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ECON140: Microeconomics
Ch.1
Chapter 1
FIRST INTRODUCTION TO
ECONOMICS
Dr. Mohammed A. Alwosabi
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• Scarcity does not imply poverty. Every
individual, every firm, and every countryregardless of its economic system or the
level of development- experiences scarcity.
• Scarcity applies to money and time,
• Scarcity confronts (experienced by) every
one whether they are poor or rich.
rich
• Scarcity cannot be eliminated so we have to
learn how to cope with it.
• The existence of scarcity forces us to make
choices.
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• Incentives are influenced by the changes in
the marginal benefits (MB) and marginal
costs (MC) and hence, lead to changes in
our choices
• People compare the benefit from a small
change in an activity (MB) to the cost of
making a small change in an activity (MC).
• MB is
i the
th benefit
b
fit from
f
one more unit
it off an
activity (or the benefit from a small change
in an activity).
• MC is the opportunity cost of one additional
activity (the opportunity cost of a small
change in an activity).
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Dr. Mohammed Alwosabi
The Fundamental Problem of Economics:
Scarcity and Choice
• It is a fact of life that we cannot get
everything we want. We all want more than
we can get.
• Our inability to satisfy all our "unlimited
wants" because of our "limited
wants
limited resources"
resources
is called scarcity.
• We live in a world of scarcity of resources
relative to human wants.
• Scarcity means that unlimited wants always
exceed the limited resources available to
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satisfy them.
• A choice is a comparison of alternatives.
• The choices we make depend on the
incentives we face.
• An incentive is a reward that encourages an
action (or choice) or penalty that
discourages an action (or a choice).
• The
Th incentives
i
ti
that
th t we face
f
will
ill influence
i fl
the choices that we make when dealing with
scarcity.
• For example, if a price of a good falls,
people have incentive to buy more of that
good.
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• A change in a MB or in a MC changes the
incentives that we face and leads us to
change our choices.
• If MB > MC, people have an incentive to do
more of that activity.
• If MB < MC, people have an incentive to do
less of that activity.
• Optimization is making the best use of the
available resources given the available
information and technology.
• Optimization implies that people choose
only the actions that will bring greater MBs
than MCs
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ECON140: Microeconomics
Ch.1
Trade off
• Every choice has its tradeoff—an exchange.
• To get more of one thing you have to get
less of something else.
• A tradeoff is giving up one thing to get
something else.
• The big tradeoff is the tradeoff between
efficiency and equity at business level and
at government level.
• Thinking about a choice as a tradeoff
emphasizes cost as an opportunity forgone.
• What we give up is the cost of what we get.
• Economists call this cost the opportunity 7
cost.
Dr. Mohammed Alwosabi
Opportunity Cost:
• Every time we choose to use scarce
resources in one way, we give up the
opportunity to use them in other ways.
• The opportunity cost of making a choice is
the highest-valued thing we give up in order
to get something else.
• The best thing you choose not to do is the
opportunity cost of the thing that you
choose to do.
• The forgone alternative or the next best
alternative is the opportunity cost of the
thing that you choose to do.
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• The opportunity cost of an increase in one
extra action is its marginal cost.
• In a world of scarcity, everything we do
involves an opportunity cost.
• If there is no scarcity (resources are not
limited), there will be no opportunity cost
(i.e., opportunity cost is zero)
• Example:
Suppose on one Thursday night, you can do
only one of three actions. You rank these
three alternatives as follows: meet your
friends, study ECON140 or watch your
favorite show on TV. What is the opportunity
cost of meeting your friend?
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• Example:
Suppose Ahmed is faced with two choices:
either to work and get BD500 or study at the
local university and pay BD200 tuition for
the course and BD50 to buy the textbooks. If
Ahmed decides to join the university, what
is the opportunity(ies) cost(s) of joining the
university?
• Exercise:
Suppose you have a holiday for one week
and you have 3 choices: to go to Mekka for
Umrah, to go to Dubai, or to spend the week
preparing for the midterm exams. If you
decide to go for Umrah, what is the
opportunity cost of the week?
FACTORS OF PRODUCTION
• The factors of production are the
productive resources (also called inputs)
used to produce goods and services.
• The four basic factors of production (the
inputs) are:
1 Land:
1.
L d refers
f
tto all
ll natural
t
l resources on the
th
ground, above it, and beneath it such as
water, air, oil, and minerals.
• Rent is the reward (return or income) for
using land.
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ECON140: Microeconomics
Ch.1
2. Labor: refers to the time and efforts that
people devote to produce goods and
services.
• Labor involves mental and physical skills
and abilities of people to produce goods
and services.
• Quantity and quality are included in the
"labor" factor.
• The quality of labor depends on human
capital.
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•
•
In everyday terms, we talk about money,
stocks, and bonds as being capital. These
items are financial capital. They play an
important role in providing businesses and
individuals with financial resources, but
they are not used to produce goods and
services.
Because financial capital are not
productive resources, they are not part of
capital in economic definition.
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ECONOMICS:
• Economics is a social science that studies
how best individuals, businesses,
governments, and societies make their
choices to cope with scarcity (to allocate
scarce resources among competing uses).
• The study of economics is typically divided
into two main branches: microeconomics
and macroeconomics.
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Dr. Mohammed Alwosabi
•
Human Capital refers to the knowledge and
skills that people obtain from education,
on-the-job training, and work experience.
• Wage is the income for labor.
3. Capital: final goods produced to be used in
producing other goods and services, e.g.,
equipments machines,
equipments,
machines tools,
tools and
structures.
• Interest is the reward for using capital.
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4. Entrepreneurship: refers to organizing and
managing the resources to produce new or
improved goods or services.
• An entrepreneur is an innovator who
comes up with new ideas, brings
resources together, organize them and
manage them to produce new or improved
products and technologies.
• An entrepreneur is a risk taker. He bears
the risks that arise from his business
decisions.
• The reward for entrepreneur is profit.
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• Microeconomics is the study of individual
behavior and choices in the economy.
• The focus of microeconomics is on the
individual consumers, individual firms,
individual industries and individual markets.
• It studies supply and demand in individual
markets the prices and quantities of inputs
markets,
and individual goods and services,
production processes, cost structure for
individual goods and services, and
distribution of goods and services.
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ECON140: Microeconomics
Ch.1
Dr. Mohammed Alwosabi
• Macroeconomics studies the total
(aggregate) behavior and performance of an
entire economy (country) or the global
economy.
• It focuses on the total (aggregate) economic
activity such as the total output, total
employment, total income, inflation, and
government policies such as government
spending and taxation, and so forth.
• Macroeconomic policies such as fiscal
policy and monetary policy focus on
national goals such as achieving full
employment, reducing inflation, smoothing
business cycle, and increasing the
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economic growth of the country.
ECONOMY
• An economy is simply a collection of all our
production and consumption activities in a
defined geographical area—Bahrain
economy, German economy, Japanese
economy, or the global economy.
• What people collectively produce is what
the economy produces, what people
collectively consume is the economy's
consumption.
•
1. How do choices end up determining what,
how, and for whom goods services are
produced?
2. How can choices made in the pursuit of
self-interest also promote the social
interest?
•
•
An economy is also called economic
system.
Economic system can be defined as a
mechanism (a way) that is used by a
society to allocate (decides how to use) its
limited resources among the competing
uses to satisfy the human wants.
This mechanism answers the two big
Economic questions that summarize the
scope of economics.
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What, How, and For Whom?
• Goods and Services are the objects that
people value and produce to satisfy human
wants
• Goods are physical objects such apple,
laptops, and cars.
• Services
S i
are tasks
t k performed
f
d for
f people
l
such as auto-repair, hair-cut saloons, and
doctors’ clinics
• We will discuss the three questions of what,
how and for whom to emphasize the
concepts of choices and tradeoff
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1. What goods and services to produce with
our limited resources and in what
quantities (types of gods and services).
What to produce varies across countries
and over time.
1. How to produce the goods and services we
select using the available factors of
production (production methods).
2. For whom goods and services are
produced depends on the incomes that
people earn. (who consumes these goods
and services)
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ECON140: Microeconomics
Ch.1
Self-interest vs. Social-interest
• A choice is in your self-interest if you think
that choice is the best one available for
you.
• Social interest occur if the outcome of an
action or a choice is the best for the society
as a whole.
whole
• Economists try to find the factors that
assure pursuing self- interest does not
contradict promoting social interest and
work out the trade off between efficiency
and equity
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Dr. Mohammed Alwosabi
ECONOMICS AS A SOCIAL SCIENCE
• Economics is a social science.
• Like all other sciences, in order to discover
how an economic world works, economists
distinguish between two types of
statements: positive statements and
normative statements
statements.
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• Positive statements are statements about
"what is". They describe how the world
actually exists or behaves.
• They are objective statements.
• They may be right or wrong.
• Positive statement can be tested and
checked.
Examples of positive statements:
• The high temperature today was 35 degrees.
• Higher interest rates reduce the total
amount of borrowing.
• Bahrain economy has lower unemployment
than Saudi's economy
• The American stock market boomed in the
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1990s
• Normative statements are statements about
"what ought to be". They describe how the
world should exist or behave.
• Normative statements are subjective and
matters of opinions. That you agree or
disagree with them.
• Normative statements cannot be tested
tested.
Examples of normative statements:
• It was too hot today.
• 5% unemployment rate is too high.
• It is desirable to have a minimum wage law
• Every citizen must have a free health care28
•
• An economic model is an explanation and
simple representation of some aspect of the
economic world that includes only those
features of the world that are needed for the
purpose at hand.
• Every economic model is based on a set of
assumptions and results in some
implications.
The task of economics is to discover
positive statements that are consistent
with what we observe and that helps us to
understand how the economic world
works.
• This task can be divided into three steps:
1. observation and measurement
1
measurement,
2. model building, and
3. testing models.
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ECON140: Microeconomics
Ch.1
• Economic model is a diagrammatic,
mathematical, written or verbal
representation of the economy.
• Economic models are used to explain and
predict economic behavior, and to design
and evaluate economic policies. The
success of a model is judged by its ability to
predict.
• An economic theory is a general rule or
principle that enables us to understand and
predict the economic behavior and
performance by people, firms and the entire
economy.
• It explains the relationship between factors.
• It is a bridge between a model and reality.
reality
• Economic theory is a proposition about
which model work
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Unscrambling cause-and-effect: Ceteris
Paribus
• Most economic behavior has many
simultaneous causes.
• Confusion can result when too many things
change and so it might not be possible to
understand what caused what
what.
• So, in their models, economists change one
factor at a time, holding all other relevant
factors unchanged, to isolate (unscramble)
the factor of interest and investigate its
effects in a clear way.
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•
Economists try to avoid fallacies (errors of
reasoning that lead to a wrong
conclusion).
• But two fallacies are common, and you
have to be careful and alert to avoid them.
• They are:
1. The
1
Th Fallacy
F ll
off Composition
C
iti
i the
is
th (false)
(f l )
statement that what is true for the parts is
true of the whole or that what is true for
the whole is true of the parts. For example,
one person can walk through the door into
the class, so the entire 40-person class
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can simultaneously walk through the door.
Dr. Mohammed Alwosabi
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•
•
1.
2.
3.
4.
•
To identify cause and effect, economist
use a Latin phrase called ceteris paribus
Ceteris Paribus means
other things being equal,
other things being constant,
nothing else changing, or
everything else remains the same,
"Ceteris Paribus" assumption is necessary
because of complexity of real economy. It
makes it easier to formulate economic
theory and policy, but it also increases the
risk of error.
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2. The Post Hoc Fallacy means “after this,
therefore, because of this.”
• This fallacy is a (false) claim that a first
event causes a second event because the
first occurred before the second.
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ECON140: Microeconomics
Ch.1
Dr. Mohammed Alwosabi
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