INTRODUCTION

TO MICRO-
ECONOMICS

5/8/2023 COMPILED BY: MR P. MUTEMASANGO

ECONOMICS DEFINITION

• Economics is a social science, which focuses on how limited resources are

allocated to satisfy the unlimited needs and wants of individuals, governments
and firms in an economy.
Economics is divided into two important sections, which are: Macroeconomics &
Microeconomics
• Macroeconomics deals with the behaviour of the aggregate economy and
Microeconomics focuses on individual consumers and businesses.
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DIFFERENCES BETWEEN MICRO AND MACRO- ECONOMICS

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POSITIVE AND NEGATIVE
ECONOMICS/STATEMENTS

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 ECONOMIC PROBLEM

• The basic economic problem is concerned with how best to allocate scarce
resources in order to satisfy people's unlimited needs and wants.
• In every country, resources are limited in supply and decisions have to be
made by governments, firms (businesses) and individuals about how to
allocate scarce resources to satisfy their unlimited needs and wants.
• Finite resources VS Unlimited needs and wants

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 REASONS FOR ECONOMIC PROBLEM
1. SCARCITY OF RESOURCES :resources are limited in relation to their demand and
economy cannot produce all what people want.

2. Unlimited human wants :human wants are never ending, i.E. They can never be
fully satisfied. As soon as one want is satisfied, another new want emerges.

3. Alternative uses : resources are not only scarce, but they can also be put to
various uses. It makes choice among resources more important.

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 • Essentially, economics is the study of how resources are allocated to satisfy
the unlimited needs and wants of individuals, governments and firms in an
economy.

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 Decision on ALLOCATION OF RESOURCES,
Leads to 3 major economic problem/
questions:

•What to produce
•How to produce
•Whom to produce

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WHAT TO PRODUCE

This problem involves selection of goods and services to be produced and the
quantity to be produced of each selected commodity
• Food or Clothes
• Cars or hospitals
• ipods or Cosmetics or military strength
Guiding Principle: Allocate the resources in such a manner which gives
maximum aggregate satisfaction.

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 TYPES OF GOODS
 An economic good is one which is limited in supply, such as oil, wheat, cotton, housing and cars.
It is scarce in relation to the demand for the product, so human effort is required to obtain an
economic good.
 Free goods are unlimited in supply, such as the air, sea, rain water, sunlight and (to some extent)
public domain webpages. There is no opportunity cost in the production or consumption of free
goods
 A free good is not the same as a good that is provided without having to pay (such as education
or healthcare services provided by the government).
 The latter has an opportunity cost (the money could have been spent on the provision of other
goods and services) and is funded by taxpayers' money. Public Libraries are not free goods
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• Consumer Goods
Products purchased by consumers for personal or household use.
• Capital Goods
Producers’ goods or means of production (e.g: Machines)
Creating Capital goods  Investment
A normal good refers to any good where there is a direct relationship between income changes and the demand curve.
An inferior good is any good where there is an inverse relationship between changes in income and a demand curve.
Necessity goods are essential for daily use and individuals consume them regardless of any change to their disposable income. On the
contrary, luxury goods are non-essential, expensive, highly desired, and associated with affluence. An increase in disposable income increases
the demand for luxury goods.

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HOW TO PRODUCE

 techniques used.
 least cost method of production
 labour intensive or capital intensive

Guiding Principle: Combine Factors Of Production in such a manner so that

maximum output is produced at minimum cost, using least possible scarce
resources.
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FOR WHOM TO PRODUCE
This problem refers to selection of category of people who will ultimately consume the
goods, i.e. Whether to produce goods for more poor and less rich or more rich and less
poor.

Will everyone get an equal share of what is produced ?

 Would the income be distributed equally?

Guiding Principle: Ensure that urgent wants of each productive factor are fulfilled to the
maximum possible event.

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MICROECONOMIC AGENTS
OR DECISION MAKERS

• Firms
– Produce and sell goods and services
– Buy inputs (labor, capital & raw materials)
– Pay corporate tax and V.A.T to the government
• Consumers
– Buy goods and services
– Sell inputs (labor services, loanable funds)
– Pay P.A.Y.E and V.A.T to the government
Government(Macro)

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PUBLIC AND PRIVATE SECTOR

• Private sector refers to economic activity of private individuals and firms. The
private sector's main aim is to earn profit for its owners.
• Public sector refers to economic activity directly involving the government, such as
the provision of state education and healthcare services. The public sector's main aim
is to provide a service. For example, the government might provide education and
healthcare services for the general public.
• All economic agents (governments, firms and individuals) produce and consume goods
and services

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GOODS AND SERVICES

 Goods are physical items that can be produced, bought and sold. Examples
are furniture, clothing, toothpaste and pencils.
 Services are non-physical items that can be provided by firms and paid for
by customers. Examples are haircuts, bus journeys, education, concerts,
telephone calls and internet access.

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NEEDS AND WANTS

Needs are goods or services that are essential for our survival. These include nutritional food, clean water, shelter, protection,
clothing and access to healthcare and education.
• All individuals have a right to have these needs met and this is stated in Articles 25 and 26 of the United Nations Universal
Declaration of Human Rights, drafted in December 1948
• Article 25
 Everyone has the right to a standard of living adequate for the health and wellbeing of himself and of his family, including
food, clothing, housing and medical care and necessary social services, and the right to security in the event of
unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.
• Article 26
 Everyone has the right to education. Education shall be free, at least in the elementary and fundamental stages. Elementary
education shall be compulsory. Technical and professional education shall be made generally available and higher education
shall be equally accessible to all on the basis of merit.

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• Wants are goods or services that are not necessary for survival but are
demanded by economic means to fulfil a function. They are human desires, that is,
things we would like to have. Wants are unlimited as most people are rarely
satisfied with what they have and are always striving for more. Wants are a
matter of personal choice and part of human nature
 These figures suggest that their basic needs are not being met. In contrast, the
ten richest people on the planet have wealth equivalent to the poorest half of
the world's population.
 2018 – Ten richest people.

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 THE DEFINITION OF CONSUMPTION AND
CONSUMER
• Consumption is when a commodity is used or Using the goods and services to satisfy
want; a consumer does the consumption.

• A consumer can be an individual, or a household, or a family dynasty (Kennedy’s), or

an institution, or a country, or all humankind.

• The default definition of a consumer is a household, which is a person or a group of

people living in the same residence.

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UTILITY

• Utility: usefulness and pleasure a consumer receives when they consume a

product.
• Total utility: tot. satisfaction gained from consuming a certain quantity of a product. So
how happy are you after eating 5 ice creams?
• Marginal utility: extra utility gained from consuming one more unit of a product. (falls as
consumption increases)

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FACTORS OF PRODUCTION
• It refer to the resources required to produce a good or service, namely land,
labour, capital and enterprise.
 Production of any good or service requires resources, known as the factors of
production, which are divided into four categories:
 Land - the natural resources required in the production process, such as oil, coal,
water, wood, metal ores and agricultural products.
 Labour - the human resources required in the production process, including skilled &
unskilled labour.
 Capital - the manufactured resources required in the production process, such as
machinery, tools, equipment and vehicles.
 Enterprise - the skills a business person requires to combine and manage the other
three factors of production successfully.

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 FACTORS OF PRODUCTION AND THEIR REWARDS

FACTOR REWARDS
1. Land 1. Rent : Rental income comes from the ownership of property, such as physical and
related assets, and is paid by the tenants of the land resources.
2. Salaries/Wages: Wages are paid to workers on an hourly basis, such as those who
2. Labour earn a national minimum wage. Salaried staff are paid a fixed amount per month.
3. Profit: This is the return for the entrepreneur's good business ideas and for
3. Enterprise taking the risks in starting up and running the organisation. Profit is what
remains after all business costs are paid, including payment to the other factors
of production.
4. Capital 4. Interest: If the interest rate is high, it becomes less worthwhile for businesses and
households to borrow money for production purposes because the cost of borrowing
is high, and vice versa. 5/8/2023 25
MOBILITY OF FACTORS OF PRODUCTION

 It refers to the extent to which resources can be changed for one another in
the production process.
 For example, farming can be very traditional in some parts of the world
and rely heavily on labour resources.
 However, in other countries, farming is predominantly mechanised, with a
heavy reliance of capital resources.

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MOBILITY OF FACTORS OF PRODUCTION

 Economists usually talk about labour mobility, although factor mobility can apply to
any factor of production. For example:
 Land might be used for various competing purposes, such as to grow certain
fruits and/or vegetables, or to construct buildings such as housing, hospitals or
schools.
 Capital equipment might be used for different purposes too. For example, the
same machinery in the Coca-Cola factory can be used to produce Coca-Cola,
Sprite and/or Fanta.
 Entrepreneurs can also be mobile. For example, Meg Whitman, chief executive
officer (CEO) of Hewlett-Packard, was previously a vice president of the Walt
Disney Company and CEO of eBay.
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MOBILITY OF LAND

• Most land is occupationally mobile. This means that it can be used for a number od
purposes.
• Land which is currently being used for farming may be used instead for to build
houses. Trees can be used to make tables or sleepers for railway lines.
• Land, in its traditional sense, is geographical immobile. It is not possible to move a
section of land from Maputo Province to Inhambane, for example.
• Some forms of land, in its wider meaning can be moved to an extent. For example
the course of rivers can be diverted and wildlife can be moved.

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MOBILITY OF LABOUR

• The ability of labour to change where it works or in which occupation.

• Labour mobility can be broken down into two categories.
1. Geographical mobility
 It refers to the willingness and ability of a person to relocate from one area to another for
employment purposes. Some people may not be geographically mobile for the following reasons:
 Family ties and related commitments
 Differences in the price and availability of housing in different areas and countries
 Differences in educational systems in different areas
 Restrictions on the movements of workers

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 2. OCCUPATIONAL MOBILITY - LABOUR

 Occupational mobility refers to the ease with which a person is able to

change between jobs. The degree of occupational mobility depends on the cost
and length of training required to change profession.
 Developing and training employees to improve their skills set improves labour
occupational mobility (as workers can perform a greater range of jobs).
 Teachers are typically occupationally mobile.

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MOBILITY OF CAPITAL

• The ability to change where capital is used or in which occupation.

• The geographical and occupational mobility of capital varies according to the type
of capital goods e.g. a photocopier used by a bank in one area can be sold to, and
then be used by, a bank in another area.
• A coal mine and a dock, however, are fixed in position and so are geographically
immobile. They are also occupationally immobile since their use cannot be changed,
as they have been made for a specific purpose.
• In contrast, a delivery van used by a book publisher may be bought and employed
by a toy manufacturer.
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MOBILITY OF ENTERPRISE

• The ability to change where enterprise or in which occupation.

• The mobility of enterprise depends on the mobility of entrepreneurs.
• Enterprise is the most mobile factor of production.
• The skills involved in being an entrepreneur can be applied in every industry.
• Someone who has borne uncertain risks and organised factors of production in the car industry
should be able to do this, for example, in the textile industry too.
• Apart from being occupationally mobile, enterprise is also geographically mobile.
• Someone who has been successful in starting up and running a business in one country is likely to
be successful in another country also.

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QUANTITY AND QUALITY OF THE FACTORS OF PRODUCTION
1. QUANTITY AND QUALITY OF LAND
Quantity of land
• The amount of physical land in existence does not change with time.
• There is certain degree of soil erosion which reduces the supply of agricultural land, but also
a certain amount of land reclamation which increases its supply.
• Some natural resources are renewable whilst others are non-renewable. Renewable resources,
for example wind power, are replaced by nature and can be used again and again.
• Over-fishing and the hunting of wildlife can diminish numbers to a point where they cannot be
restored.

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 THE QUALITY OF LAND

• There are a number of reasons why the quality of natural resources may
increase. Fertilisers can be applied to fields to increase the fertility of the
land. The purity of rivers, and so the health of fish in the rivers, can be
improved by stopping firms polluting the rivers. Providing good drainage can
increase the yield from fruit trees.

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THE QUANTITY OF LABOUR
• The quantity of labour is influenced by two key factors. One is the number of workers
available and the second is the number of hours for which they work. The number of
available workers is determined by:
• The size of population.
• The age structure of the population.
• The retirement age.
• The school leaving age.
• Attitude to working women.

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 • The number of hours which people work is influenced by (among other
factors):
• The length of the average working day, for example full-time workers in
the USA tend to work for longer hours than those in European union
countries
• Whether they work full or part-time, for example more people in the UK
work part-time than those in France
• The duration of overtime
• The length of holidays taken by workers
• The amount of time lost through sickness and illness

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THE QUALITY OF LABOUR

• The quality of labour can be improved as a result of better education, better

training, more experience and better healthcare. A better educated, better
trained and more experienced labour force will be able to carry out more
difficult tasks, work with more complex machinery and equipment, and
produce more and better quality products. A healthier labour force will be
able to concentrate more, be stronger for any manual tasks and will have
fewer days off sick.

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 THE QUANTITY OF CAPITAL
• The quantity of capital is influenced by investments and tends to increase with time. Every year some
capital goods physically wear out and some become outdated, for example a farm barn may fall down
and some machinery may be replaced by newer, more efficient machinery.
• New capital goods, however, usually take the place of those goods, which firms are unable (or choose
not) to use any more. The total value of the output of capital goods produced is referred to as gross
investment. Some of the capital goods being produced will be replacing those which have worn out or
become obsolete. The value of replacement capital is called depreciation or capital consumption. Net
investment is the value of the extra capital goods made. It is equal to gross investment minus
depreciation. For example, if a country produces $200million capital goods one year and there is
depreciation of $70million, net investment is $130million. The country will have more capital goods.
These additional capital goods will allow it to produce more goods and services.
• Occasionally, gross investment may be lower than depreciation. This means that some of the capital
goods taken out of use, are not replaced. This is said to be negative net investment.
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 QUALITY OF CAPITAL
• Advances in technology enable capital goods to produce a higher output and a
better quality output.
• The development of robotics in car production, for example, has increased
significantly the number of cars the number of cars that a car factory can produce.
(Automation in car manufacturing)

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 ENTERPRISE
Quantity of enterprise
• The quantity of enterprise will increase if there are more entrepreneurs.
• A good education system, including university degree in economics and business studies, may help to develop
entrepreneurs in an economy.
• Lower taxes on firm's profits (corporate taxes) and a reduction in government regulations may encourage more
people to set up their own businesses.
• Sometimes, a disproportionate number of immigrants become entrepreneurs.
Quality of enterprise
• The quality of enterprise can be improved if entrepreneurs receive better education, better training, better health
care and gain more experience.

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CAUSES OF CHANGES IN THE QUANTITY AND QUALITY
OF FACTORS OF PRODUCTION - SUMMARY

• Changes in the costs of factors of production

• Net migration of labour
• Government policies such taxes and subsidies
• New technologies – high productivity, reduced average cost of production
• Improvements in education and healthcare
• Unfavourable weather conditions such droughts or flooding
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OPPORTUNITY COST

 Opportunity cost is a very important concept in the study of economics.

Opportunity cost is the cost of the next best opportunity forgone (given up)
when making economic decisions.
 Every choice made has an opportunity cost because in most cases there is an
alternative.

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EXAMPLE OF OPPORTUNITY COSTS

 The opportunity cost of visiting the cinema on Saturday night could be the money
you would have earned from babysitting for your neighbour instead.
 The opportunity cost of building an additional airport terminal is using the same
government funds to build public housing for low-income families.
 The opportunity cost of a school purchasing 100 laptops for use in classrooms might
be the science equipment that could not be bought as a result.
 The opportunity cost of going to university to study for a degree is the loss in
income that would have been earned if the undergraduate student had chosen to
work instead.

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THE INFLUENCE OF OPPORTUNITY COST ON
DECISION MAKING
 Consumers have limited incomes, so whenever they purchase a
particular good or service, they give up the benefits of purchasing
another product.
 Workers tend to specialise - for example, as secondary school
teachers, accountants, doctors and lawyers. By choosing to specialise
in a particular profession, workers give up the opportunity to pursue
other jobs and career

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  Producers need to choose between competing business opportunities. For
example, Toyota has to decide how best to allocate its research and development
expenditure in terms of developing its petrol-fuelled cars or its hybrid electric
cars.
 Governments constantly face decisions that involve opportunity cost. If a
government chooses to spend more money on improving the economy's
infrastructure (such as improving its transportation and communications networks),
it has less money available for other uses (such as funding education and
healthcare).
 In general, decision makers will choose the option that gives them the greatest
economic return.
 For example, a government might prioritise welfare benefits over its expenditure on
national defence or repaying the national debt
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PRODUCTION POSSIBILITY CURVE (PPC)

 The production possibility curve (PPC) shows the maximum combination of

any two categories of goods and services that can be produced in an
economy, with the existing resources and technology, at any point in time.
 Essentially, it shows the productive capacity of the economy.

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 PPC DIAGRAM

 The PPC diagram is a

graphical representation of
the maximum combination
of the amounts of goods
and services that can be
attainable
produced in an economy, unattainable
per period of time.

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THE INFLUENCE OF OC ON DECISION MAKING
 Assume a country can only produce two types of goods: wooden furniture and
olive oil. It has a limited amount of land, labour and capital.
 In Figure 4.1, if producers wish to increase production of olive oil from to O1 to
O2 then the amount of wooden furniture manufactured will
have to decrease from W1
to W2.
 The opportunity cost of
producing the extra O1 to
O2 litres of olive oil is
therefore W1 to W2
tonnes of wooden
furniture.
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THE PRODUCTION POINTS IN FIGURE ARE AS FOLLOWS:
 Point A - all resources are dedicated to the production of wooden furniture.
 Point B — all resources are dedicated to the production of olive oil.
 Point C - W1 tonnes of wooden furniture are produced along with O2 litres of
olive oil.
 Point D – W2 tonnes of wooden furniture and O2 litres of olive oil are produced.
 Point E - this point is beyond the production
possibility curve and lies outside the productive
capacity of the economy, so it is currently unattainable.
 Point F - this point is within the productive capacity
of the economy, so the production of both olive oil
and wooden furniture can increase without any
opportunity cost as some factors of production are
currently not being used.
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 CAUSES AND CONSEQUENCES OF SHIFTS AND MOVEMENTS OF
THE PPC MOVEMENTS ALONG THE CURVE
 For a country to be on its PPC two conditions have to be met:
 All resources are used - there is no unemployment of factors of production.
 There is efficiency in the use of resources – factors of production are allocated to their best use/purpose.
 A movement along a PPC results in an opportunity cost.
This means that to produce more of one product,
there must be less of another product.
 A movement along the PPC from point X to point Y
means more consumer goods are produced (from A to B),
but at the expense of fewer producer goods (from C to D).

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PPC EXAMPLE 2

• Assumptions:
• There are only two goods, pizza and spaghetti.
• There are limited inputs and given technology of production.

• Definition:
• The PPC shows the maximum amount of pizza you can produce, given the
amount of spaghetti to be produced.

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AN IMPROVEMENT IN SPAGHETTI
TECHNOLOGY EFFECT OF AN INCREASE IN TOTAL RESOURCES (INPUTS)

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DEPENDING ON OUR CHOICES OF PRODUCTION, THE
OPPORTUNITY COST MAY: REMAIN CONSTANT, INCREASE,
DECREASE

• Constant • Increasing • Decreasing

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 Thank you!

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