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Introduction to Microeconomics
AQUILES RAMOS DEJALDE, LPT, PhD.
Associate Professor 1
 What is Economics?
Economics Defined - Economics is the study of the
ALLOCATION of SCARCE resources to meet UNLIMITED
human wants.
• Microeconomics - is concerned with decision-making by
individual economic agents such as firms and consumers.
(Subject matter of this course)
• Macroeconomics - is concerned with the aggregate
performance of the entire economic system.
ALLOCATION
In economics, allocation refers to the process of distributing or
assigning limited resources among various competing uses, needs,
or wants. It involves deciding how to allocate scarce resources to
different goods, services, or activities to achieve specific objectives
or optimize outcomes. Allocation is a fundamental concept in
economics because it addresses the central problem of scarcity and
the need to make choice
SCARCE RESOURCES
In economics, scarce resources refer to the limited supply of
productive inputs or factors of production that are used to
produce goods and services. These resources are considered
scarce because they are insufficient to satisfy all of society's
unlimited wants and needs. The concept of scarcity is a
foundational principle in economics and serves as the basis for
many economic theories and decision–making processes.
UNLIMITED HUMAN WANTS
In economics, "unlimited human wants" refers to the idea that
people have a seemingly infinite number of desires, needs, and
preferences for goods and services. These wants can encompass
a wide range of material and non-material desires, including
basic necessities like food, clothing, and shelter, as well as more
complex desires such as entertainment, travel, education, and
luxury items.


In economics, "needs" and "wants" are two distinct categories

used to differentiate between different types of human desires
and preferences for goods and services. These concepts help
economists and decision-makers understand consumer behavior
and resource allocation.
 Food
Shelter
Biological Needs Clothing
Medicine
NEEDS of Man Sex Education
Recognition
Socio-Cultural Needs Spiritual
Approval
 Goals of Economics

To strengthen economic freedom (includes);

• consumer choice
• Freedom of occupational choice
• Freedom to consume or save
• Freedom to own properties
• Freedom of enterprise
To promote economic efficiency-producing more with the use of
fewer resources.
Factors that contribute to efficiency;
 modern technologies (new tools and machines)
 managerial skills
 To promote economic stability-means there is no violent ups and
down in the economy.
 consistent growth
 movement of the output of the economy, employment,
and prices of goods and services should be kept at reasonable
ranges.
 To promote economic security-to increase individual
security has been an important goal of economics.
 To attain a high level of growth in the economy-economic
growth means the capacity to produce goods and services is
increasing and it is growing more rapidly than the population.
 Growth - is determined by two factors;
 expansion in the resources available for producing goods and
services such as;
- larger labor force and larger capital stock
- improved skills and technology, including managerial and
entrepreneurial skills, so that more goods and services can
be
produced from given resources.
 Government has two basic responsibilities in promoting economic
growth;
 to provide law and order that will create a conducive investment
climate, such as enforcement of contracts and the preservation of
environment;
 to provide public safety services that the private sector cannot
provide but are important for an expanding economy.
 …

Scope of Economics
Scope refers to the extent to which something deals with or
the extent to which something is concerned. Consumption of
goods and services is the most basic way to define its scope.
However, in reality, the scope of economics is much more
than the regular consumption of goods and services. It can be
distinguished as follows:
 Microeconomics

• Micro refers to small; it is the study of individual units of

consumption of goods and services as well as that of
production and much more. It is concerned with one single
household, office, industry or market.
• Moreover, concepts such as product pricing and consumer
or firm behavior are a part of it. Various types of markets
are also studied under this. Hence, the consumption of
goods and services and the behavior responsible for it is a
part of microeconomics.
 Macroeconomics

Macro means large; it is the study of the overall production

and consumption of goods and services. It is concerned with
national income, GDP, GNP or gross national product.
Concepts such as macro-level business cycles, national budget,
unemployment and money supply are a part of
macroeconomics.
 Scarcity and Choice
• Scarcity refers to the limited availability of resources (such
as time, money, land, labor, and natural resources) in
comparison to the unlimited wants and needs of individuals
and society as a whole. In other words, it's the condition
where there are not enough resources to produce all the
goods and services that people desire. Scarcity is a
fundamental and unavoidable aspect of economics.
 Scarcity and Choice
• Choice is the process of selecting among different
alternatives or options when faced with scarcity. When
resources are scarce, individuals and societies must make
choices about how to allocate those resources to fulfill their
most pressing needs and wants. These choices involve trade-
offs, as selecting one option often means giving up another.
 The Economic Problem
 Basic Economic Problems
• 1. What goods and services should be produced and in what
quantities?
• 2. How these goods and services should be produced?
• 3. For whom should these goods and services be produced?
 Limits of opportunity costs and choices

 The concept of "limits" in the context of opportunity costs

and choices refers to the constraints and boundaries that
exist when making decisions. These limits are important to
consider because they define the boundaries within which
individuals and societies must make choices and allocate
resources.
 Laissez-Faire Capitalism

 is an economic and political philosophy that advocates for

minimal government intervention in the economy.
 The term "laissez-faire" is French and translates to "let it be" or
"leave it alone."
 In the context of capitalism, it means that the government should
largely refrain from regulating or interfering with economic
activities, allowing individuals and businesses to operate with
maximum freedom and autonomy.
 Features of Laissez-Faire Capitalism
 Limited Government Intervention
o Government interventions such as regulations,
subsidies, and price controls are typically seen as
distortions of market efficiency.
 Free Market
o Prices are determined by supply and demand, with little to no
government interference.
 Property Rights
o Protecting private property rights is considered essential in a
laissez-faire capitalist system.
o Individuals have the right to own, use, and transfer property
(including land, goods, and intellectual property) as they see
fit, with minimal restrictions.
 Competition
o Competition is encouraged as a means of promoting
efficiency and innovation.
o Businesses must compete with one another to attract
customers, which is believed to lead to better
products and services.
 Individual Liberty
o Places a high value on individual freedom and
personal autonomy.
o People have the liberty to pursue their economic
interests and make choices that they believe are in
their best interests.
 Self-Regulation
o Markets have a self-regulating mechanism, wherein
supply and demand forces will naturally lead to
equilibrium and optimal resource allocation.
o They believe that government regulations are often
unnecessary because the market can correct itself.
 A command economy

 Also known as a planned economy, is an economic system in which

the central government or a central authority exercises significant
control and direction over the production, allocation, and
distribution of goods and services within an economy.
 Features of Command Economy
 Central Planning
o Economic planning is centralized. The government or a central
planning authority makes decisions about what goods and services
will be produced, how they will be produced, and in what
quantities.
o This includes setting production targets, determining the allocation
of resources, and controlling factors like production techniques
and technologies.
 Ownership
o Often, the government or state owns and controls the means of
production, including factories, farms, and other productive assets.
o Private ownership of major industries may be limited or
prohibited. The government may also control natural resources.
 Resource Allocation
o The central authority decides how resources, such as labor, capital,
and raw materials, are allocated among different sectors and
industries. This allocation is typically based on government
priorities and objectives, which can include social and political
goals.
 Price Control:
o Prices for goods and services are often set by the
government rather than being determined by market forces
(supply and demand). This can lead to issues with
shortages, surpluses, and inefficiency.
 Limited Consumer Choice
o Consumers may have limited choices in the products and services
available to them, as the government controls what is produced
and sold.
 Command economies are often associated with socialist or
communist ideologies, where the goal is to achieve economic
equality and eliminate private ownership of the means of
production. The most well-known examples of command
economies include the former Soviet Union, Maoist China, and
North Korea.
 The market system
 also known as a market economy or capitalism, is an economic
system characterized by the predominance of market forces in
determining the production, allocation, and distribution of goods
and services.
 In a market system, economic decisions are primarily made
by individuals and businesses in pursuit of their own self-interest,
and the government's role is generally limited to establishing
and enforcing the rules of the market.
 Features of a market system:
 Private Ownership
o private individuals and entities have the right to own
property, including businesses and productive assets. Private
ownership encourages entrepreneurship and investment
Market Competition
o Competition is a fundamental aspect of a market
system. Numerous buyers and sellers interact in markets
for goods and services, leading to competition that helps
set prices, determine production levels, and encourage
efficiency and innovation.
Supply and Demand
o Prices are primarily determined by the forces of supply
and demand. When demand for a product or service
exceeds its supply, prices tend to rise, incentivizing
producers to increase production. Conversely, when
supply exceeds demand, prices tend to fall, encouraging
consumers to buy more.
Profit Motive:
o Individuals and businesses in a market system are
motivated by the pursuit of profit. This profit motive
drives innovation, investment, and the allocation of
resources to activities that are most economically
viable.
Limited Government Intervention
o In a pure market system, the government's role is
minimal, limited to enforcing contracts, protecting
property rights, and ensuring competition. Regulations
are generally designed to prevent fraud, ensure
consumer safety, and maintain a level playing field.
Efficiency
o Market systems are often praised for their efficiency in
resource allocation. Resources tend to flow to their most
valued uses as determined by consumer preferences and
the profitability of production.
 Income Inequality
o Market systems can result in income inequality, as
individuals and businesses with greater resources or skills
can accumulate wealth more easily. Government policies
and social safety nets are often used to address this issue.
 The Invisible Hands
 a concept in economics that was popularized by the Scottish
economist Adam Smith in his seminal work, "An Inquiry into
the Nature and Causes of the Wealth of Nations," published in
1776. The invisible hand concept is a metaphorical way of
describing how individual self-interest and voluntary exchange
in a competitive market economy can lead to desirable outcomes
for society as a whole.
 Feature of an invisible hand
o Individual Self-Interest
According to the concept, individuals and businesses
often act in their own self-interest. They seek to
maximize their own well-being, profits, or utility by
making choices that benefit themselves.