ECON111 Lecture Notes - Lecture 1: Economic Model, Human Capital, Financial Capital
Week 1
Introduction to Microeconomics
All economic questions arise because we have unlimited wants but limited resources, which include time, income,
and prices. Society is also limited by productive resources, like land, labour, capital, and entrepreneurship.
Economics is the social science and tool that is used to study the choices that individuals, businesses, governments,
and societies makes as they cope with scarcity and incentive, and make personal, business and government
economic policy decisions. It divides into:
ā¢ Macroeconomics: studies the performance of the national and global economy.
ā¢ Microeconomics: studies the choices that individuals and businesses make, the interactions of these choices
in markets, and the influence of the government on these choices.
Choices
Faced with scarcity, we must make choices between the available alternatives. The choices that we make depends
on the incentives that we face. If you want more of one thing, you must exchange something else for it. So choices
involve trade-offs. Opportunity cost is the cost of this trade-off ā you give up next best alternative to make your
choice.
One important choice is how much to save and how much to consume. Savings can be channelled through the
financial system to finance businesses and pay for capital; trading off current consumption for higher economic
growth and higher future consumption.
Another choice is how much effort to devote to education and training. This increases human capital and
productivity; trading off current consumption and leisure time for higher economic growth and higher future
consumption.
Lastly, we make choices about how much effort to devote to research and the development of new products and
production methods, creating greater future production. This trades off current production for greater future
production.
Choices are made using marginal analysis: we compare the marginal cost and marginal benefit. A decision is rational
if the marginal benefit exceeds the marginal cost. A change in marginal costs and benefits changes the incentives we
face, and so can change our choice.
Economic Questions
Hoī do peoplesī īhoiīes deterī
µiī
¶e īhat, hoī, aī
¶d for īhoī
µ goods aī
¶d serīiīes are produīed?
Patterns of production depends on choices made by individuals, governments and firms and change over
time. Our trade-offs determine which goods and services are prioritised. E.g. In Australia, agriculture
accounts for 4 per cent of total production, manufactured goods for 26 per cent, and services (retail and
wholesale trade, health care, and education are the biggest ones) for 70 per cent.
In China, agriculture accounts for 10 per cent of total production, manufactured goods for 46 per cent, and
services for 44 per cent.
Factors of production are deterī
µiī
¶ed īy firī
µsī īhoiīes aī
¶d trade-offs between land, labour, capital, and
entrepreneurship, and also change over time.
The end user of a good or service depends on the distribution of buying power. This is determined by
peoplesī iī
¶īoī
µes (which are unequal) and prices. Education has a big impact on earnings, but all people earn
income by selling factors of production.
1. Land earns rent
2. Labour earns wages. This has been fairly constant at around 70% of total income.
3. Capital earns interest
find more resources at oneclass.com
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Document Summary
All economic questions arise because we have unlimited wants but limited resources, which include time, income, and prices. Society is also limited by productive resources, like land, labour, capital, and entrepreneurship. Economics is the social science and tool that is used to study the choices that individuals, businesses, governments, and societies makes as they cope with scarcity and incentive, and make personal, business and government economic policy decisions. It divides into: macroeconomics: studies the performance of the national and global economy, microeconomics: studies the choices that individuals and businesses make, the interactions of these choices in markets, and the influence of the government on these choices. Faced with scarcity, we must make choices between the available alternatives. The choices that we make depends on the incentives that we face. If you want more of one thing, you must exchange something else for it.