MODULE 1: Introduction to Microeconomics

Learning Outcomes:

At the end of the course, the student is able to:

explain what economics is;

explain what are the foundation of economics;
discuss the nature of economics;
distinguish microeconomics from macroeconomics;
differentiate positive from normative economics; and
identify the characteristics of microeconomics.

Teaching-Learning Activity:

In this module, you will get the definition of economics, Microeconomics and the
basic economic concepts. Individual activities and activities that will ask you to share
and discuss with your co-learners are also provided. The application of concepts will be
through case study.

Economics Defined

PROF STIGLER says

“economics is the study of principles governing the allocation of scarce means among
competing ends”

Generally, Economics can be defined as a social science which deals with the
proper allocation and efficient use of available resources for the maximum satisfaction
of human wants.(Fajardo,1995)

Deals with the allocation of scarce resources to satisfy the unlimited needs and wants.
The science of scarcity; our responses and the consequences of those responses.
The science of how individuals and societies deal with facts.
Economics is by necessity concerned with choice.(Villegas, 1993)

The Foundation of Economics

1. Needs and wants

2. Resources

NEEDS - the basic essentials for living

- cannot be foregone

WANTS- desires that give higher level of satisfaction

Note where your needs would end that is where you start wanting. Meaning we need
to be satisfied first with the basic necessities (food, clothing, shelter) before we can start
wanting.

RESOURCES are the inputs to produce the goods and services in the society. In
economics we term it as the factors of production. They are the basic resources
because they constitute the basic needs in production. They are the basic tools used in
the production of goods and services.
The factors of production are:
1. Land- the God-given resources ; the environment; refers to all natural resources
2. Labor - human resources utilized in the production activities in the society
3. Capital- man-made resources ; financial resources in the economy;
4. Entrepreneur- people responsible in combining the 3 factors of production; decides
for the combination of these factors; sources of techniques, innovation in the society

Branches of Economics

Microeconomics

Deals with the individual behavior of consumers, firms, workers and investors as
well as the markets that these units comprise. Microeconomics is concerned with the
market activities on individual economic units such as consumers, resource owners, and
business firms. It is concerned with the flow of goods and services from firms to
consumers, the composition of the flow, and the process for establishing relative prices
of the component parts of the flow. It deals with the flow or resources ( services) from
resource owners to business firms, with their evaluation, and with their allocation among
alternative uses.

Macroeconomics

Deals with aggregate economic variables , such as the level and growth rate of
national output, interest, inflation and unemployment. Macroeconomics treats the
economic system as a whole rather than individual economic units of which it is
composed. The particular goods and services making up the flow from business firms to
consumers are not integral parts of the analysis, nor are the individual resources or
services moving from resource owners to business firms. The value of the overall flow of
goods ( net national product) and the value of the overall flow of resources( national
income) are the focuses of macroeconomics.

Approaches of Analysis

The principal functions of economic theory fall into two categories: to explain the
nature of economic activity; and to predict what will happen to the economy as facts
change. The explanation of the nature of economic activity enables us to understand
the economic environment in which we live, how one part relates to others and what
causes what. We would also like to be able to predict with some degree of accuracy
what is likely to happen to the key variables that affect our well-being and to be able
to do something about them if we dislike the predicted consequences.

Economists differentiate positive economics and normative economics on the basis of

whether the users of theory are concerned with causal relationship only, or they intend
some kind of intervention in economic activity to the course of that activity.

Positive Analysis

Analysis describing relationships of cause and effects; deals with explanation

and predictions. It is completely objective, limited to the cause and effect relationships
of economic activity, and concerned with the way economic relationship are.

Normative Analysis

Analysis examining questions of “what ought to be?”; what is the best with value
judgment. It is concerned with what ought to be.Value judgments must necessarily be
made , that is, possible objectives to be achieved must be ranked, and choices must
be made among those objectives. Economic policy-making conscious intervention in
economic activity with the intent of altering the course that it will take is essentially
normative in character. But if economic policy-making is to be effective in improving
economic well-being, it must be rooted in sound positive economic analysis.
Policymakers should be cognizant of the full range of consequences of the policies they
recommend.

Characteristics of Microeconomics

Microeconomics is concerned with the process of resource allocation by individual

decision units or markets. It deals with efficiency with which these resources are
allocated. From this definition, some characteristics are derived:

Microeconomics looks at the decisions of individual units. It focuses on the

choices made by individual decision units such as households, producers, and firms.

Microeconomics looks at how prices are determined in various types of market

structures such as pure competition, monopoly, monopolistic competition, and
oligopoly.

Microeconomics deals with social welfare. It examines the efficiency,relative

desirability, and choice of alternative methods by which resources are utilized to
alleviate scarcity. This branch of microeconomics is termed “welfare economics”.

Microeconomics has a limited focus.It does not examine the processes or

efficiency of allocation in alternative types of economic systems, such as a socialistic
planned economy. It does not focus on other economic issues, such as aggregate level
of employment of resources or the rate of inflation.

Microeconomics develops skills. The study helps develop a set of useful and
marketable skills as follows:

A. Helps develop logical reasoning.

B. Helps develop skill in the construction and use of models.
C. Employs optimizing techniques that are useful for making decisions in a variety
of situations.
D. The concepts studied in microeconomics are applicable to personal resource
allocation decisions, such as career choices or financial investments.

References:

Managerial Economics by Villegas

Introductory to Macroeconomics by Pagoso et al

Introductory to Microeconomics by Pagoso et al

Economics by Fajardo