Romeo Bordallo Jr.

Comprehensive Summary on the topics

Microeconomics
Assumptions and Definitions
Opportunity cost

Like a household, a society faces many decisions. It must find some way to decide what
jobs will be done and who will do them. It needs some people to grow food, other people to
make clothing, and still others to design computer software. Once society has allocated people
(as well as land, buildings, and machines) to various jobs, it must also allocate the goods and
services they produce.
The management of society’s resources is important because resources are scarce.
Scarcity means that society has limited resources and therefore cannot produce all the goods
and services people wish to have. Just as each member of a household cannot get everything
she wants, each individual in the society cannot attain the highest standard of living to which
she might aspire.
Microeconomics deals with the behavior of individual economic units. These units
include consumers, workers, investors, owners of land, business firms – in fact, any individual or
entity that plays a role in the functioning of our economy. Microeconomics explains how and
why these units make economic decisions. For example, it explains how consumers make
purchasing decisions and how their choices are affected by changing prices and incomes. It also
explains how firms decide how many workers to hire and how workers decide where to work
and how much work to do.
Much of Microeconomics is about limits – the limited incomes that consumers can
spend on goods and services, limited budgets and technical know-how that firms can use to
produce things, and limited number of hours a week that workers can allocate to labor or
leisure. However, microeconomics is also about ways to make the most of these limits. More
precisely, it is about the allocation of scarce resources. For example, microeconomics explains
how consumer can best allocate their limited incomes to the various goods and services
available for purchase. It explains how workers can best allocate their time to labor instead of
leisure, or to one job instead of another. In addition, it explains how firms can best allocate
limited financial resources to hiring additional workers versus buying new machinery, and to
producing one set of products versus another.
On the other hand, assumptions provide a way for economist to simplify economic
processes and make them easier to study and understand. An assumption allows an economist
to breakdown a complex process in order to develop a theory and realm of understanding.
Good simplification allow the economist to focus only on the most relevant variables. Later,
the theory can be applied to more complex scenarios for additional study.
For example, economist assume that individuals are rational and maximize their utilities.
This is simplifying assumption allows economist to build a structure to understand how people
make choices and use resources. In reality, all people act differently. However using the
assumption that all people are rational enables economist study how people make choices.
Finally, opportunity cost represents the potential benefits an individual, investor, or
business misses out on when choosing one alternative over another. Because by definition they
are unseen, opportunity cost can be easily overlooked. Understanding the potential missed
opportunities forgone by choosing one investment over another allows for better-decision
making.
Opportunity cost is the forgone benefit that would have been derived by an option not
chosen. To properly evaluate opportunity cost, the costs and benefits of every option available
must be considered and weighed against the others. The true opportunity cost would be the
forgone profit of the most lucrative of those listed.