LESSON 1

Introduction to Microeconomics

Learning Outcomes
At the end of the lesson, the students will be able to:
a. Define the concept of economics;
b. Analyze the scope of microeconomics and macroeconomics; and
c. Appreciate the function/s of economic principle as basis of some of our daily
activities.

Introduction
You are probably wondering why we need to study economics. The answer is
actually very simple- we use it everyday. We hear so often in the news reports how fuel
prices go up and down. We may expect transport strikes demanding for roll back in
gasoline prices or increase fare. In our daily commute to work or school, we experience
traffic situations. We may think that roads are not wide enough or these are just to
many vehicles playing the streets. We regularly go to grocery stores to shop for our
daily needs. There are times we observe several items on sale. We sometimes feel that
either these either these items are near expiration or the store had overstocked. It is
difficult to miss these daily experiences and we cannot deny their relations to
economics. These experiences are oftentimes interconnected. It is possible that there is
an increase in fuel prices because of an increase in the prices of oil in the world market.
Heavy traffic is a result of an unregulated increase in the volume of vehicles and the
government has not enough resources to finance the high demand of new roads. The
discounted prices on goods can be leveled- off by new stocks of goods at regular prices.
So think about it, is it important for one to learn about economics?

Activity
“BudgeTHINK”
Instruction: list the goods and services your family purchased based from your
monthly income. See the table below as your guide.
Monthly Income: Php20,000.00
Number of household: 4

Items Amount
 1. Rice 1000
2.
3.
4.
5.
6.
7.
8.
9.
10.

Total 20,000

Analysis
1. Base from the activity, which item you allotted big amount of money? Are those
essentials?
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2. In general, what thing you should do just to properly allocate your monthly
earnings?
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3. Base from the activity, how would you define economics?
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Abstraction/Discussion
The Essence of Economics
Our monthly income can be considered as our resources, we used these, as
medium of purchasing goods and services. The problem is sometimes it became scarce,
our 20,000 monthly income would somehow not enough to address to our unlimited
wants and needs. Because of this, the term allocation occurred. Scarcity is the reason
why we need to study economics, and allocation is the fruit of our study.
This course will not help us to gain entrepreneurial skills, economics basically
dealt with household management. After this course, the only thing that your teacher
wanted to inculcate to your mind is to become a wise consumer by applying the proper
way of allocation base from our limited resources to our unlimited demands.
Economics is a social science that deals with scarce resources and unlimited
human wants. It is important to realize that the study of economics is essential due to
the existence of two extremes- Scarce resources and unlimited human wants and
needs.
Economics works because of these four factors of production
1. Land- covers all natural resources that exist without man’s intervention.
2. Labor- refers to the human inputs such as manpower and skills that are used
in transforming other resources into different product that meet our needs.
3. Capital- is a man-made factor of production that is used to create another
product (machinery and equipment)
4. Entrepreneurship- The resource that integrates land, labor, and capital to
produce new products.
These four factors of production are scarce, that is, they are either improperly
allocated or are limited. It does not mean that we cannot produce much; it is
just that wants or desires are only met relative to the availability of these
various resources. The finite nature of land, labor, capital, and entrepreneurship
consequently makes the existence of scarcity, on top of our unlimited wants and
needs, a universal and perpetual phenomenon.

Needs are things we cannot live without. Example of these are water, food, and
shelter. These are essential requirements for man’s survival. One cannot imagine a life
without food and water. On the other hand, wants are those non-essential things we
can possibly live without. To further understand the two concepts, consider man’s need
for water. Water is essential for human’s survival yet we may wish to have soda drinks
for a time that we could afford it. It is possible for man to live even without soda drinks
but definitely not without water.
Scope of Economics: Microeconomics and Macroeconomics
Economics is divided into two main branches- the microeconomics and the
macroeconomics. Microeconomics deals with the economic of firm. It focuses on the
behavior of a particular unit of the economy such as the consumers, producers, and
specific markets. In microeconomics, you will often deal with terms like consumer’s
behavior, production theory, cost and profit, and market structures.
 On the contrary, macroeconomics deals with the aggregates. Its scope is wider
as it studies the entirety of an economy, whether national or international, as it
attempts to determine economic changes. In macroeconomics, the essential discussion
begin on how growth and output are measured and how the multiplier works. Labor,
employment, and inflation are included for long-run effects as monetary, fiscal, and
trade policies.
The Economic system and the Basic Economic Questions
We mentioned earlier that the existence of scarcity is central to the study of
economics. Scarcity necessitates the proper allocation of resources to meet people’s
unlimited wants. This process of allocation is answered based on the three economic
questions: what to produce; how much to produce; and for whom to produce.
What to produce?
In this first question, a scarcity determines the kind and quantity of products
they will be producing depending on what the consumers want to buy or willing to pay
for:
How to produce?
A society decides who will produce the goods and what process of production will
be used. A good may be produced by corporations, by small business owners or by the
government itself. The process of producing this good may be addressed depending on
the costs and availability of resources needed.
For whom to produce?
The question of for whom goods will be distributed revolves around the issue of
who will benefit from the goods and services produced. This depends on the
distribution of wealth in a particular society. Therefore, a consumer who has the
capacity to pay for certain goods and services, is more likely to benefit than one who
could not afford them.
The questions what, how, and for whom to produce are answered base on the
structure of economic system. The way resources are allocated is influenced by the type
of economy a society has. An economic system is characterized by the type of
institutions responsible for the management and allocation of resources used in the
production of the goods and services. Generally, there are three known economic
system, namely market economic system, command economic system, and mixed
economic system.
A command economic system is where all economic resources are owned by the
government. The question on what to produced is answered by producing more public
goods like roads, public schools, and public hospitals. The question on how to produce
is answered by employing all possible laborers using available machinery and
equipment. For whom to produce is also answered by the government such that
production should be for the public.
 In a market economic system, the question how to produce is answered by
producing goods that yield high profits, the question on how to produce is answered by
producing at constant returns to scale with minimum costs, and the question for whom
to produce is answered by distributing the goods to those who can afford to buy them.
Lastly, the mixed economic system is where are all three questions are answered
by both the government and private entities benefiting both. Today, most countries
apply this type of economy but in different proportions- maybe more of command and a
little of market or more of market and a little of command.
Opportunity Cost and Trade-Off
One of the pervasive effects of scarcity is the concept of opportunity cost. This
refer to the cost of giving up an alternative by selecting the next best choice. When the
resources is scarce or limited, consumers are compelled to choose how to manage them
efficiently and decide how much of their wants or needs will be satisfied and how much
of them will be unsatisfied. Hence, when a particular need pursued all the other
alternatives are forgone. And the more we have of this good, more of the other things
are needed to be sacrificed.
For instance, the cost of a soda drink today is Php25.00. The opportunity cost of
buying it corresponds to all other items that can be bought with the same amount.
When a consumer pursues to purchase two soda drinks, he will be giving up a Php50.00
worth for other things. The important concept about this is that we can identify the
good points what we have to give up in order to get another. This is what economics
call a trade-off. In our example, the good points a consumer got from losing the
Php50.00 are the possession and consumption of the soda drink, his thirst being
quenched and his wants being satisfied.
Production Possibility Frontiers and Opportunity Cost
The concept of the trade-off, is illustrated in economics by the Production
Possibility Frontiers or PPF. It is graph which shows the greatest sum of output given
accessible inputs, or factors of production, in an economy.
For example, a firm needs to produce two types of soda drinks. Table 1.1 shows
all possibility production combination of two kinds of soda drinks a manufacturer can
produce in a given time. Using a fixed amount of inputs, a manufacturer can produce
40 units of orange soda and none of the cola drinks in one hour, while 30 units of
orange soda and 20 units of cola can be produced within two hours, and so on. The
trade-off is illustrated here by showing how much of the cola drinks is not produced as
the manufacturer chooses to spend more time producing orange sodas.
From these combination in Table 1.1, we can obtain the production possibility
frontier. Figure 1.1 shows this graphical representation derived from the table.
 Table 1.1 Trade-off Between Orange Soda and Cola
Number of Hours Orange Cola
Soda
1 40 0
2 30 20
3 25 25
4 10 30
5 0 40

Orange Soda

40 A
30 B
20 C
10 D

E Cola
10 20 30 40
Figure 1.1 Production Possibility Frontier
From this figure, we can observe that at point A, 40 units of orange sodas but
none of the cola drinks will be produced. At point B, two hours will be consumed to
make 30 units of orange sodas, and 20 units of cola will be manufactured. At point C,
three hours used would yield 25 orange sodas and 25 colas. This goes on that for five
hours, no orange sodas and more of colas. Therefore, the opportunity cost of producing
cola drinks is the amount of orange soda that the manufacturer had to give up in order
to produce the cola. To produce 20 units of cola (from point A to point B), 10 units of
orange soda had to be given up.

Application
Task 1: Answer the following question based on your understanding of the previous
lesson.
1. Why is economics important?
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 2. Define the word scarce.
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3. What makes human wants unlimited?
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4. What kind of economic system is used in the Philippines? Explain your answer?
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5. What is the difference between our economic system and the United States’
economy? Explain.
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Task 2: Create your own PPF (must be in schedule and graph). Below the graph must
be your paragraph explanation.

Closure
Great job students, we are done for our first topic in this course. This is just an
introductory topic that will give you overview on what economics is. Please do advance
reading on the demand and supply analysis. Thank you and stay safe my dear students.