ECN1101

Microeconomics
 Basic Economic Concepts
Chapter 1

 Objectives:
- For students to understand the basic economic
problem.
- For students be able to make rational economic
choices.
- For students to be able to explain the factors of
production.
 Topics to be discussed
 What is Economics
 3 Basic Economic Questions
 Opportunity Cost
 3 Factors of Production
 Market System
 Micro and Macro Economics
 Canada’s mixed free-enterprise economy
 What is Economics
 Economics is social science concerned with
factors that determine production, distribution
and consumption of goods.
 Economics?
 The social science concerned with how
individuals and societies decide how to
satisfy there unlimited wants given our
limited resources.
 I can’t buy a house if I don’t have an income!
 The science of decision making
 How to make decisions
 “The Economic Problem”
 Scarcity… What is it?
 Limited resources but unlimited wants
 Means: Minimize the waste…
 Unlimited wants VS Limited Resources
 Can’t buy 3 burgers if you only have enough
money for 1.
 What are some things that you “want” to have?
Do you have the resources to purchase them?
 Needs VS Wants
 What are some of your needs…wants.
 Scarcity brings us to the
concepts of
 Effectiveness: A measure of how well an
economy performs in terms of producing goods
and services that meet the needs and wants of
people.

 Efficiency: A measure of how well an economy

performs in terms of producing high volumes of
goods and services at a low cost per item.
 Three Basic Economic Resources
– Factors of Production
 Natural resources (Land)– “free gifts of nature”
 Land, minerals, oil, forests and air
 Capital Resources – “manufactured aids to production”
 Tools, machines, equipment, factories
 Things used in producing goods and services and getting them to
consumers.
 Human Resources (Labor)– “mankind’s physical and
mental talent”
 These are the skills people have that are used to produce goods
and services.
 Business person – the individual who combines the factors
of production in order to produce a good or service.
 Risk taker, policy maker, and innovator
 Opportunity Cost
 The true cost of choosing one alternative
over the other.
 Trade offs – giving up one thing in order to
obtain another.
 The one that you give up when the choice is
made.
 You decide to spend $80 on some great shoes and do not pay your electric bill.
The opportunity cost is having the electricity turned off, having to pay an
activation fee and late charges. You might also have food in the fridge that gets
ruined and that would add to the total cost.
“Opportunity cost is the opportunity lost”
 Types of Economics
 Macroeconomics – branch of economics that
deals with economic theory and the economic
decisions of large bodies like the government.
 Theories of Economics
 Countries and their governments
 Trade between countries
 Microeconomics – branch of economics that
deals with behavior and decisions of smaller
unit like individuals and businesses.
 Families, businesses, and communities
 Domestic economies
 3 Basic Economic Questions
 1) What to produce?
 With limited resources, deciding what is
needed the most is often a factor in
determining what will be produced. What is
the need or want of this product?
 What is the point of making a product that no
one is going to buy. Businesses need to make
money…so they choose products that people
want.
 3 Basic Questions Cont…
 2) How should it be produced?
 Technology, labor, capital Equipment
 getting the lowest cost to make the product.
 Are we going to make the product from
scratch or will a machine be making the
product.
 What will each option cost?
 3 Basic Questions Cont…
 3) Who gets how much?
 Who is going to use this product?
 Most goods and services are distributed to
individuals through a price system.
 If you want it and can afford to buy it…you will.
 Products can also be distributed through other
means; force, first come, lottery, majority.
 Market System
Market is where buyers and sellers
come together to exchange goods and
services for money or to buy and sell
things.
Market system is also know as free-
enterprise system
Two key features of market system:
1)Profit motive

2)Competition
 Mixed Economic System Of
Canada

 80% of Canadian economy is produced by

private sector and 20% is produced by
government sector ( health care,
education, public transit, postal services,
traffic control law, public security, etc.)
 Positive Economics

Positive economics is a stream of economics that focuses on

the description, and explanation of economic developments,
expectations, and associated phenomena. It relies on objective
data analysis, relevant facts, and associated figures. It
attempts to establish any cause-and-effect relationships and
test the development of economic theories.
Positive economics is objective and fact-based where the statements are precise,
descriptive, and clearly measurable.

An example of positive economics is, “an

increase in tax rates ultimately results in
a decrease in total tax revenue”
 Normative economics
 Normative economics is subjective and value-
based, originating from personal perspectives
or opinions involved in the decision-making
process.  They often sound political, which is
why this economic branch is also called "what
should be" or "what ought to be" economics.
 An example of normative economics is,
“unemployment harms an economy more
than inflation”.
 Specialization and Trade
 Factor endowment
 An advantage in production that comes from
better skills, equipment, or other resources
 Theory of absolute advantage (Smith)
 Nations, like firms and individuals, should
specialize in producing goods and services for
which they have an advantage
 They should trade for goods and services for
which they do not enjoy an advantage

© 2018 McGraw-Hill Ryerson Limited 13-18

 Test Your Understanding
Beer Wine
Freedonia 4 1
Libraland 3 4

 Which country should specialize in which

product?
Freedonia should specialize in beer and Libraland
should specialize in wine

© 2018 McGraw-Hill Ryerson Limited 13-19

 Test Your Understanding
Beer Wine
Freedonia 4 1
Libraland 3 4

 Suppose that initially the working

population of each country is 20 million,
with 10 million working in each industry.
What is the total output of the two
countries?

© 2018 McGraw-Hill Ryerson Limited 13-20

 Test Your Understanding
Beer Wine
Freedonia 4 1
Libraland 3 4

 Suppose that initially the working population of each

country is 20 million, with 10 million working in each
industry. What is the total output of the two countries?
Beer Wine
Freedonia 40 10
Libraland 30 40
Totals 70 50
© 2018 McGraw-Hill Ryerson Limited 13-21
 Test Your Understanding
Beer Wine
Freedonia 4 1
Libraland 3 4
 Suppose that each country decides to specialize in the product in which it
has an advantage. What will be the total output of each product, and what
are the gains from trade?

Beer Wine
Freedonia 80 0
Libraland 0 80
Totals 80 80

Gains are 10 beer, 30 wine

© 2018 McGraw-Hill Ryerson Limited 13-22
 Specialization and Trade

 Theory of Comparative Advantage

 The advantage that comes from producing
something at a lower opportunity cost than
others are able to do

© 2018 McGraw-Hill Ryerson Limited 13-23

 Comparative Advantage
Table 10.4. Output per Worker by Country and Industry
  Number of Bushels per Day
  Wheat   Beans
United States   4 or 4
Philippines   1 or 3
 Each country has a trade-off (opportunity
cost) for each item it produces
Table 10.5. Opportunity costs of Production
  Cost of Producing One Unit
  Wheat   Beans
United States   1 bean or 1 wheat
Philippines   3 beans or 1/3 wheat
© 2018 McGraw-Hill Ryerson Limited 13-24
 Comparative Advantage
 The U.S. is comparatively better at making
wheat
 It gives up 1 beans, while Philippines gives up 3

Table 10.5. Opportunity costs of Production

  Cost of Producing One Unit
  Wheat   Beans
United States   1 bean or 1 wheat
Philippines   3 beans or 1/3 wheat
The Philippines is comparatively better at beans
 It gives up 1/3 of wheat, while the U.S. gives up 1
 Both can be better off specializing, with trade

© 2018 McGraw-Hill Ryerson Limited 13-25

 Chapter Review
 What is the basic Economic question?

 What are the four factors of production?

 What are opportunity costs?

 Define microeconomics and macroeconomics.