HOPE ENTERPRISE UNIVERSITY COLLEGE

Faculty of Business
COURSE TITLE: Microeconomics I
COURSE CODE: Econ -201
DEPARTMENT: Management
LEVEL: Undergraduate
CREDIT HOURS: 3
ACADEMIC YEAR: 2024 G.C
2/27/2024 SEMESTER: II
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 CHAPTERS LECTURE TOPICS and HOURS

CHAPTER ONE Introduction of Economic (8 Hrs)

CHAPTER TWO The Theory of Consumer Behaviour (8
Hrs)
CHAPTER THREE The Theory of Production (14 Hrs)

CHAPTER FOUR The Theory of Cost of Production (12 Hrs)

CHAPTER FIVE Price and Output Determination in a

Perfectly Competitive Market (8 Hrs
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What is Economics?

➢The word economy comes from the Greek phrase-”one who manages
a household”.

➢ Adam Smith – the father of economics

➢ He brought out his famous book: - An Inquiry into the Nature and
Causes of Wealth of Nations -1776.

➢Economics is a social science which studies about efficient allocation

of scarce resources so as to attain the maximum fulfillment of
unlimited human needs. 2/27/2024
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 As economics is a science of choice, it studies how people choose to use
scarce or limited productive resources

1. Land

2. Labour
to produce various
3. Equipment
commodities.
4. Technical knowledge

5. and the like

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 Key statements derived from the above definition are:

a. Economics studies about scarce resources;

b. It studies about allocation of resources;

c. Allocation should be efficient;

d. Human needs are unlimited

e. The aim (objective) of economics is to study how to satisfy the

unlimited human needs up to the maximum possible degree by
allocating the resources efficiently.

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 There are 2 fundamental facts that provide the foundation for the field
of economics.

1) Human (society‘s) material wants are unlimited.

2) Economic resources are limited (scarce).

❑ Scarcity
Basic Economic Problem
❑ Choice

 Limited amount of resources for the unlimited desire

 Choice is at the heart of all decision-making.

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Four Main Reasons to Study Economics
1). To learn a way of thinking
Opportunity Cost
Marginalism
Efficiency
2). To understand society
“The study of economics is an essential part of the study of
society”
3). To understand global affairs
4). To be an informed voter

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1. People face tradeoffs :
• “No such thing as free lunch”
• Give up one thing to get another - OC
2. Everything has an OC – whatever must be given up to get
that item
3. Rational people make decisions at the margins – increments
matter
4. People respond to incentives – e.g. cigarette laws,
communism (if MR exceeds MC)
5. Trade can make everyone better off- Free Trade is good (for
everybody)
6. Markets are usually a good way to organize economic
activity. Adam Smith “Invisible Hand”
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7. Governments can sometimes improve market outcome –
Property rights and Market failure
8. A country’s standard of living depends upon its production
power (productivity)
9. Prices rise when government prints too much money
10. Phillips curve – short run tradeoff between inflation and
unemployment

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1.3.1 Scope of Economics:
 The core of modern economics is formed by its two major
branches:
A. Microeconomics is concerned with the economic behavior of
individual decision making units such as households, firms,
markets and industries.
B. Macroeconomics is a branch of economics that deals with
the effects and consequences of the aggregate behaviour of all
decision making units in a certain economy.
 It looks the economy as a whole and discusses about the
economy-wide phenomena.
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 Microeconomics Macroeconomics

Studies individual economic units of an Studies an economy as a whole and its

economy. aggregates.

Deals with individual income, individual Deals with national income and output
prices, individual outputs . . . and general price level

Its central problem is price determination Its central problem is determination of

and allocation of resources. level of income and employment.

Its main tools are the DD and SS of Its main tools are ADD and ASS of an
particular commodities and factors. economy as a whole.

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 Microeconomics Macroeconomics
It helps to solve the central problem of Helps to solve the central problem of “full
what, how and for whom to produce‘ in employment of resources in the economy.”
an economy so as to maximize profits

Discusses how the equilibrium of a Concerned with the determination of

consumer, a producer or an industry is equilibrium levels of income and
attained. employment at aggregate level.

Examples: Individual income, individual Examples: National income, national

savings, individual prices, an individual savings, general price level, national
firm‘s output, individual consumption, output, aggregate consumption, etc.
etc.
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Note:

 Both microeconomics and macroeconomics are complementary to each

other.

 Macroeconomics cannot be studied in isolation from

microeconomics.

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1.3.2 Positive and normative analysis

 Is economics a positive science or normative science, or both?

 What is your justification?

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Positive economics:
 It is concerned with analysis of facts and attempts to describe
the world as it is
 It tries to answer the questions what was; what is; or what
will be?
 It does not judge a system as good or bad, better or worse.
Example:
➢ The current inflation rate in Ethiopia is 33 percent.
➢ Poverty and unemployment are the biggest problems in
Ethiopia.
➢ The life expectancy at birth in Ethiopia is rising.

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Normative Economics:
 What ought to be? Or what the Economy should be?
 Value Judgments about what is good or what is bad.
 What is good for one may not be the case for the other.
 A matter of opinion-subjective in nature
Example:
➢ The poor should pay no taxes.
➢ There is a need for intervention of Gov’t in the economy.
➢ Females ought to be given job opportunities.

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1.3.3 Inductive and deductive reasoning in economics

 There are two methods of logical reasoning:

1. Inductive Reasoning:

2. Deductive Reasoning:

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Inductive Reasoning:
 A logical method of reaching at a correct general statement
 From facts to theories and
 From particular to general economic analysis.
❑Major premise: Haile is mortal.
Minor premise: Haile is a man.
Conclusion: Man is mortal.
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Deductive Reasoning:

 From general statement to specific statement.

Example:

❑Major premise: All men are mortal.

Minor premise: Haile is a man.

Conclusion: Haile is mortal Hope Enterprise University

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1. Scarcity:
 Finite or limited in supply all economic resources that a society
needs to produce G+S
 Human wants unlimited.
 Imbalance b/n our wants and the means to satisfy those wants.

Resource
Free resources - Scarce (economic) resources-
Amount available to Amount available to a society is
a society is greater less than what people want to have
than the amount at zero price. Ex: Human
people desire at zero resources, Most natural
price. resources, Capital resources,
Ex: Sunshine Entrepreneurial resources
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 Economic Resources: Classified into 4 categories

❖ Land
 All “the free gifts of nature”
 Natural resources
❖ Labor
 The contribution of human beings
✓Physical efforts of human beings and
✓Mental efforts of human beings.

❖Capital
• All the manufactured inputs.
• Ex: equipment, machinery, transport and ❖Entrepreneurial ability
communication facilities, Etc
• Special type of human
• This differs from “financial capital” talent.
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 Resource Payments

Economic Resource Resource payment

Land---------------------------------------------------Rent

Labor--------------------------------------------------Wages

Capital ------------------------------------------------Interest

Entrepreneurial ability-------------------------------Profit
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Entrepreneurs: Definition?
Entrepreneurs are individuals who:
➢ organize factors of production to produce G + S.
➢ make basic business policy decisions.
➢ introduce new inventions and technologies into business
practice.
➢ look for new business opportunities.
➢ take risks of making losses. 2/27/2024
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2. Choice:
 If resources are scarce, then output will be limited.
 If output is limited, then we cannot satisfy all of our wants.
 we made choice
 Due to scarcity we choose as to
1. what output to produce,
2. in what quantity, and
3. what output not to produce

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In short:

➢ scarcity implies choice and

➢ choice, in turn, implies cost

 That means whenever choice is made, an alternative

opportunity is sacrificed.

 This cost is known as Opportunity Cost.

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 1.
6. Scarcity
Opportun 2. Limited
ity cost resource

5.
3.
Choice
Limited
involves costs
output

4.
We might not satisfy
all our wants Hope
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3. Opportunity Cost:

Opportunity Cost - Definition:?

 Is the amount or value of the next best alternative that must

be sacrificed (forgone) in order to obtain one more unit of a

product.
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Example 1:
 Suppose the country spends all of its limited resources on the
production of food or computer.
 If a given amount of resources can produce either one MT of
food or 20 units of computer, then

➢ the cost of one MT of food is the 20 units of computer that

must be sacrificed in order to produce a meter of food.
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Example 2:
 The opportunity cost of going to college for a year is:
➢ not just the tuition, books, and fees, but also the foregone
wages.

 The opportunity cost of seeing a movie is:

➢ not just the price of the ticket, but the value of the time you
spend in the theater.
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4. The Production Possibilities Frontier or Curve (PPF/ PPC)
Definition of the PPF/PPC?
 A curve that shows the various possible combinations of G+S
that the society can produce given its resources and
technology.
Assumptions of PPF/PPC
 An economy produces food and computer.
 Given its limited resources and available technology.

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