ECO2103Cp1 IntroductiontoMicroeconomicsAUG2023

Principles of Microeconomics
ECO2103
Chapter 1
Introduction to
Microeconomics
Chapter Outline and Learning Objectives
•
1.0 What is economics? Resources in Economics
•
1.2 Why Study Economics?
•
1.3 Basic Principles in Economics
•
1.4 The Scope of Economics
•
1.5 The Market System (Circular Flow Diagram)
•
1.5 Efficiency of Market Economies
•
1.6 Economic Systems and The Role of Government
•
Free market, central planning market and the mix economy market.
Does Apple Manufacture the iPhone in
the United States?
When Apple began selling
computers in the 1970s
and 80s, it manufactured
them in the United States.
But while Apple designed
the iPhone in the U.S.,
most iPhones are
assembled in China.
Why are many products
manufactured overseas?
Can we change this?
Should we?
Copyright © 2023, 2021, 2019 Pearson Education, Inc. All Rights Reserved
What is this class about?
People make choices as they try to attain their goals.
Choices are necessary because we live in a world of
scarcity.
Scarcity
Economics
Economists study these choices using economic models,

simplified versions of reality used to analyze real-world
economic situations.
1.0 What is economics?
Economics
The study of how individuals and societies choose to use
the scarce resources that nature and previous
generations have provided.
• Economics is a behavioral or social science, concerned

with making optimal choices under conditions of scarcity.
• Economics is the study of how people make choices.
Scarcity: The Central Economic Problem
The economic problem exists

because…
The needs and wants of people are

endless, the resources available are
limited to satisfy the needs and wants.
Examples of scarcity and the trade-offs associated with making
choices:
Trade-off: The idea that, because of scarcity, producing more of
one good or service means producing less of another good or
service.
• You have a limited amount of time. Each hour on the job means one
less hour for study or play.
• A city has a limited amount of land. If the city uses an acre of land for
a park, it has one less acre for housing, retailers, or industry.
• You have limited income this year. If you spend $17 on a music CD,
that’s $17 less you have to spend on other products or to save.
Some Typical “Economics” Questions
• We will learn how to answer questions like these:
– How are the prices of goods and services
determined?
– Why do firms engage in international trade, and how
do government policies, such as tariffs, affect
international trade?
– Why does government control the prices of some
goods and services, and what are the effects of those
controls?
The Three Key Economic Questions: What,
How, and Who?
.
The choices made by individuals, firms, and governments

answer three questions:
1. What products do we produce?
2. How do we produce the products?
3. Who consumes the products?
FIGURE 1.1 The Three Basic Questions
Every society has some system or process that transforms its scarce
resources into useful goods and services.
In doing so, it must decide what gets produced, how it is produced, and
to whom it is distributed.
The primary resources that must be allocated are land, labor, and
capital.
Copyright © 2019, 2017, 2015 Pearson Education, Inc. All Rights Reserved.
1. What Goods and Services Will Be
Produced?
Individuals, firms, and governments must decide on the
goods and services that should be produced.
An increase in the production of one good requires the
reduction in the production of some other good. This is a
trade-off, resulting from the scarcity of productive resources.
The highest-valued alternative that must be given up in order
to engage in some activity is known as the opportunity cost.
Example: The opportunity cost of increased funding for
space exploration might be giving up the opportunity to fund
cancer research.
2. How Will the Goods and Services Be
Produced?
A firm might have several different methods for producing its goods and
services.
Example #1: A music producer can make a song sound good by:
• Hiring a great singer and using standard production techniques.
• Hiring a mediocre singer and using Auto-Tune to correct the
inaccuracies.
Example #2: As the cost of manufacturing labor changes, a firm might

respond by:
• Changing its production technique to one that employs more
machines and fewer workers.
• Moving its factory to a location with cheaper labor.
3. Who Will Receive the Goods and
Services Produced?
The way we are most familiar with in the United States is
that people with higher incomes obtain more goods and
services.
Changes in tax and welfare policies change the distribution
of income, though people often disagree about the extent to
which this “redistribution” is desirable.
Try this..
•
The 3 key economic questions include all of the following
EXCEPT
•
A) "What products do we produce?"
•
B) "How do we produce these products?"
•
C) "Where should these products be produced?"
•
D) "Who consumes the products?"
1.2 Factors of Production
The resources used to produce goods and services; also known as production inputs, or
resources.
• Natural Resources
Resources provided by nature and used to produce goods and services.
• Labor
Human effort, including both physical and mental effort people, used to produce goods and
services.
• Physical Capital
The stock of equipment, machines, structures, and infrastructure that is used to produce goods
and services.
• Human Capital
The knowledge and skills acquired by a worker through education and experience and used to
produce goods and services.
• Entrepreneurship
The effort used to coordinate the factors of production—natural resources, labor, physical capital,
and human capital—to produce and sell products.
1.2 Factors of Production
• Entrepreneurs
–Employs the other factors of
production
–Takes initiative
–Makes strategic business decisions
–Innovates
–Takes risk
LO5
1.2 Why Study Economics?
1. To Learn a Way of Thinking
• Economics has three fundamental concepts:
– Opportunity cost
– Marginalism
– Efficient markets - No free lunch
The study of economics teaches us a way of thinking and helps us make

decisions.
2. To Understand Society
The study of economics is an essential part of the study of society.
3. To Be an Informed Citizen
•
Understanding what happens in a recession and what the government can
and cannot do to help in a recovery is an essential part of being an informed
citizen.
BASIC PRINCIPLES IN ECONOMICS
1. THE PRINCIPLE OF OPPORTUNITY COST
PRINCIPLE OF OPPORTUNITY COST

The opportunity cost of something is what you sacrifice to get it.
• Opportunity cost
The best alternative that we forgo, or give up, when we make a choice or
decision. (What you sacrifice to get something).
The Cost of College
Opportunity cost of money spent on tuition and books $ 40,000
Opportunity cost of college time (four years working for

$20,000 per year) 80,000
Economic cost or total opportunity cost $120,000

1. THE PRINCIPLE OF OPPORTUNITY COST
APPLICATION 1
DON’T FORGET THE COSTS OF TIME AND INVESTED FUNDS

APPLYING THE CONCEPTS #1: What is the opportunity cost of running a
business?
Suppose you run a lawn-cutting business and use solar-powered equipment that you
could sell tomorrow for $5,000. Instead of cutting lawns, you could work as a janitor for
$300 a week. You have a savings account that pays a weekly interest rate of 0.20
percent (or$0.002 per dollar. What is your weekly cost of cutting lawns?
We can use the principle of opportunity cost to compute the cost of the lawn business.
• The opportunity cost of the $5,000 is $10 weekly interest.

• The opportunity cost of the time is $300 weekly income as a janitor.
• The opportunity cost of cutting lawns is $310 a week.
Your turn..
In the last few week, you must have been

involved in making decision for yourself that
relate to opportunity cost. Can you lists
down THREE (3) things that you did that
make you faced opportunity cost?
2. THE MARGINAL PRINCIPLE (1 of 2)
MARGINAL PRINCIPLE
Increase the level of an activity as long as its marginal benefit
exceeds its marginal cost. Choose the level at which the marginal
benefit equals the marginal cost.
The process of analyzing the additional or incremental costs or

benefits arising from a choice or decision.
• Marginal benefit
The additional benefit resulting from a small increase in some
activity.
• Marginal cost
The additional cost resulting from a small increase in some activity.
2.1 THE MARGINAL PRINCIPLE (2 of 2)
How Many Movie

•
Sequels?
The marginal benefit of
movies in a series decreases
because revenue falls off with
each additional movie, while
the marginal cost increases
because actors demand
higher salaries.
The marginal benefit exceeds

the marginal cost for the first
two movies, so it is sensible to
produce two, but not three,
movies.
Try this..
•
The principle that individuals and firms pick the activity level
where the incremental benefit of that activity equals the
incremental cost of that activity is known as the
•
A) marginal principle.
•
B) principle of opportunity cost.
•
C) principle of diminishing returns.
•
D) spillover principle.
Try this..
•
The principle that individuals and firms pick the activity level
where the incremental benefit of that activity equals the
incremental cost of that activity is known as the
•
A) marginal principle.
•
B) principle of opportunity cost.
•
C) principle of diminishing returns.
•
D) spillover principle.
•
The marginal principle implies that an individual should produce
or consume where
•
A) marginal benefit exceeds marginal cost.
•
B) marginal benefit is less than marginal cost.
•
C) marginal benefit equals marginal cost.
•
D) total benefit equals total cost.
•
The marginal principle implies that an individual should produce
or consume where
•
A) marginal benefit exceeds marginal cost.
•
B) marginal benefit is less than marginal cost.
•
C) marginal benefit equals marginal cost.
•
D) total benefit equals total cost.
To Learn a Way of Thinking (3 of 3)
Efficient Markets—No Free Lunch
• efficient market A market in which profit opportunities are
eliminated almost instantaneously.
• The study of economics teaches us a way of thinking and
helps us make decisions.
Positive and Normative Economics
• Positive economics
• Economic statements that are factual.
• Answers the question “What is?” or “What will be?”
• An approach to economics that seeks to understand behavior
and the operation of systems without making judgments. It
describes what exists and how it works.
• Normative economics
• Economic statements that involve value judgments.
• Answers the question “What ought to be?”
• An approach to economics that analyzes outcomes of
economic behavior, evaluates them as good or bad, and may
prescribe courses of action. Also called policy economics.
LO3
The Scope of Economics (1 of 2)
Microeconomics and Macroeconomics
• microeconomics The branch of economics that examines the
functioning of individual industries and the behavior of individual
decision-making units—that is, firms and households.
• Microeconomics looks at the individual unit—the household, the firm,
the industry. It sees and examines the “trees.
Microeconomics is the study of
• how households and firms make choices,
• how they interact in markets, and
• how the government attempts to influence their choices.
The Scope of Economics (1 of 2)
Microeconomics and Macroeconomics
• macroeconomics The branch of economics that examines the
economic behavior of aggregates—income, employment, output, and
so on—on a national scale.
• Macroeconomics looks at the whole, the aggregate. It sees and
analyzes the “forest.”
Table 1.1 Issues in Microeconomics and
Macroeconomics
Examples of Microeconomic Issues Examples of Macroeconomic Issues
• How consumers react to changes in • Why economies experience periods of

product prices recession and increasing unemployment
• How firms decide what prices to charge • Why, over the long run, some economies
for the products they sell have grown much faster than others
• Which government policy would most • What determines the inflation rate
efficiently reduce opioid addiction
• What determines the value of the U.S.
• The costs and benefits of the federal dollar in exchange for other currencies
government’s process for approving the
sale of a new prescription drug • Whether government intervention can
reduce the severity of recessions
• The most efficient way to reduce air
pollution
TABLE 1.1 Examples of Microeconomic and Macroeconomic
Concerns
Division
of Economics Production Prices Income Employment
Microeconomics Production/output Prices of individual Distribution of Employment by
in individual goods and services income and individual
industries and Price of medical care wealth businesses and
businesses Price of gasoline Wages in the industries
How much steel Food prices auto industry Jobs in the steel
How much office Apartment rents Minimum wage industry
space Executive Number of
How many cars salaries employees in a firm
Poverty Number of
accountants
Macroeconomics National Aggregate price level National income Employment and

production/output Consumer prices Total wages and unemployment in
Total industrial Producer prices salaries the economy
output Rate of inflation Total corporate Total number of jobs
Gross domestic profits Unemployment rate
product
Growth of output
2.3 The Market System
Explain the basics of how a market system works.
A market is a group of buyers and sellers of a good or service,

and the institution or arrangement by which they come together
to trade.
Two key groups participate in the modern economy:
Households consist of individuals who provide the factors of
production: labor, capital, natural resources, and other inputs
used to make goods and services.
• Households receive payments for these factors by selling them
to firms in factor markets.
Firms supply goods and services to product markets;
households buy these products from the firms.
What do economists study?
• The circular flow of income
– firms and households
The circular flow of goods and incomes
– goods markets
▪real flows: goods and services
Goods and services
– goods markets
▪money flows: consumer expenditure
Goods and services
£
Consumer
expenditure
– goods markets
– factor markets
– goods markets
– factor markets
▪real flows: services of labour and other factors
Goods and services
£
Consumer
expenditure
Services Copyright
of factors© 2019,of production
2017, (labour,
2015 Pearson Education, etc)
Inc. All Rights Reserved.
– goods markets
– factor markets
▪real flows: services of labour and other factors
▪money flows: wages and other incomes
Goods and services
£
Consumer
expenditure
Wages, rent
dividends, etc.
£
Services Copyright
of factors of production (labour, etc)
© 2019, 2017, 2015 Pearson Education, Inc. All Rights Reserved.
Figure 2.6 The Circular-Flow Diagram (1 of 2)
Circular-flow diagram: A model
that illustrates how participants in
markets are linked.
• Households provide factors of
production to firms.
• Firms provide goods and
services to households.
• Firms pay money to households
for the factors of production.
• Households pay money to firms
for the goods and services.
Figure 2.6 The Circular-Flow Diagram (2 of 2)
Like all economic models, the
circular-flow diagram is a
simplified version of reality:
• No government
• No financial system
• No foreign buyers and sellers
of goods
We will explore these sectors

in later chapters.
Economic Systems and the
Role of Government
Classifying economic systems
Totally Totally
planned free-market
economy economy
Socialist Capitalist
Economy Economy
System System
Mid-1980s
N. Korea China UK Hong

Cuba Poland France USA Kong
Totally Totally
planned free-market
economy economy
Socialist Capitalist
Economy Economy
System System
Mid-1980s
N. Korea China UK Hong

Cuba Poland France USA Kong
Totally Totally
planned free-market
economy economy
Socialist N. Korea Cuba China Poland France USA Capitalist
UK China
Economy (Hong
Economy
System Kong) System
Mid-2010s
BASIC ECONOMIC PROBLEMS
2. Socialist Economy System

Command Economy/Central planning
E.g.: North Korea and Cuba
Characteristics Advantages Disadvantages
(a) Government makes all economic (a) Equal distribution of income
(a) Consumers have no freedom of
among society choice
decisions (b) Low unemployment problems (b) Workers have no incentive to work
(b) Government owns all resources (c) Government provides public hard because they receive almost an
and allocated through central goods and services for society’s equal income.
planning according to society’s benefit. (c) Absence of competition will result in
need. (d) Inequality of income and wealth fewer FDI
(c) Society’s have no right to make are minimized. (d) Technology inferior
decisions. (e) Government directs nations (e) Price system does not operate and
(d) Equal distribution of income it is hard to estimate the demand for
resources to produce desirable
goods
goods and services.
BASIC ECONOMIC PROBLEMS (cont.)
Economic Decisions in the Socialist Economic System
What/How/How much/For whom to produce?
Everything is controlled by the government

1 through central planning.
Government itself will decide on methods of

2 production which least cost methods.
Government will serve basic needs first and

3 luxury goods later.
1. Capitalist Economy System

Free market economy/free enterprise/laissez-faire
E.g.: USA, Canada, Japan and Germany
Characteristics
(a) The resources are owned by Advantages
private sectors. (a) Freedom of choice
(b) No government intervention in Disadvantages
(b) People have right to own
making economic decisions. (a) Wide disparity between the
wealth.
(c) Individual firms are free to make rich and the poor
(c) The harder people work, the
the economic decisions. (b) Misallocation of resources
more they will receive.
(d) Price mechanism is used as an (c) Human welfare is ignored
indicator. (d) There is mobility of labour.
(d) Social cost and negative
(e) Producer objective – maximize (e) Competition leads to the
externalities
profit production of quality goods
Consumer objective – maximize and services.
satisfaction
Capitalist Economy System
Laissez-Faire Economies: The Free Market
• laissez-faire economy Literally from the French: “allow [them] to
do.” An economy in which individual people and firms pursue their
own self-interest without any central direction or regulation.
• Mechanism: Decisions on price and quantity are made on the basis
of demand and supply alone.
Economic Systems and the Role of
Government
Consumer Sovereignty
• consumer sovereignty The idea that consumers ultimately
dictate what will be produced (or not produced) by choosing
what to purchase (and what not to purchase).
• The mix of output is dictated by consumers who “vote” by
buying or not buying.
Economic Decisions in the Capitalist Economic System

What and how much?
Depends on consumers’ demand
Called as consumer’s sovereignty
For whom? How?

Depends on the society’s purchasing Depends on the cheapest method of
power production
Higher income will get more goods and The objective is to achieve efficiency
services because of higher purchasing and maximum profit
power than the lower income people
The Mixed Economy System
Mixture between Capitalist and Socialist Economy System
E.g.: Malaysia, Singapore, Great Britain
• Resources are owned by both the government and
the private sectors
• Government will provide public goods and merit
goods which private sectors are unwilling to
Characteristics produce.
• Individuals and firms are free to own wealth and
need to pay tax to the government.
• Individuals and firms can make economic
decisions.
• There is a variety of goods and services produced
by private sectors and the government provides
public goods at affordable prices.
• The economic activities are more stable and
Advantages organized.
• There would be a narrow gap between the rich and
the poor.
• The social costs are minimized.
Economic Decisions in the Mixed Economic System
What and how much to produce?
Determined by market demand and supply.
The public sectors provide public goods at affordable price and private
sectors produce variety of goods and services to maximize their profits.
How to produce?
The producer will choose the most efficient and cost-effective method.
Government will enact laws to combat inefficiencies from negative
externalities.
For whom to producer?
Depend on the society’s needs and income distribution.
Efficiency of Market Economies
Market economies tend to be more efficient than centrally-
planned economies.
Market economies promote:
• Productive efficiency, a situation in which a good or service
is produced at the lowest possible cost; and
• Allocative efficiency, a state of the economy in which
production is in accordance with consumer preferences; in
particular, every good or service is produced up to the point
where the last unit provides a marginal benefit to society equal
to the marginal cost of producing it.
Source of Economic Efficiency
Productive efficiency comes about because of competition.
Allocative efficiency arises due to voluntary exchange.
Voluntary exchange: A situation that occurs in markets when
both the buyer and the seller of a product are made better off by
the transaction.
• Each transaction that takes place improves the well-being of
the buyer and seller; transactions continue until no further
improvement can take place.
Let’s try this..
An economy in which a central authority draws up a plan that
establishes what will be produced and when, sets production
goals, and makes rules for distribution is a
A) free-market economy.
B) laissez-faire economy.
C) public-goods economy.
D) command economy.
Let’s try this..
An economy in which a central authority draws up a plan that
establishes what will be produced and when, sets production
goals, and makes rules for distribution is a
A) free-market economy.
C) public-goods economy.
D) command economy.
Another one..
An economy in which individual people and firms pursue their
own self-interest without any central direction or regulation is
a(n)
A) command economy.
C) invisible-hand economy.
D) private-sector economy.
Another one..
An economy in which individual people and firms pursue their
own self-interest without any central direction or regulation is
a(n)
A) command economy.
C) invisible-hand economy.
D) private-sector economy.
Yes, one more..
An institution through which buyers and sellers interact and
engage in exchange is
A) a central authority.
B) "laissez-faire."
C) a market.
D) a production frontier.
Yes, one more..
An institution through which buyers and sellers interact and
engage in exchange is
A) a central authority.
B) "laissez-faire."
C) a market.
D) a production frontier.
The second last..
Consumer sovereignty
A) is dependent on profits.
B) is the idea that consumers can buy whatever they want to.
C) is the idea that consumers determine what is produced in the
economy through their demands.
D) is only possible in a monarchy.
The second last..
Consumer sovereignty
A) is dependent on profits.
B) is the idea that consumers can buy whatever they want to.
C) is the idea that consumers determine what is produced in
the economy through their demands.
D) is only possible in a monarchy.
Finally..
In a ________, the amount of output that any one household
gets depends on its income and wealth.
A) Marxist economy
B) socialist economy
C) command system
D) free-market system
Finally..
In a ________, the amount of output that any one household
gets depends on its income and wealth.
A) Marxist economy
B) socialist economy
C) command system
D) free-market system
Apply the Concept: What Is Socialism? (1 of 2)
In his book Das Kapital, Karl
Marx argued that the market
system (capitalism) would be
replaced by a communist
economy controlled by workers.
Countries adopting communism
have instead become centrally
planned, with firm government
control.
After a new trend

emerged: social democratic
parties.
Apply the Concept: What Is Socialism? (2 of 2)
Social democratic parties
favor a large role for
government in the economy,
sometimes including
government ownership or
control of some large
industries.
This is not socialism in the
Marxist tradition; but its
proponents argue for an
increased role for
government in sectors like
health care and education.
REVIEW TERMS AND CONCEPTS
• ceteris paribus, or all else equal • Economic system
• economics • Free market economy
• efficiency • Socialist economy system
• efficient market • Capitalist economy system
• macroeconomics
• Marginalism
• microeconomics
• normative economics
• opportunity cost
• positive economics
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Principles of Microeconomics

Economists study these choices using economic models,

• Economics is a behavioral or social science, concerned

The economic problem exists

The needs and wants of people are

The choices made by individuals, firms, and governments

Example #2: As the cost of manufacturing labor changes, a firm might

The study of economics teaches us a way of thinking and helps us make

The study of economics is an essential part of the study of society.

PRINCIPLE OF OPPORTUNITY COST

The Cost of College

Opportunity cost of money spent on tuition and books $ 40,000

Opportunity cost of college time (four years working for

Economic cost or total opportunity cost $120,000

DON’T FORGET THE COSTS OF TIME AND INVESTED FUNDS

• The opportunity cost of the $5,000 is $10 weekly interest.

• The opportunity cost of cutting lawns is $310 a week.

In the last few week, you must have been

The process of analyzing the additional or incremental costs or

How Many Movie

The marginal benefit exceeds

• How consumers react to changes in • Why economies experience periods of

Macroeconomics National Aggregate price level National income Employment and

A market is a group of buyers and sellers of a good or service,

We will explore these sectors

N. Korea China UK Hong

N. Korea China UK Hong

2. Socialist Economy System

What/How/How much/For whom to produce?

Everything is controlled by the government

Government itself will decide on methods of

Government will serve basic needs first and

1. Capitalist Economy System

Economic Decisions in the Capitalist Economic System

For whom? How?

For whom to producer?

Depend on the society’s needs and income distribution.

After a new trend

This work is protected by United States copyright laws and is

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