MICROECONOMIC THEORY AND PRACTICE

RESOURCE UTILIZATION AND ECONOMICS

Problem of
scarcity

Economic Allocation problem

resources
‘

Economics Defined
 The efficient allocation of the scarce means of production toward the satisfaction of human
needs and wants.

Two important concepts in the definition of economics:

 The scarce mean of production refers to our economic resources like land, labor and capital,
which we use to produce to all goods and services that we need and want.
 The problem however is that we do not have enough resources to produce all the goods and
services that we desire. This is because our resources are limited or scarce while our wants are
generally unlimited.

Origin of the word “economics”

 The two Greek roots of the word economics are oikos – meaning household – and nomus –
meaning system or management. Oikonomia or oikonomus therefore means the
“management of household”.

Scarcity: The Central Problem of Economics

Scarcity is the basic and central economic problem confronting every man and society. It is the
heart of the study of economic and the reason why you are studying it now.

Problem of Scarcity

Limited resources Unlimited wants

Scarcity
The figure illustrates the interaction of limited resources available and the unlimited wants of man and
society. If limited resources fall short to meet the unlimited wants of the society, it will eventually create
a problem, which it called, “scarcity”.

Economics

Limited Resources Unlimited Wants

Allocation

The figure depicts the relationship between available limited resources and the unlimited wants of man
and society. It shows that when limited resources fail to meet the unlimited wants of the society,
economics comes into play in order to effectively and efficiently allocate resources.

Factors of Production

There are four economic resources which serve as inputs in the production process. We refer to
these resources as the factors of production and they include the land, labor, capital, and
entrepreneurship.

 Land
This broadly refers to all natural resources, which are given by, and found in nature, and
are, therefore, not manmade, it does not solely mean the soil or the ground surface, but refers
to all thing and power that are given free to mankind by nature. The compensation for use of
land is called rent.

 Labor
Labor is any form of human effort exerted in the production of goods and services.
Labor covers a wide range of skill, abilities, and characteristics. The compensation for labor
rendered is salary or wage.

 Capital
Capital is manmade goods used in the production of other goods and services. It
includes the building, factories machinery, and other physical facilities used in the production
process. The reward for the use of capital is called interest.

 Entrepreneurship
An entrepreneur is a person who organizes, manages, and assumes the risks of a firm,
taking a new idea or a new product and turning it into a successful business.
 Entrepreneurs also possess managerial skills needed in building, operating and
expanding a business. Entrepreneurship is an economic good that commands a price referred to
as profit or loss.

Circular Flow of Model

Wages and salaries, rent, interest,

profit RESOURCE
MARKET
Labor, land, capital entrepreneurial
ability.

BUSINESSES
HOUSEHOLDS
-buy resources
- sell resources
- sell products
- buy products

Good and services

PRODUCT MARKET
Consumption
expenditure

The figures illustrate the flow of resources and payment for their use as well as the flow of goods and
services and payment for them. Thus, the household sector sells resources to and buys products from the
business sector while the business sector buys resources from and sells products to the household sector.

What is the relationship between Economics and Scarcity?

 Their relationship is such that if there is no scarcity, there is no need of economics. The study of
economics is therefore essential in order to address the issue of resource allocation and
distribution, in response to scarcity.

The Concept of Opportunity Cost

 In economics, opportunity cost refers to the foregone value of next best alternative. In
particular, it is the value of what is given up when one make a choice. The thing thus given-up is
called the opportunity cost of one’s choice.
 Example: if there price of coke 20 per can and one piece of cupcake is 10, then the relative price
of coke is 2 pieces of cupcake. Therefore, if a consumer only has 20 and chooses to buy a bottle
of coke with it, then we can say that the opportunity cost of the bottle of coke was the 2 pieces
of cupcakes, assuming that the cupcakes were the next best alternative.
Opportunity Cost

Saving (Firm/Individual)

Credit (Interest) Investment (Profit)

This figure illustrates the concept of opportunity cost. The savings of the firm and individual is subject to
two choices between credit and investment. Of the saving of an individual will be put on credit, there is a
possibility of earning interest or a bad debt (not getting the money back). On the other hand, when
savings of an individual is invested, it may earn profit of may be subject to loss. With this in mind, what
do you think is the best choice or next best alternative?

Basic Decision Problems

Below are some decision problems that households, firms, the government, and society must think
about in order to properly Manage their resources.

 Consumption
Is the basic decision problem that the consumers must always deal with in their day to day
activities.
 Production
They determine the needs, want, and demands of consumer, and decide how to allocate their
resources to meet the demand. Good and services may be produces by different methods of
production, defending on the firms technological state, and on the available resources within
society.
 Distribution
This problem is primarily addresses to the government. There must be proper allocation of all
the resources for the benefit of whole society. In market economy, though, absolute equality of
every member, as to the distribution of resources, can never be achieved.
 Growth over time
This is the last basic decision problem that a society or nation must deal with. Societies continue
to live on. They also grow in numbers. On the other hand, people have definite lives, but
societies (or nations) have longer, if not infinite lives. All the problems of choice, consumption,
production, and distribution have to seen in the context of how they will affect future events.