An Introduction to

Microeconomics
Ch 1, Economics 9th ed., Roger A. Arnold

North South University

 An Introduction
Economics is a social science (where we want to study and
understand the human society).
Societies or economies (e.g. a country, city) face the problem
of scarcity.
scarcity: human wants are greater than the resources
available to satisfy those wants.
E.g., 1000 people want cars, but there are only 500 cars
available (example continued next slide).

North South University

 Effects of Scarcity
The following are the effects of scarcity (continued from last slide):
1) We need to make choices or decisions because of scarcity. E.g., we
have to choose which 500 people out of the 1000 will get the 500 cars.
2) Rationing device: A way of deciding who gets the available limited
resources (cars). E.g., ‘price’ is the most common rationing device. Only
those people who can pay the price of the car will get the car.
3) Competition: People will compete to get those 500 cars and also
compete to obtain the rationing device (in this case, the money to pay
the price). E.g., we can see people competing for jobs to obtain more of
the rationing device (money or price).

North South University

Continued
Economics is defined as the science of scarcity where we study how a
society (or economy) manages the problem of scarcity.

A society (or economy) is made up of mainly three sectors or actors:

1) consumers (households & individuals) 2) firms or businesses
3) the government

Macroeconomics (ECO 104) deals with behaviour and decision-making

related to aggregate markets or the entire economy (e.g., all
households, all business); in ECO 104 we also study macroeconomic
measurements (variables), such as inflation and GDP.

North South University

Goods and Bads
Goods & services (e.g. food, clothes, home, education, cars...) are things that
make us happy, give us satisfaction or benefit.
The economic term for happiness or satisfaction or benefit is utility.
Therefore, goods give us utility. We are willing to pay for goods. E.g., we are
willing to pay for food, clothes, education, etc. since they give us utility.

Bads - Anything from which individuals receive disutility (i.e. dissatisfaction)

e.g. garbage, fever, air pollution, etc.
We are willing to pay for the removal of bads (e.g. we pay the garbage
man to remove garbage and the doctor to remove our fever).

Who makes the goods? Using what?

North South University

Resources (or Inputs or Factors of Production)
Goods (& services) are produced by firms or businesses. Goods are
produced using resources or inputs or factors of production. They are:
• Land – All natural resources (e.g. forests, water, air, etc.)
• Labour – Physical and mental effort of workers in the production
process
• Capital – Produced goods that can be used as inputs in the
production process (e.g. factories, machines, computers, etc.)
• Entrepreneurship – The talent for organizing the above mentioned
resources to produce goods (e.g. The CEO, Chairman, Director)
The skills and knowledge regarding the use of resources is Technology
North South University
Opportunity Cost and Behaviour
Opportunity cost is the next best alternative (or option) given-up (or
sacrificed) whenever we make a choice or decision.
E.g., you made a decision to read this slide. If you were not reading this slide,
what would you be doing? Perhaps you would be spending time with your
family or friends. ‘Spending time with family or friend’ is the opportunity
cost in this case (you are giving-up this option).

Changes in opportunity cost affect behaviour:

The higher the opportunity cost of doing something, the less likely it will be
done. E.g., your favourite relative has come to visit your home. If you read
this slide, you will be giving up spending time with him or her. The
opportunity cost has increased (i.e., you are giving-up more) and hence you
are less likely to read the slides.

North South University

 Incentive and Behaviour
Something that encourages or motivates us to undertake an activity.
E.g., a student might study very seriously for a tuition waiver. The
tuition waiver is the incentive for studying seriously.
Incentives affect the behaviour (decisions) of individuals. E.g., without
the tuition waiver (incentive) the student may not study very seriously.
Negative Incentive: Something that discourages us to do something.
E.g. if you cheat during the exam, you might lose marks. Here, ‘losing
marks’ is a negative incentive which should discourage you to cheat.
Changes in incentives affect our behaviour and decision-making.
Think about it.

North South University

Decision Making (Comparing Benefits
and Costs)
Remember: One effect of scarcity is that we have to make decisions or
choices.
How is a choice or decision made? According to economic theory, we make
decisions by comparing benefits and costs. If benefits are greater than the
costs (benefit > costs), then we are likely to do something.
For example, you chose to study at NSU because the benefit of studying at
NSU > cost of studying at NSU.
Think about the benefits and costs of studying at NSU.
Opportunity cost is a cost and hence it is included in the cost-benefit
analysis. For example, you could have worked instead of studying at NSU;
hence, the salary from work is a (opportunity) cost of studying at NSU.

North South University

Efficiency
In Economics, efficiency means getting the maximum benefit from the
available resources.

E.g., we have 1.5 hours for a lecture (the available resource); if we can
get the maximum benefit (learning and knowledge) from the 1.5
hours, then we have achieved efficiency.

Similarly, a if a business can get the maximum output (goods and

services) from the available labor and machines, then we say the
business has achieved productive efficiency.

North South University

Exchange or Trade
Trade: The giving up of something for something else
E.g. we may give up 10 taka for a cup of tea
A trade has usually two sides: The buying side and the selling side.

People engage in trade or exchange because they expect to be

better-off (happier or more satisfied) after the trade
That is, we will only trade if: the benefit from the trade > cost of the
trade. Trade takes place in a market (Ch 3)

North South University

Theory or Model
A simple representation of the real world designed with the intent to
better understand and/or explain.
The simplification can be done using assumptions and by focusing only
on the variables (or factors) that are important to our study.
*E.g. to study the CGPA of a student we can focus on 1) the hours a
student studies 2) class attendance. There might be no need to
consider factors such as the height and weight of students*
A good theory accurately predicts real world phenomenon. E.g. the
*theory above* (about CGPA) predicts that: if a student studies more,
then his or her CGPA will increase. If this happens in the real world,
then the *above theory* is a good theory.

North South University

 Ceteris Paribus
Ceteris Paribus means all other things constant or nothing else
changes.
This assumption is essential when we want to study and determine the
correct, precise relationship between two variables.
E.g., we want to find out by how much will the CGPA increase if a
student increases study by 1 hour. In that case, we need to keep class
attendance constant. After that, if the student studies for 1 more
hour and CGPA increases by 0.5, then it indicates that the CGPA
increased precisely by 0.5 because of studying 1 more hour.
If we don’t keep attendance constant, we cannot find the correct and
precise relationship. E.g., if a student studies more but misses class,
then the CGPA may fall and we may falsely conclude that studying
more reduces CGPA!
North South University
Appendix A (Ch 1)
In a model or theory we might be interested to study of the relationship
between different variables. There are three possible relationships
between two variables:
Directly (Positively) Related: Two variables are directly or positively related
if they change in the same way (they both increase or decrease together).
E.g. Hours of study ↑ then CGPA ↑ or study hours↓ then CGPA ↓
Inversely (Negatively) Related: The variables change in opposite ways. E.g.
hang-out with friends ↑ then CGPA ↓ or hang-out ↓ then CGPA ↑
Independent: Variables are not related. If one changes the other does not
change. E.g. temperature on Moon and your CGPA are independent (not
related)

North South University

Continued
The relationship between two
variables can be represented using
graphs. Usually, we place the
dependent variable on the y-axis and
independent variable on the x-axis. If
the variables are directly (positively)
related, then we will have an upward
sloping graph. E.g. the graph on the
right is telling us, if income increases,
then consumption (expenditure) will
increase.
North South University
In case of a negative relationship In case of independence
we will have a downward we might have a vertical
sloping graph (as below) or horizontal line (as below).

The graph below tells This graph tells us, Y

us, if X changes Y can change but X
does not change remains fixed or
constant

North South University

Graphs: Movement and Shift
In ECO 101 and 104, most of the graphical models are based on two
important principles.
1) Remember a graph contains two variables. If one of the variables in
the graph changes, then there will be a movement along the curve.
E.g. if the income increases from $200 to
300, then there will be a movement along
along the curve from C to D.

North South University

Continued
2) If a relevant variable outside of the graph changes, then the entire
curve will shift
E.g., if the price of goods and services
increase, then consumption will decrease
and the entire graph will shift down.

North South University

Please clear these concepts thoroughly before moving on; it will make
the chapters ahead easy and interesting. You’ll also be able to apply
these concepts in other courses.

North South University