Lecture 1

Chapter 1
Introductory
Motivation
Understand…analyze…visualize

What is the economics, and microeconomics (in the

link with macroeconomics and other economic
subjects)

How do firms/consumers/governments make choice

and interact with each other in the economy

Do firms behave differently in markets, such as

maket of cars, vegetables... and ice-cream?
Content

1.1. Microeconomics
1.1.1. Definition of Economics
1.1.2. Subjects and research methods of Microeconomics
1.1.3. Some basic concepts

1.2. The basic economic problems

1.3. Optimal economic choices

1.3.1. The nature of economic choices
1.3.2. Objectives of economic choices
1.3.3. Methods of economic choices
1.3.4. Production possibility frontier
1.1. Microeconomics
1.1.1. Definition of Economics
1.1. Microeconomics
1.1.1. Definition of Economics

The word economy comes from a

Greek word for “one who manages
a household.”

Tề gia trị quốc bình thiên hạ

Economics

Economics is the study of how

society manages its scarce
resources.
Scarcity . . .
means that society has limited resources
and therefore cannot produce all the
goods and services people wish to have.
 Society and Scarce Resources:

• The management of society’s

resources is important because
resources are scarce.
• Scarcity implies choice and choice
implies cost.
Experts warn Vietnam seriously
lacks water (vietnamnet.vn)
Renewables in Vietnam:
Current Opportunities and Future
Outlook (EVBN)
Microeconomics vs
Macroeconomics
 Microeconomics
the study of how households and firms
make decisions and how they interact in
markets.

 Macroeconomics
the study of economywide phenomena,
including inflation, unemployment, and
economic growth
1.1.2. Subject and Method of
Microeconomics
 Subjects: study of how households and firms
make decisions and how they interact in markets.
 Scientific method:
OBSERVATION,
THEORY, AND MORE OBSERVATION
 Role of assumption: Assumptions can simplify the
complex world and make it easier to understand.
 Economic model: Economists also use models to
learn about the world. The models are most
often composed of diagrams and equations
Circular-flow diagram:

A visual model of the economy that

shows how money and goods flow
through markets among households
and firms.
Circular-flow diagram:
 Firms
 Produce and sell goods and services:
Output
 Hire and use factors of production:
Input
 Households
 Buy and consume goods and services
 Own and sell factors of production
Our First Model: The Circular-
Circular-flow diagram:
Flow Diagram

 Markets for Goods and Services

(Final goods)
 Firms sell
 Households buy
 Markets for Factors of Production
(Input)
 Households sell
 Firms buy
Our First Model: The Circular-
Circular-flow diagram:
Flow Diagram

 Factors of Production
 Inputs used to produce goods and
services
 Land, labor, and capital
The Circular Flow Diagram

MARKETS
Revenue FOR Spending
GOODS AND SERVICES
Goods •Firms sell Goods and
and services •Households buy services
sold bought

FIRMS HOUSEHOLDS
•Produce and sell •Buy and consume
goods and services goods and services
•Hire and use factors •Own and sell factors
of production of production

Factors of MARKETS Labor, land,

production FOR and capital
FACTORS OF PRODUCTION
Wages, rent, •Households sell Income
and profit •Firms buy
= Flow of inputs
and outputs
= Flow of dollars

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1.2 The basic economic problems
Firms : what goods to produce, for which
customers, and how to produce goods to
maximize profit.
1.2. The basic economic
problems
Consumers: what goods to consume, for
which purpose of consumption, and how to
consume to maximize benefit.
Government: maximize welfare

1. Firms: profit
2. Consumers: benefit
3. Government: welfare
1.3. Optimal economic choices
1.3.1. The nature and objectives of
economic choices

Members of the economy make choices

when facing resource in scarcity to
maximize profit (firms) or benefit
(consumers) or welfare (goverment).

Government (maximize welfare):

Choosing Fish or Steel?
1.3. Optimal economic choices
1.3.3. How to make optimal choices

1. Comparing opportunity cost:

The opportunity cost of an item is what you
give up to get that item.

2. Thinking at margin:
Economists use the term marginal changes to
describe small incremental adjustments to an
existing plan of action.
Rational people often make decisions by
comparing marginal benefits and marginal
costs.
 Principle
The #2: The Cost
opportunity of Something
cost
Is What You Give Up to Get It.
 Decisions require comparing costs and benefits of
alternatives.
 Whether to go to college or to work?
 Whether to study or go out on a date?
 Whether to go to class or sleep in?
 The opportunity cost of an item is what you give up to
obtain that item.
Think at margin

 Marginal changes are small,

incremental adjustments to an
existing plan of action.

People make decisions by comparing

costs and benefits at the margin.
Marginal benefit (MB) and
Marginal cost (MC)

Think at Margin
 AVERAGE COST = TOTAL COST / TOTAL QUANTITY

 AVERAGE COST = $7/3 =...

 MARGINAL COST ($) FOR EXTRA UNIT OF CONSUMPTION

Marginal benefit (MB) and
Marginal cost (MC)
Does the driver think at Margin?
1.3. Optimal economic choices
1.3.4. Production possibility
frontier (PPF)

PPF is a graph that shows the various

combinations of output that the
economy can possibly produce given
the available factors of production
and the available production
technology that firms use to turn
these factors into output.
The production possibility
frontier (PPF)
➢ To illustrate the PPF, we focus on two
goods at a time and hold the quantities of
all other goods and services constant.

➢ That is, we look at a model economy in

which everything remains the same
(ceteris paribus) except the two goods
we’re considering.
 The Production Possibilities Frontier

Quantity of
Steel (Tons)

3,000 D

C
2,200
2,000 A
Production
possibilities
frontier
1,000 B

0 300 600 700 1,000 Quantity of

Fish (Tons)
The production possibility
frontier (PPF)
➢ The production possibilities frontier
shows the combinations of output—in
this case, fish and steel—that the
economy can possibly produce.

➢ The economy can produce any

combination on or inside the frontier.

➢ Points outside the frontier are not

feasible given the economy’s
resources.
The
Our production
Second Model:possibility
The frontier
(PPF)
Production Possibilities Frontier

 Concepts Illustrated by the

Production Possibilities Frontier
 Tradeoffs
 Opportunity Cost
 Efficiency
 Economic Growth
Tradeoffs
Principle #1: People Face
Tradeoffs.
To get one thing, we usually have to
give up another thing.
 Food v. clothing
 Leisure time v. work
 Efficiency v. equity

Making decisions requires trading

off one goal against another.
Opportunity cost
 The production possibilities frontier shows the
opportunity cost of one good as measured in terms
of the other good.
 When society moves from point A to point B, it
gives up 200 tons of steel to get 100 tons of fish.
That is, at point A, the opportunity cost of 100
tons of fish is 200 tons of steel.
 The opportunity cost of each ton of fish is two
tons of steel.
 Notice that the opportunity cost of a car equals
the slope of the production possibilities frontier.
Efficiency
Principle #1: People Face
Tradeoffs
 Efficiency v. Equity
Efficiencymeans society gets
the most that it can from its
scarce resources.
Equity means the benefits of
those resources are
distributed fairly among the
members of society.
A Shift in the Production
Possibilities Frontier

A technological advance in the

computer industry enables the
economy to produce more steel
for any given ton of fish.

As a result, the production possibilities

frontier shifts outward. If the economy
moves from point A to point E, then
the production of both steel and
fish increases.
PPF1: A is inefficient, B is efficient, C is infeasible
PPF2: explains a growth in production: C is efficient
and attainable (due to New technology)
PPF1: A is inefficient, B is efficient, C is infeasible
PPF2: explains a growth in production: C is efficient
and attainable (due to New technology)

D
 The Production Possibilities Frontier

Quantity of
Steel (Tons)

4,000

3,000

2,100 E
2,000
A

0 700 750 1,000 Quantity of

Fish (Tons)