Download ABSE 101 Introduction to Microeconomics Our entire life is a set of

ABSE 101 Introduction to Microeconomics
Our entire life is a set of activities, which are making us a part of the world of
economics.
On the one hand, we are continually faced with our own economic problems:
what should I buy in the supermarket? Should I go to university, or should I try to find a
job now? Shell I go for a summer vacation, or should I work to earn some money for the
university tuition?
On the other hand, we are affected by the local, national, and international
economic issues: price increases, interest rate changes, etc.
So just what is economics about?
One does not need going to university to guess that economics is about economic
problems. But which problems are economic? Is there anyone who does not have
economic problems? Why do we have economic problems? Why is it impossible to solve
all economic problems and live without them for the rest of our lives?
Economics tries to find the answers to all these questions. However, it will not
give us a set of facts and theories to be memorized. Studying economics will give you a
way of thinking about the economic problems. This means, that economics will offer us
an organized way of identifying and analyzing economic problems. This is why we will
try to organize and arrange the questions and the answers that we are looking for.
1. Sources of economic problems
Ask people if they would like more money, and most of them will answer “yes”.
They want more money so that they can buy more goods and services. This applies not
only to poor people, but also to most wealthy people too. The point is that human wants
are unlimited. Yet the means of fulfilling human wants are limited. At any one time the
world can only produce a limited amount of goods and services. This is because the
world only has a limited amount of resources.
These resources, or factors of production, are of three broad types:
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Human resources: labor (L). The labor force is limited both in number
and skills.
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Natural resources: land and raw materials (N). The world’s natural
resources are limited.
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Manufactured resources: capital (K). Capital consists of all those
inputs that have been produced by people. The world’s capital
resources are limited too.
People put together these resources and create output (goods and services). The
quantity and the quality of output depend on the available resources and on the
technology.
A technology is the way of putting resources together.
Since resources are limited, people cannot have all they want.
The excess of human wants over what can actually be produced is called scarcity of
resources. Therefore, scarcity is a relationship between unlimited human wants and
scarce resources.
Because of scarcity, people have to make choices. Of course, people do not face the
problem of scarcity to the same degree, but both the poor and the rich want more, than
they can afford.
Scarcity is the major source of economic problems.
The second source of economic problems is the technological change. When
resources increase in quantity, when their quality is improved, and when technologies
change, people can produce more and better goods and services. However, their wants
still exceed their ability to produce. With technological changes the problem of scarcity
has to be solved in a new way.
The third source of economic problems is the change in taste and preference.
People just learn how to balance with the scarce resources, and their wants change. Now
they need different goods and services and the problem of scarcity has to be solved in a
new way.
2. The three economic questions
The three sources of economic problems raise three questions that should be
answered.
Scarcity means that people cannot have as much as they want of everything.
Therefore, they have to make a choice what and how much goods and services to
produce. This is the first economic question.
On the other hand, scarcity of resources means that people should not waste them.
They should find ways to produce maximum output with their scarce resources.
Technological change improves the ability to produce, but at the same time, it raises
again the question “how to use scarce resources” in order to produce as much as
possible.
The third economic question is “for whom to produce”. People are never
satisfied by the way in which goods and services are distributed and the change of taste
and preferences raises this question again and again.
Economics is the study of how people make decisions what to produce, how
to produce, and for whom to produce.
In economics, we call people economic agents, or economic decision makers.
According to the problems they solve, economic agents can be divided into two
big groups: households and firms. Households own resources (labor, land and capital).
They sell these resources to the firms. The firms put resources together and produce
goods and services, which they sell to the households. The third economic agent is
government. It solves economic problems when the society decides that the government
can make more efficient decisions of some problems, than households and firms.
3. Microeconomics and macroeconomics
We study economics because we want to know how to make our lives better. This
means, that we are interested in the impact of our decisions on our on life.
Microeconomics studies the impact of economic decisions on the individual
households and firms. It is interested in the operation of individual markets for goods and
services, where the prices of these goods and services are determined. For example,
microeconomics studies the prices of gasoline, vegetable oil, chicken, transportation, etc.
Microeconomic studies the markets for labor services, too. For example, it studies why
football players are paid better than engineers, how the wages of doctors, and waters are
are determined, etc. All these issues affect our individual lives as households. At the same
time, microeconomics studies the costs and the profits of the firms and how firms set the
prices of goods and services that they buy and sell.
Macroeconomics studies the impact of economic decisions on the national
economy as a whole. It studies what is the total output produced in the country and how
it increases over time. It studies the causes and sources of economic growth and
economic recessions. It is interested in the overall use of resources in the country. This
means that it studies the rate of employment and the rate of unemployment in general.
While microeconomics is interested in the prices in individual markets, macroeconomics
studies the average price level and its increase (inflation) or decrease.
4. Positive and normative economics
In thinking about economic questions, we must distinguish questions of fact from
questions of fairness.
Positive economics presents want is, what was, and what will be. The conclusions
of positive economics can be proved with facts. We can assess them whether they are
true, or false.
However, there are many cases, when we cannot check whether the answers to
economic questions are true or false. For example: should the government raise taxes on
the rich and redistribute the money to the poor? Is it better to have a higher inflation but a
lower unemployment, than a lower inflation but higher unemployment? There are no
right or wrong answers to these questions. The answers depend on ethical values rather
than facts. These are questions of normative economics. Normative economics deals with
what should be now and in the future, and what should have been in the past. In relies on
logical solutions of the questions.
5. Society’s technological possibilities
When economists study how people solve economic questions, they try to present
a simple picture of the economy and ignore all the factors that are not important for the
particular problem. Such pictures are called economic models.
The economy can be presented on a scheme.
Government
Final goods and services
Households
L, N, K
Firms
The above picture is a schematic model of the economy. It presents the economic
agents and the main decisions that they make. It ignores all the details which are not
important for the identification of economic agents.
We can present economic problems on schedules (tables) or on graphs. We can
also use mathematical equations to present the relationships in the economy.