capital assets, and is generally
responsible for the production and
distribution of income and wealth. As such, it
is considered as an economy bordering
between capitalism and communism.

52. Examples of countries using
a Socialism Economy
1. California

53. Mixed Economy
- this economy is a mixture of market system
and the command system.

54. Examples of countries using
a Mixed Economy
1. Korea
2. China

55. end.