INTRODUCTION TO MICROECONOMICS

Scarcity and Choice in Resource Allocation

The Economics is - the study of the production, distribution and consumption of wealth in human society. Economics is the social science of satisfying unlimited wants with scarce resources. The Economics is divided into two sections: microeconomics (micro) and macroeconomics (macro). Microeconomics studies small-scale economies. That is, from the individual level on up to the industry level. Microeconomics is concerned with how consumers (buyers) and producers (sellers) come together to e change goods and services, how much is produced, what to produce, and the going prices. Macroeconomics is the branch that studies large-scale economies. Macroeconomics observes and analy!es how entire countries, full of many industries and consumers, function. "t is not simply the sum of many #microeconomics#$ many of the concepts are entirely different. %here micro will study a single consumer, a paper-clip manufacturing plant or the airline industry, macro studies the entire economy within which those three e ist. Macroeconomics studies elements of a large economy, including inflation, government policies, output growth, and unemployment. The basic economic problem is about scarcity and choice since there are only a limited amount of resources available to produce the unlimited amount of goods and services we desire. &ll societies face the problem of having to decide:

1. What goods and services to produce:

& society must determine how much of each of the many possible goods and services it will ma'e, and when they will be produced. %ill we produce bread or shirts today( )oes the economy uses its resources to operate more hospitals or hotels( )o we ma'e i*od +anos or produce more coffee( ,hould we produce a few high--uality shirts or many cheap shirts( %ill we use scarce resources to produce many consumption goods (li'e bread) or will we produce fewer consumption goods and more investment goods (li'e breadma'ing machines), which will boost production and consumption tomorrow(

2.

How are goods produced?

& society must determine who will do the production, with what resources, and what production techni-ues they will use. %ho farms and who teaches: "s electricity generated from oil, from coal, or from nuclear power: %ith much air pollution or with little? 3.

or whom are goods produced?

.ne 'ey tas' for any society is to decide who gets to eat the fruit of the economys efforts. .r, to put it formally, how is the national product divided among different households( %hat is the best method of distributing products to ensure the highest level of wants and needs are met( %ho will get e pensive hospital treatment - and who not( ,hould there be a minimum wage( "f so, at what level should it be set(

Scarcity
I somethin! is scarce " it #ill ha$e a mar%et $alue. "f the supply of a good or service is low, the mar'et price will rise, providing there is sufficient demand from consumers. /oods and services that are in plentiful supply will have a lower mar'et value because supply can easily meet the demand from consumers. %henever there is e cess supply in a mar'et, we e pect to see prices falling Insatiable human #ants and needs Economic resources are limited, but human needs and #ants are in inite. "ndeed the development of society can be described as the unco$erin! o ne# #ants and needs - which producers attempt to supply by using the available factors of production. Ma%in! choices 0ecause of scarcity, choices have to be made on a daily basis by all consumers, firms and governments. 1or a moment, 2ust have a thin' about the hundreds of millions of decisions that are made by people in your country every single day. Ta'e for e ample the choices that people ma'e in the big city about how to get to wor'. They have to ma'e choices about when to travel, whether to use the bus, the tube, to wal' or cycle 3 or indeed whether to wor' from home. Millions of decisions are being ta'en, many of them are habitual (we choose the same path each time) 3 but somehow on most days, people get to wor' on time and they get home too4 This is a remar'able achievement, and for it to happen, our economy must provide the resources and the options for it to happen. Trade"o s #hen ma%in! choices Ma'ing a choice made normally involves a trade"o - in simple terms, choosing more of one thing means giving up something else in e change. 0ecause wants are unlimited but resources are finite, choice is an unavoidable issue in economics.

Economic Systems
&n economic system is best described as a net#or% o or!anisations used by a society to resolve the basic problem of what, how and for whom to produce.

There are four categories of economic system.

Traditional economy: %here decisions about what, how and for whom to produce are based on custom and tradition. 5and is typically held in common ie private property is not well defined. &ree mar%et economy: %here households own resources and free mar'ets allocate resources through the wor'ings of the price mechanism. &n increase in demand raises price and encourages firms to switch additional resources into the production of that good or service. The amount of products consumed by households depends on their income and household income depends on the mar'et value of an individual6s wor'. "n a free mar'et economy there is a limited role for the government. "ndeed in a highly free mar'et system, the government limits itself to protecting the property ri!hts of people and businesses using the legal system, and it also see's to protect the value of money or the value of a currency. 'lanned or command economy: "n a planned or command system typically associated with a socialist or communist economic system, scarce resources are owned by the state (i.e. the government). The state allocates resources, and sets production targets and growth rates according to its own view of people7s wants. The final income and wealth distribution is decided by the state. "n such a system, mar'et prices play little or no part in informing resource allocation decisions and -ueuing rations scarce goods. Mi(ed economy) "n a mi ed economy, some resources are owned by the public sector (government) and some resources are owned by the private sector. The public sector typically supplies public, -uasi-public and merit goods and intervenes in mar'ets to correct perceived mar'et failure. %e will come bac' to all of these concepts later on in our study of microeconomics.

Opportunity Cost
There is a well 'nown saying in economics that *there is no such thing as a free lunch+, Even if we are not as'ed to pay a price for consuming a good or a service, scarce resources are used up in the production of it and there must be an opportunity cost involved. Opportunity cost measures the cost of any choice in terms of the ne(t best alternati$e ore!one. Many e amples e ist for individuals, firms and the government. -or%"leisure choices) The opportunity cost of deciding not to wor' an e tra ten hours a wee' is the lost wages foregone. "f you are being paid 89 per hour to wor' at the local supermar'et, if you choose to ta'e a day off from wor' you might lose 8:; from having sacrificed eight hours of paid wor'. Ma%in! use o scarce armin! land) The opportunity cost of using arable farmland to produce wheat is that the land cannot be used in that production period to harvest potatoes.

!ositive versus "ormative Economics or #tatements

.ne of the crucial s'ills needed by scientists is the ability to differentiate between opinion, especially their own opinion, and facts. 'ositi$e economics.statements are statements about how the world actually e ists or behaves.

 Normati$e economics.statements are statements about how the world should e ist or behave. Thus, positive statements are factual while normative statements are opinions. <ow does one distinguish between the two types of statements( The easiest method to distinguish between the two is to simply as' whether or not the statement can be tested empirically. "f the statement can be tested, then it is positive even if it is false. <owever, if it cannot be tested, then the statement must be an opinion, as opinions are sub2ective and are untestable.

The $uilding of Theories and %odels

& model is a formal statement of a theory. +o matter what discipline, be it physics, meteorology, astronomy or economics, researchers use models to e plain the world, and models are built upon variables. & variable is a measure that can change from time to time or from observation to observation. *rice is a variable, it differs from time to time. 0ut why does it alter itself( +o, it does not alter itself. That it hardly stay still is because other variables have impacts on it, either positive or negative, linear or nonlinear. The real world is so comple that we 2ust cannot ma'e out all the variables that govern it, but abstract some of them, to put together a model. "n this sense, models are all simplifications, stripping away detail to e pose only those that are important to the -uestion being as'ed. &n intuitive e ample of modeling is the charting of a map. Most maps are two-dimensional representations of a three-dimensional world, showing only things we are concerned about, omitting pretty much of the geographical details. +ow we 'now what a variable is and why a model is different from the real world. 0ut how e actly it is built( .ne of the techni-ues, or scientific methods, is the device of All Else Equal, or ceteris paribus. =ery handy it is when we try to isolate the impact of one single factor upon something. %hat is the impact of a >?@ rise in gasoline price on driving behaviors, ceteris paribus, or assuming that nothing else changes( %e can tell that a reduction in driving occurs, but how much less, assuming no simultaneous change in other related things, income, number of children, population, laws and so forth( "n a word, the concept helps us simplify reality in order to focus on the relationships that we are interested in. %e can then delve into the relationship between 2ust two variables by simply assuming that all else remain intact during any procedure. Economists literally find A means to represent a model or convey an economic idea, words, graphs, and e-uations. *ros and cons e ist for each of them. a Words convey simple ideas effectively, but not ade-uate for multi-variable models or twovariable model that is to show the mathematical nature of the -uantitative relationship. Graphs do this 2ob intuitively, and in a more specific as well as accurate way. "t does not only give you the big picture, but also shows you what it is li'e at a specific point. Equations are not used as fre-uently as the former two, but presents us the underlying process, so more suitable for in-depth research and modeling.