Microeconomics Week 1
Economics the study of the choices people and societies make to attain their unlimited want,
given their scarce resources. In other words the study of choices consumers, business
managers and government officials make to attain their goals, given their scarce resources
Choice- the choice reflects the trade-offs people face because we live in a
world of scarcity. The choices we make influence our incentives i.e. reward or
Scarcity- the situation in which unlimited wants exceed the limited resources
available to fulfil those wants.
Resources- inputs used to produce goods and services, including natural
resources such as land, water and minerals, labour, capital and entrepreneurial
ability. These are otherwise referred to as factors of production
There are three important economic ideas, when people make choices:
1. People are rational- assumes that consumers and firms sues as much of the available
information as they can to achieve their goals. Rational individuals weigh the benefits and
costs of each action, and they choose an action only if the benefits out weight the costs.
2. People respond to economic incentives- the emphasis that consumers and firms respond to
economic incentives i.e. reward or penalty
3. Optimal decisions are made at the margin-economists use the word ‘marginal’ to mean
extra or additional. The optimal decision is to continue any activity up to the point where the
marginal benefit equals the marginal cost.
SCARCITY, TRADE-OFFS AND THE ECONOMIC PROBLEM THAT EVERY
SOCIETY MUST SOLVE
As we live in a world of scarcity, society cannot have it all. Therefore, society faces trade-
Trade-off is the idea that because of scarcity, producing more of one good or serve means
producing less of another good or service. Trade is VOLUNTARY exchange between two or
more people (for money, for other goods i.e.: barter, for satisfaction) that makes ALL
PARTICIPANTS BETTER OFF!
There are three fundamental questions for trade-offs:
1. What goods and services will be produced?
Opportunity cost- any activity is the highest-valued alternative that must be given up
to engage in that activity
2. How will the goods and services produced? 3. Who will receive the goods and services produced?
THE TWO TYPES OF ECONOMIES
We have two types of economy:
1. Centrally planned economy- an economy in which the government decides how
economic resources will be allocated
Example : Soviet Union
The government decides what goods to produce, how the produce them and who
would receive them. Thus, objective is not to satisfy consumers but follow orders.
Disadvantage: not successful in producing low-cost, high quality goods and services
2. Market economy-an economy in which the decisions of households and firms interacting
in markets allocate economic resources.
Example: high-income democracy countries such as Australia, Canada etc…
Rely on primarily on privately owned firms to produce goods and services and deice
how to produce them.
Markets rather than government determine who receives the goods and services
produced. The objective is to satisfy consumers in terms of their wants and needs. In
essence ultimately consumers decide what goods and services will be produced, thus
the concept called consumer sovereignty.
Consumer sovereignty concept that firms produce goods and services that
meet the wants of consumers or the firms will go out of business. Therefore it
is ultimately consumers who decide what goods and services will be produced.
EFFICIENCY AND EQUITY
Market economy tends to be more efficient than centrally planned