Notes on Microeconomics

Chapter 1-1: Basic Economics Concepts

1. Economics
 Economics is a social science.
 It studies human behaviour using scientific methods.
Economics develop economic theories to explain and predict human behaviour.
In the study of economics, we are concerned with how people use scarce resource to satisfy human
wants.
This relates to the following two important issues in economics:
(a) Resource allocation
This concerns how limited resources are allocated for the production of different goods and
services.
(b) Distribution of goods and services
This is also regarded as income distribution.
This concern how goods and services are distributed among different people.

2. Classification of economics
(a) Microeconomics
(b) Macroeconomics

3. Wants, Scarcity and Choice

3.1 Wants
Wants are human desires.
Human wants are unlimited.
3.2 Scarcity
Scarcity refers to the situation in which the resources available are not enough to satisfy all people’s
wants.
Scarcity is a relative concept.
We need to compare the availability of resources against people’s wants in order to determine whether
there is scarcity.
3.3 Choice
When scarcity exists, people need to make choices.
If a person is rational, he or she will choose an option with the highest value.
3.4 Scarcity and choice
Since people do not have sufficient resources to satisfy all our wants, they have to make choices
on the use of resources.

4. Opportunity cost
4.1 Concept of opportunity cost

Causes Problem Consequence

Unlimited wants
Opportunity
Scarcity Choice
costs

Limited resources

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4.2 Definition of opportunity cost
The opportunity cost of a choice is the value of the highest-valued option forgone.
4.3 Remarks on opportunity cost
(i) Change in the value of the chosen option will not affect the cost
(ii) The cost will change only if there is a change in the highest-valued option forgone or its value
(iii) change in the value of other option may not affect the cost
(iv) no choice implies no cost
(v) Past expenditure is not a cost
The cost that has been paid in the past and cannot be recovered.
It is not the opportunity cost of the choice; and does not affect current decision making.
(vi) Money is not just the money expense
Concept of full cost
Full cost = monetary cost (explicit cost) + non-monetary cost (implicit cost)
 Monetary cost refers to the actual payment involved in obtaining the chosen option.
 Non-monetary cost refers to the cost involved in obtaining the chosen option with no actual
payment made. Time cost is a common example of non-monetary cost.
4.4 Decision flow chart to tackle questions on opportunity cost

Identify of available options

Rank all options according to preference

(usually given in the question)

Question : Question : Question :

Identify cost Compare the costs of two acts Identity whether cost changes

Identity Identity
the cost of each act the cost of each act

Compare
the cost of each act If the value of the
If the highest-valued
option forgone chosen option
(or its value) changes or the
changes options other than
the highest-valued
option forgone
changes
Answer: Answer: Answer: Answer:
The highest-valued (i) costs are the Cost changes + Cost does not
option forgone same state increases or change +
(ii) different + decreases explanation
state which one is
higher and which is
lower
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4.5 Change of opportunity cost

Situation Effect on
(Value of A > Value of B > value of C) the opportunity cost
(a) A change in the value of the chosen option remains unchanged
(b) A change in the value of the highest-valued option forgone will change
(i) value of B  Increases
(ii) value of B  (value of B  > value of C) Decreases
(iii) value of B  (value of B  < value of C) decreases
New priority: value of A > value of C > value of B 
(c) A change in the value of other options forgone uncertain, depending on
whether the value of the
highest-valued option
forgone changes
(i) value of C  increases
Value of A > value of C  > value of B
(ii) value of C remains unchanged
Value of A > value B > value of C 
(iii) option B is not available decreases
Value of A > value of C
(iv) New option is added in the priority list increases
Value of A > value of D > value of B > value C
(iv) option B and option C are not available No cost