Microeconomics

Economics

comes from the Greek word oikonomos

Economic means

one who manages a household

What is the Study of Economics?

study of mankind in the ordinary business of life

Alfred Marshall

the great 19th-century economist, in his textbook, Principles of Economics.

science of scarcity.

Economics

Scarcity

means that we have unlimited wants but limited resources. Since we are unable to have everything we desire, we must make choices on how we will use our resources.

Economics

the study of how we manage our resources in the production and distribution of goods and services.

household

faces many decisions. It must decide which household members do which tasks and what each member receives in return. 

a household must allocate its scarce resources among its various members, taking into account each member’s abilities, efforts, and desires.

Society

faces many decisions. It must find some way to decide what jobs will be done and who will do them.

Why is it important to have management in society

because resources are scarce. 

Macroeconomics

focused on the overall structure and performance of the national or global economy. It is concerned with the analysis of aggregates

Study of Macroeconomics

studies the determination of national income, price level, employment, economic growth, money, economic policies, international trade, among others.

Microeconomics

is concerned with the behavior and decision-making of the individual players in the economy, such as the consumers, businesses, and the government

Study of Microeconomics

studies the prices, markets, buying decisions of consumers, selling decisions of firms, costs of production, profit maximization, market failure, etc.,

HOW PEOPLE MAKE DECISIONS

Principle 1: People face trade-offs

Principle 2: The cost of something is what you give up to give it

Principle 3: Rational people think at the margin

Principle 4: People respond to incentives

HOW PEOPLE INTERACT

Principle 5: Trade can make everyone better off

Principle 6: Markets are usually a good way to organize economic activity

Principle 7: Governments can sometimes improve market outcomes

HOW THE ECONOMY AS A WHOLE WORKS

Principle 8: A country’s standard of living depends on its ability to produce goods and services

Principle 9: Prices rise when the government prints too much money

Principle 10: Society faces a short-run trade-off between inflation and unemployment

Trade-offs

To get something that we like, we usually have to give up something else that we also like. Making decisions requires trading off one goal against another

Opportunity Cost

Whatever must be given up to obtain some item

MARGINAL THINKING

Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities. 

INCENTIVES

Is something that induces a person to act. 

Trade

allows each person to specialize in the activities she does best, whether it is farming, sewing, or home building. By trading with others, people can buy a greater variety of goods and services at lower cost. 

Trade allows country to?

specialize in what they do best and to enjoy a greater variety of goods and services. 

1980’s and early 1990s

The collapse of communism in the Soviet Union and Eastern Europe in the late 1980s and early 1990s was one of the last century’s most transformative events 

COMMUNISM

These central planners decided what goods and services were produced, how much was produced, and who produced and consumed these goods and services. The theory behind central planning was that only the government could organize economic activity in a way that promoted economic well-being for the country as a whole. 

MARKET ECONOMY

the decisions of a central planner are replaced by the decisions of millions of firms and households. Firms decide whom to hire and what to make. Households decide which firms to work for and what to buy with their incomes. These firms and households interact in the marketplace, where prices and self-interest guide their decisions. 

Market freedom

no one is looking out for the economic well-being of society as a whole. Free markets contain many buyers and sellers of numerous goods and services 

Free markets

contain many buyers and sellers of numerous goods and services 

MOTIVE OF SELF-INTEREST

All of them are interested primarily in their own  well-being 

 ORGANIZE ECONOMIC ACTIVITY

Decentralized decision making and self-interested decision makers, market economies have proven remarkably successful in organizing economic activity to promote overall economic well-being. 

INVISIBLE HAND

Smith is saying that participants in the economy are motivated by self-interest and that the “invisible hand” of the marketplace guides this self-interest into promoting general economic well-being

INVISIBLE HAND

participants in the economy are motivated by self-interest

PRICES

instrument with which the invisible hand directs economic activity.

COMMUNIST COUNTRIES

prices were not determined in the marketplace but were dictated by central planners.

planners in communist country

lacked the necessary information about consumers’ tastes and producers’ costs, which in a market economy is reflected in prices. Central planners failed because they tried to run the economy with one hand tied behind their backs—the invisible hand of the marketplace. 

Central planners in communist country

failed because they tried to run the economy with one hand tied behind their backs—the invisible hand of the marketplace. 

ECONOMIST ADAM SMITH in his 1776 book

An Inquiry into the Nature and Causes of the Wealth of Nations

Property Rights

the ability of an individual to own and exercise control over scarce resources 

market failure

refer to a situation in which the market on its own fails to produce an efficient allocation of resources. 

One possible cause of market failure is an externality,

the classic example of an externality is pollution. 

Another possible cause of market failure is market power

which refers to the ability of a single person or firm (or a small group) to unduly influence market prices. 

market economy rewards people according to?

ability to pro- duce things that other people are willing to pay for. The world’s best basketball player earns more than the world’s best chess player simply because people are willing to pay more to watch basketball than chess. 

AVERAGE INCOME

These figures illustrate the significant disparities in income levels across different countries, highlighting the wide variation in living standards globally.

PRODUCTIVITY

Citizens of high-income countries enjoy more TVs, cars, better nutrition, healthcare, and longer life expectancy than those in low-income countries.

Productivity is the key:

 Differences in living standards and income growth are primarily due to variations in countries’ productivity. Higher productivity leads to a better standard of living, while lower productivity results in a more modest existence.

PUBLIC POLICY

living standards, the crucial question is how it will affect the ability to produce goods and services. To enhance living standards, policymakers need to focus on raising productivity by ensuring that workers are well-educated, equipped with necessary tools, and have access to the best available technology.

Productivity

primary determinant of living standards, overshadowing other factors such as labor unions, minimum-wage laws, or international competition.

Inflation

when the overall level of prices in the economy increases. This can lead to significant economic challenges.

Causes of Inflation

In most cases, large or persistent inflation is caused by an increase in the quantity of money. When a government creates large quantities of money, the value of the money falls, leading to a rise in prices. This is why keeping inflation at a low level is a goal of economic policymakers around the world.