INTRODUCTION TO MICROECONOMICS do, how businesses make decisions, and how

governments allocate resources.

- Economics can also help us to understand the social
WHAT IS ECONOMICS? and political implications of economic policies. For
- Economics is the study of how societies use scarce example, it can help us to understand how a tax cut
resources to produce valuable goods and services, might affect different income groups, or how a trade
and distribute them among different individuals. agreement might affect different industries.

- It is also a social science that examines the choices 3. To be an informed citizen. In today's world, it is
that people, businesses, governments, and nations more important than ever to be an informed citizen.
make to allocate resources. Economics can help us to understand the complex
issues that face our society and to make informed
- One of the key concepts in economics is scarcity. decisions about how to address them.

*Scarcity means that there are

limited resources available to satisfy all of
our wants and needs. This forces us to make ECONOMICS IS OFTEN DIVIDED INTO TWO
choices about how to use our resources most MAIN BRANCHES:
efficiently. 1. Microeconomics
* Efficiency is a measure of how -Adam Smith, often considered the father of modern
well resources are used to produce goods economics.
and services. An efficient economy produces
the greatest possible output with the least -studies how individuals make decisions about
possible input of resources. consumption, production, and investment. They also
examine how these decisions are influenced by
factors such as prices, income, and preferences.
WHY STUDY ECONOMICS? -Households and firms are the two main types of
1. To learn a way of thinking. Economics teaches us economic agents in microeconomics. Households are
how to think critically and analytically about the the consumers of goods and services. Firms are the
world around us. It helps us to understand the producers of goods and services.
complex forces that drive the economy and to make -The main topics of microeconomics include:
better decisions.
 Setting of individual
- Examples of economic concepts that can help us to prices: Microeconomists study how
think more critically: individual prices are set in the market. They
A. Opportunity cost: Opportunity examine the factors that influence prices,
cost is the value of the next best alternative such as supply and demand, costs of
that we give up when we make a choice. production, and government regulations.

B. Marginalism: Marginalism is  Market mechanism: The market

the principle that economic decisions should mechanism is the process by which markets
be made based on the marginal costs and coordinate the economic activity of
benefits of each option. individuals and firms. Microeconomists
study how the market mechanism works to
C. Efficient markets: The efficient allocate resources efficiently and to promote
market hypothesis states that asset prices economic growth.
reflect all available information. This means
that it is impossible to consistently beat the
market by buying and selling assets based 2. Macroeconomics
on publicly available information.
- John Maynard Keynes is deemed the father of
2. To understand society. Economics is also the modern macroeconomics.
study of how people make choices. It helps us to
understand why people buy and sell the things they
- studies the behavior of the economy as a whole. It services are distributed among different individuals
examines topics such as economic growth, inflation, or groups within the society.
unemployment, and business cycles.
- Main topics in macroeconomics include:
METHODS IN ECONOMICS
 Business cycles: Business cycles are
fluctuations in the economy between periods 1. Positive Economics
of expansion and recession. - concerned with describing and explaining economic
Macroeconomists study the causes and phenomena as they are, without making value
consequences of business cycles and judgments or expressing opinions about whether they
develop policies to mitigate their effects. are good or bad. It deals with objective analysis
 Investment and consumption: Investment based on data and observable facts.
and consumption are two of the most 2. Normative Economics
important components of aggregate demand.
Macroeconomists study how investment and - involves making value judgments and policy
consumption decisions are made and how recommendations. It addresses questions about what
they affect the economy. should be done, often guided by ethical, moral, or
political principles.
 Financial market behavior: Financial
markets play a vital role in the economy by
allocating resources to businesses and
households. Macroeconomists study how Economic policy is the set of actions that a
financial markets work and how they affect government takes to influence the economy.
the economy. Economic policymakers typically have four main
goals:
 Growth of nations: Economic growth is the
1. Efficiency- is the ability to produce goods and
long-term increase in the productive
services with the least amount of resources.
capacity of an economy. Macroeconomists
study the factors that contribute to economic 2. Equity- is the fair distribution of income and
growth and develop policies to promote it. wealth.
3. Growth- is the increase in the production of goods
and services over time.
THREE FUNDAMENTAL QUESTIONS IN
ECONOMICS 4. Stability- is the absence of large fluctuations in
economic activity, such as inflation and
1. What gets produced?
unemployment.
-This question relates to the allocation of resources to
determine which goods and services will be produced
to meet the needs and wants of society. It involves CETERIS PARIBUS ASSUMPTION
choices about the types of products and services that
will be available in the market. - The assumption of “Ceteris Paribus” is important in
studying economics. It is a Latin phrase that means
2. How is it produced? "all other things held constant or all else equal”.
-This question pertains to the methods and techniques - This assumption is used to isolate the effect of a
used in the production process. It involves decisions specific variable or factor under study while keeping
about the combination of resources (labor, capital, all other relevant factors constant or unchanged.
land, technology) and production techniques to
efficiently create the chosen goods and services.
3. Who gets what is produced? WHAT ARE MARKETS?

- This question focuses on the distribution of the - Venues where there is interaction between buyers &
goods and services that are produced. It addresses sellers.
how the benefits and access to these goods and
- fundamental institutions in economics where buyers for their land, and capitalists receive interest for their
and sellers come together to exchange goods, capital.
services, or resources.
TYPES OF ECONOMIC MARKETS
1. Market Economy
CIRCULAR FLOW OF A MARKET
ECONOMY -Market economies are economies in which the
production and distribution of goods and services are
determined by the forces of supply and demand. In a
market economy, businesses are free to produce
whatever they want and consumers are free to buy
whatever they want.
2. Mixed Economy
- Mixed economies are economies that combine
elements of both market economies and command
economies. In a mixed economy, the government
plays a role in the economy, but businesses and
consumers also have a significant degree of freedom.
3. Command Economy
- Command economies are economies in which the
government controls the production and distribution
HOW MARKETS SOLVE THE 3 ECONOMICS
of goods and services. In a command economy, the
QUESTIONS
government decides what goods and services will be
1. What to produce? produced, how much will be produced, and who will
receive them.
- Consumers dictate what goods need to be produced
by their demand. Producers choose which markets
can be profitable based on the demand of consumers.
For example, if there is a high demand for
smartphones, producers will choose to produce more
smartphones.
2. How to produce?
- Producers use technology to produce goods and
services with minimal costs. The prices of inputs are
based on their availability. For example, if the price
of oil increases, producers of goods that use oil will
have to find ways to reduce their costs of production
or increase their prices.
3. For whom to produce?
- Consumers decide how the produced goods are
distributed. This can be decentralized or based on the
contribution of the members of the society. For
example, in a market economy, goods and services
are distributed based on people's willingness and
ability to pay for them.
- Producers receive payment for the use of factors of
production from consumers. For example, workers
receive wages for their labor, landowners receive rent
 3. Investment Goods
-are a type of capital good that is used to increase
future production capacity. They are goods that are
ECONOMIC OUTPUT & PRODUCTION purchased by businesses with the intention of using
POSSIBILITY FRONTIER them to produce more goods and services in the
ECONOMIC OUTPUT future. (machinery, equipment, research and
development, etc.)
- the result of using various inputs, including goods
and services, in a production process driven by
technology. The "No Free Lunch" assumption CONCEPTS RELATED TO PRODUCTION IN
reminds us that there are always costs associated with AN ECONOMY
producing outputs, and efficient resource allocation is
essential for economic success. 1. Economics has limited resources
- All economies have limited resources. This means
that there is a limited amount of land, labor, capital,
PRODUCTION IN AN ECONOMY and natural resources available to produce goods and
- refers to the process of creating goods and services services. As a result, economists must make choices
that are intended to satisfy the needs and wants of about how to allocate these resources in the most
individuals and society as a whole. efficient way possible.

- Production relies on several factors of production, 2. Economic Efficiency vs. Technical Efficiency
which include:  Economic efficiency refers to the allocation
 Land: Natural resources, such as minerals, of resources in such a way that maximizes
water, and fertile land, used in production. the output of goods and services that society
desires.
 Labor: The physical and mental effort
contributed by workers to produce goods  Technical efficiency, on the other hand,
and services. refers to the production of goods and
services using the least amount of resources
 Enterprise: represents the human initiative
possible.
and organization required to bring the other
factors of production together efficiently. 3. Production Possibility Frontier (PPF)
 Capital: Physical capital (machinery, tools,
buildings) and financial capital (money) - is a curve that shows the maximum combinations of
used to facilitate production. two goods or services that can be produced with a
given set of resources and technology.

GOODS WE CAN SEE IN THE ECONOMY

PRODUCTION POSSIBILITY FRONTIER
- In the economy, there are various types of goods,
each serving different purposes and roles. - The Production Possibility Frontier (PPF) is a
graphical representation of the trade-offs and
1. Consumer Goods constraints an economy faces when allocating its
limited resources between the production of two
-are products that are produced for and directly
different goods or services.
consumed by individuals and households to satisfy
their immediate needs and wants. (cars, appliances, - It shows the maximum amount of one good that can
furniture, food, etc.) be produced for each level of production of the other
good while using the available resources efficiently.
2. Capital Goods
Characteristics of PPF
-are goods that are used to produce other goods and
services. They are not consumed directly by 1. Shows the Maximum Quantity of Goods: The
consumers, but instead are used by businesses to PPF shows the maximum combinations of two goods
produce consumer goods or other capital goods. or services that can be produced with a given set of
(machinery, vehicles, computers, etc.) resources and technology. This is because resources
are limited, and there are only so many goods and decide how to allocate them to maximize his output
services that can be produced with those resources. of wheat and corn.
2. Shows Points of Productive Efficiency and At the beginning, he decides to focus all his resources
Inefficiency: The PPF distinguishes between points on producing wheat only. As a result, he can produce
of productive efficiency (points on the curve) and 10 bushels of wheat and 0 bushels of corn.
productive inefficiency (points inside the curve).
Points on the curve represent efficient resource Now, he wants to diversify and start producing some
allocation, where the economy is using its resources corn as well. To do this, he needs to reallocate some
optimally. In contrast, points inside the curve indicate of his resources away from wheat production and into
underutilization of resources, where the economy is corn production. As he does so, he notices that the
not producing as much as it could with the given MRT of wheat for corn is 2:1, which means that for
resources. every 2 bushels of wheat he gives up, he can produce
1 additional bushel of corn while keeping the total
3. Shows Trade-offs and Opportunity Costs: The output constant.
PPF shows the trade-off between producing one good
and another. This trade-off is known as the
opportunity cost. The opportunity cost of producing PPF AND THE GAINS FROM TRADING
one good is the amount of the other good that must be
given up in order to produce that good. Specialization
4. Can Show Effects of Economic Growth: - No two economies are exactly alike. They have
Economic growth can be shown on the PPF by an different endowments of resources, such as land,
outward shift of the curve. This is because economic labor, and capital. This means that some economies
growth is typically associated with an increase in have a comparative advantage in producing certain
resources or an improvement in technology. When goods.
either of these things happens, the economy is able to
produce more of both goods, or more of one good - A comparative advantage is the ability to produce a
without sacrificing the production of the other good. good at a lower opportunity cost than another
economy. The opportunity cost of producing a good
is the value of the next best good that is sacrificed.
MARGINAL RATE OF TRANSFORMATION - For example, suppose Country A has a comparative
(MRT) advantage in producing wheat and Country B has a
comparative advantage in producing corn. This
- Marginal Rate of Transformation (or MRT) is an means that Country A can produce wheat at a lower
economic concept that helps to measure the opportunity cost than Country B, and Country B can
opportunity cost. MRT shows the number of units of produce corn at a lower opportunity cost than
a product that one needs to sacrifice to make one unit Country A.
of another product.
Trading
- Below is the formula to calculate the MRT:
- When economies specialize in producing what they
MRTxy= ∆Good Y/ ∆Good X are best at, they can then trade their specialized goods
Here ∆Good X is the marginal cost to make with other economies. This trade is beneficial
or avail an extra unit of X. And ∆Good Y is because each economy can obtain goods that it
the marginal cost to produce or avail an doesn't specialize in, allowing them to enjoy a
additional unit of Y. broader variety of products.

- As you sacrifice more of good X, the opportunity

cost of producing good Y increases. This is because THE PPF AND TRADING: IT TAKES (AT
you are giving up more and more of good X in order LEAST) TWO TO TANGO
to produce one more unit of good Y.
- When it comes to international trade, it indeed takes
- Example: Imagine a farmer who can produce two at least two participants to tango. This dance involves
types of crops on his land: wheat and corn. He has a two important concepts: absolute advantage and
fixed amount of land and resources, and he needs to comparative advantage.
1. Absolute Advantage 2. Comparative Advantage:
- occurs when one country can produce a good using To determine comparative advantage, we need to
fewer resources (or with lower production costs) calculate the opportunity cost for each person in
compared to another country. terms of producing one unit of each good.
Opportunity cost is what they give up to produce one
- Example: Imagine two countries, Country A and more unit of a good.
Country B. Country A can produce 100 cars using
fewer resources (less labor and capital) than Country For Homer:
B, which can only produce 80 cars with the same
amount of resources. In this case, Country A has an - The opportunity cost of 1 can of beer is 4
absolute advantage in car production. hamburgers (given that he can produce 8
beers or 32 hamburgers).
2. Comparative Advantage - The opportunity cost of 1 hamburger is 1/4
can of beer (given that he can produce 32
- occurs when one country has a lower opportunity hamburgers or 8 beers).
cost of producing a particular good compared to
another country. Opportunity cost represents the For Peter:
value of what must be given up to produce one more
unit of a good. - The opportunity cost of 1 can of beer is 1/2
hamburger (given that he can produce 24
- Continuing with the car example, let's say that in beers or 48 hamburgers).
Country A, the opportunity cost of producing 1 car is - The opportunity cost of 1 hamburger is 2
giving up the production of 5 computers, while in cans of beer (given that he can produce 48
Country B, the opportunity cost of 1 car is giving up hamburgers or 24 beers).
the production of 10 computers. Although Country A
doesn't have an absolute advantage in car Now, let's analyze comparative advantage:
production, it has a comparative advantage because - Homer has a comparative advantage in producing
it gives up less computer production to make cars. hamburgers because his opportunity cost of
EXAMPLE producing 1 hamburger (1/4 can of beer) is lower
than Peter's (2 cans of beer).
In this scenario, we have two goods: beer and
hamburgers, and two productive members of society, - Peter has a comparative advantage in producing
Homer Simpson and Peter Griffin. We'll analyze their beer because his opportunity cost of producing 1 can
production capabilities in terms of absolute and of beer (1/2 hamburger) is lower than Homer's (4
comparative advantage. hamburgers).

1. Absolute Advantage: - In this case, it's clear that both Homer and Peter
have a comparative advantage in one of the goods.
Homer Simpson can produce 8 cans of beer and 32 Homer specializes in hamburger production, while
hamburgers daily. Peter Griffin can produce 24 cans Peter specializes in beer production.
of beer and 48 hamburgers daily. Here's how it
breaks down: - This specialization allows them to trade with each
other, benefiting from each other's strengths, and
-Homer has an absolute advantage in producing ultimately increasing their overall consumption of
hamburgers because he can produce more both beer and hamburgers.
hamburgers than Peter (32 vs. 48).
- Peter has an absolute advantage in producing beer
because he can produce more beer than Homer (24 - The Production Possibility Frontier (PPF) illustrates
vs. 8). the maximum combinations of two goods that an
economy or, in this case, two individuals (Peter and
Homer) can produce with their given resources and
technology, while fully utilizing their resources
efficiently. Let's plot the PPFs for Peter and Homer
based on their production capabilities:
Homer's PPF might look like this:

This graph represents Homer's PPF. The curve shows

that as he allocates more of his resources to beer
production, he produces fewer hamburgers, and vice
versa. The slope of the curve represents the
opportunity cost.

Peter's PPF might look like this:

This graph represents Peter's PPF. Similar to Homer's

PPF, it shows the trade-off between producing beer
and hamburgers. As Peter allocates more resources to
beer production, he produces fewer hamburgers, and
as he shifts resources towards hamburger production,
he produces fewer cans of beer.

- Both individuals' PPFs illustrate their respective

production capabilities and the trade-offs they face
when deciding how to allocate their resources
between beer and hamburgers. These PPFs also show
why specialization and trade can be beneficial; by
focusing on what they have a comparative advantage
in and trading, they can move beyond their individual
PPFs and achieve a higher level of consumption for
both goods.

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