Introduction to

Microeconomics
NCHNUEC441M Principles of Microeconomics
In this lecture

Chapter 1 Perloff ‘Microeconomics’

• What is Microeconomics?
• Models
• Uses of Microeconomic Models
• Positive VS Normative statement

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 What is (micro)economics?
• Resources are scarce
• Scarcity: the limited nature of society’s resources
– Society has limited resources and therefore cannot produce all
the goods and services people wish to have
• In March/April of 2020, I could not get my hands on paracetamol, hand
gel, toilet roll. Could you?
• My friend was not able to book a Covid-19 test in London.
• Economics studies how society manages its scarce resources
– Today we have loads of toilet rolls, paracetamol, etc.
– We got better at providing Covid-19 tests.
– Are we getting better at managing our resources?
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 Great toilet paper rush of 2020!

Scarcity does not mean that there’s not enough to go around—it

means that there’s not enough to satisfy everyone’s wants.

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 Three players of microecomics

• Consumer
– Maximize individual happiness (utility).
• Producer
– Maximize profit, minimize cost.
• Government
– Maximize public happiness (utility).

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 Trade-offs
• Because people cannot have everything
they want, they make trade-offs.
“There ain’t no such thing as a free lunch”
• To get something that we like, we
usually have to give up something else
that we also like

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 Trade-offs

• Making decisions requires trading off one goal

against another
– To study one more hour, give up one hour of TV
– To have an additional hospital bed for a Covid-19
patient, give up admitting a patient with a chronic
disease

In simple terms, a trade-off is where one thing increases and

another must decrease.

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 Trade-offs

• More on trade-offs
– Students: how to allocate time
– Parents: how to spend income
– Governments: national
defense and consumer goods
(guns vs. butter)
– Clean environment and high
level of income

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 Trade-off

Recall Trump’s
decision to re-open
the economy.
What were the trade-
offs he may have
faced?

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 Ventilator vs. Everything else

Response
– Rolls-Royce
– Siemens
– Formula 1 team McLaren
– Aerospace company BAE Systems
– Ford
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 A society faces three key
trade-offs
• Which goods and services to produce.
• If a society produces more cars, it must produce fewer
of other goods and services, because society has a
limited amount of resources.
• How to produce (labour/capital intensive).
• To produce a given level of output, a firm must use
more of one input if it uses less of another input.
• Who gets the goods and services
• The more of society’s goods and services you get, the
less someone else gets.

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 Prices determine allocations
• Prices influence the
decisions of individual
consumers, firms and
government.
• Prices are determined
in the market.
• Market: an exchange
mechanism that allows
buyers to trade with
sellers.
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 How People Interact
Markets Are Usually a Good Way to Organize Economic
Activity
• Communist countries, central planning
– Government officials (central planners) are in the best position
to allocate the economy’s scarce resources
• What goods and services were produced
• How much was produced
• Who produced and consumed these goods and services
• Market economy, allocation of resources
– Resources are allocated through decentralized decisions of
many firms and households as they interact in markets for
goods and services
– They are guided by prices and self-interest
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 How People Interact
• Adam Smith’s “invisible hand”
– Households and firms interacting in markets
• Act as if they are guided by an “invisible hand”
• Leads them to desirable market outcomes
– Corollary: Government intervention
• Prevents the invisible hand’s ability to coordinate the decisions of the
households and firms that make up the economy

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 Models
• A description of the relationship between two or
more economic variable that make clear, testable
predictions to make decisions.
– Demand Model: Q = 25 – 2P
– Consumption model: C = Y + (1+r)S
• Economists make many assumptions to simplify
their models.
• In most models, a decision maker maximizes an
objective subject to a constrain.
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 Positive VS Normative
• Positive statement
– Can be verified true
or false.
– Do not involve value
judgment or
opinions.
– Example: In the UK,
Dec 2017 CPI
inflation is 3.0%
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 Positive VS Normative
• Normative statement
– A conclusion as to
whether something is
good or bad.
– Cannot be tested
because a value
judgment cannot be
refuted by evidence.
(subjective).
– Example: We should
protect our industries.

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 Normative or Positive?
• A cut in wages will reduce the number of people
who are willing to work.
• The government ought to behave in such a way as
to ensure that resources are used efficiently.
• High interest rate prohibit many young people
from buying their first home.
• Hong Kong government should increase its budget
allocation to reduce the number of illegal
immigrants from mainland of China.

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