ECO 221-

Introduction to
Microeconomics
 Introduction
Definition of Economics-
• The study of how individuals and societies use limited resources to
satisfy unlimited wants.

• The study of how man can use his scarce resources to satisfy his
needs.

• Economics is a social science that is concerned with the production,

distribution and consumption of goods and services.

• Adam Smith is considered to be the first to provide a formal

definition of economics contained in his book, “An enquiry into the
nature and causes of wealth of nation” published in 1776.

• Because of this great contribution of Adam Smith, he is regarded as

the father of economics. Others such as J.S. Mill, J.B. Say, Alfred
Marshall and Pigou gave varied definitions of economics.
The definition of economics has three characteristics
Limited/scarce resources
Alternative uses
Unlimited wants
 
Scarcity: The resource is available but cannot meet the demand. The
scarce productive resource include, land, labor, capital,
entrepreneurship, and by extension technology used in the production
process.
 
Alternative uses: some resources may be having more than one use. For
example milk can make butter, cheese, chocolate etc.
 
Unlimited wants: human needs are unlimited and they are recurrent in
that when you satisfy a need today, the same need has to be satisfied
tomorrow. They are also competitive in that they compete for the limited
resources.

• Economists argue that almost everyone wants more of something.

• Even the wealthiest individuals in society do not seem to be exempt
from this phenomenon.

• This problem of limited resources and unlimited wants also applies to

society as a whole. Eg Most societies would prefer to have better
health care, higher quality education, a cleaner environment, etc

• Unfortunately, there are not enough resources available to satisfy all

of these goals.
• We study economics in order to solve the economic problem

• The economic problem is that of allocating scarce resources among

competing and unlimited wants in such a manner that greatest
satisfaction is derived.

• The society will have to make a choice on what combination of goods

and services to produce and what therefore to sacrifice.

• The quality that one foregoes /sacrifice in order to consume more of

another is what is known as opportunity cost.
• Economic analysis is applied throughout society, in business, finance
and government, but also in crime, education, the family, health, law,
politics, religion, social institutions, war, and science.
• The expanding domain of economics in the social science has been
described as economic imperialism.
Economic Goods, Free Goods, and Economic Bads
• A good is said to be an economic good or a scarce good if the
quantity of the good demanded exceeds the quantity supplied at a
zero price.

• A good is an economic good if people want more of it than would be

available if the good were available for free.

• A good is said to be a free good if the quantity of the good supplied

exceeds the quantity demanded at a zero price.

• Economists argue that there are relatively few, if any, free goods.

• A good is said to be an economic bad if people are willing to pay to

avoid the item. Examples of economic bads include things like
garbage, pollution, and illness.

• Goods that are used to produce other goods or services are called economic
resources or factors of production.
Factors of Production/ Economics
Land, Labor, Capital, and Entrepreneurial ability.

• The category of "land" includes all natural resources. These natural

resources include the land itself, as well as any minerals, oil deposits,
timber, or water that exists on or below the ground.

• This category is sometimes described as including only the "free gifts

of nature," those resources that exist independent of human action.

• The labor input consists of the physical and intellectual services

provided by human beings.

• The resource called "capital" consists of the machinery and

equipment used to produce output.

• Entrepreneurial ability refers to the ability to organize production and

bear risks.
 Economic Resource Resource Payment

land rent

labor wages

capital interest

entrepreneurial ability    profit

Positive and Normative Economics
• Different types of people use economics in different ways.

• eg a practising economist uses economic tools and information to make

any suggestion or critical analysis.

• Generally, such people use economic theories and tools for proper
understanding and specific forecasting of economic variables.

• The use of economic sciences is generally for accurate decision making and
accuracy in economic forecasting.

• Thus, positive statements are about facts. They state what the reality is.

• To be specific, economics is strictly positive in character and is concerned

with merely positive statements.

• Since positive statements are about facts, any disagreement over such
statement or analysis can be handled properly only by use of facts and their
• Normative economics is based on the normative statements.

• Normative statements are concerned with what ought to be?

• In this case, economics is not concerned with real life experiences

rather, it is concerned with, how things should be/operate.

• Normative economics can not be challenged based upon any fact.

• eg, if a political leader projects his party’s vision in election that the
unemployment rate should be brought down to 15%, this statement
may not based upon any analysis or fact, rather it is desire or the wish of
the particular political party.

• Despite there being differences between positive economics and

normative economics, economics is a science having both positive and
normative aspects.

• This is so because economics is a social science.