EC 131 Introduction

1. Introduction to Microeconomic
Analysis
2. Price Determination
• ECONOMICS is the study of the ways that individuals
and societies allocate their limited resources to try
to satisfy their unlimited wants. The major task of
economics is studying and evaluating alternatives.
• ECONOMICS is a decision science concerned with
the choices we make and the consequences of those
choices for others and ourselves. In fact, the central
forms of economics are on choice and decision-
making.
• Microeconomics- Is concerned with individual
decision-making; the allocation of resources;
and how prices, production, and the
distribution of income are determined
• MACROECONOMICS is the study of very large,
economy wide aggregate variables such as
various indicators of the levels of total
economic activity
• Scarcity- Scarcity refers to the
basic economic problem, the gap between limited –
that is, scarce – resources and theoretically limitless
wants. This situation requires people to make
decisions about how to allocate resources
efficiently, in order to satisfy basic needs and as
many additional wants as possibleHumans have
many different types of wants and needs.
Economics looks only at man's material wants and
needs
Limited resources
• Commodities (goods and services) are
produced by using resources.
• Resources are often referred to as factors of
production i.e. Land, Labour, Capital,
• Types of commodities
• Free good - A free good is available without
the use of resources. There is zero opportunity
cost, for example air.
• An economic good is a commodity in limited
supply.
• The Economic Problem
• The economic problem refers to the scarcity of
commodities. There is only a limited amount
of resources available to produce the
unlimited amount of goods and services we
desire.
• Society has to decide which commodities to
make
• Opportunity Cost
• The opportunity cost principle states the cost of
one good in terms of the next best alternative.
For example, a gardener may decide to grow
carrots. The opportunity cost of his carrot
harvest is the alternative crop that might have
been grown instead (e.g. potatoes).
• the loss of other alternatives when one
alternative is chosen.
• The PPF
• Society as a whole must make choices about
the commodities it produces and consumes.
We represent this limitation on what the
economy can produce by a simple device
called the production possibilities frontier. A
production possibilities frontier is one of the
simplest models of an economy.
• Assumptions of the PPF
• A). The factors of production (land, labor, capital and
entrepreneurship) are fixed in total supply. However,
these resources can be allocated among different types
of production.
• b) Technology is constant
• c) The economy operates efficiently, and all resources
are fully employed.
• d) Only two goods (products) are produced, that is,
food and clothing in our
• The PPF for an economy illustrates the numerous
combinations of food and clothing that can be
produced
• PP SCHEDULE FOR A HYPOTHETICAL ECONOMY
• Production Possibility Food (Tons/Day) Clothing
(Garments/Day) A 1000 0 B 750 125 C 500 250 D
250 375 E 0 500
• PPF SHAPE
• Technological improvements