Download Fundamentals of Economics

ECO 101: Principles of
Microeconomics
Fundamentals of
Economics
Ice Breaking
• Main objective is to know each other in the
class.
• Please introduce yourself. Talk about you for
two minutes.
Concepts:
• Meaning of ‘scare resources’ is meant ‘supply is
not abundant’. Scare resources (goods) should
have some sorts of ‘price’.
• The law of scarcity states that goods are scare
because there are not enough resources to
produce all the goods that people want to
consume.
• Scare goods are economic goods. Economic
goods should have some sort of price.
How to read a graph ?
• Graph is very important in Economics.
• It is a technique to present a relationship
between two variables visually.
Draw a graph using the Table
X
10
15
20
25
30
Y
5
10
15
20
25
How to explain/ read the graph ?
Production Possibility Frontier (PPF)
• A curve that illustrates the alternative combinations
of two goods that an economy can produce with
given resources and technology. A production
possibilities frontier (PPF) represents the boundary
or frontier of the economy's production capabilities.
As a frontier, it is the maximum production possible
given existing (fixed) resources and technology.
Producing on the curve means resources are fully
employed, while producing inside the curve means
resources are unemployed. The law of increasing
opportunity cost is what gives the curve its
distinctive convex shape.
Scenario
X unit
Y unit
A
B
C
4
6
7
1
2
3
Y -Unit
Inefficie
nt point
A
3
2
E
B
D
C
1
0
It means if you want more
of X-unit, you give up Yunit to be on the PPF curve
1
2
3
4
5
6
7
X Unit
An economy can operate on Points D and A but not on E. A is efficient, D is
inefficient point of an economy.
OPPORTUNITY COST AND INCREASING OPPORTUNITY COST
Scenario
Rice/per acre
A
B
C
D
E
F
5
4
3
2
1
0
+ 1 kg rice
Wheat /per
acre
0
6
12
- 4 kg
wheat
16
- 3 kg wheat
19
21
Opportunity cost of 1 more kg rice = giving up 3 kg wheat i.e. OC
of one more kg rice is 3 kg wheat. Similarly, as one goes for more
rice per acre, opportunity cost (i.e. giving up of wheat increase)
this is called increasing opportunity cost.
** What is the economic rational for increasing OC?
Slope
• The slope of a line is measured by calculating
the change in the value measured on the vertical
axis divided by the change in the value
measured on the horizontal axis.
• For the production possibilities frontier to the
right, this is the change in the quantity of Y
divided by the change in the quantity of X.
Y
Y
Slope = CD/BC or
rise/run, or Change of Y
divided by change of X.
A
C
B
D
D
Slope = CD/BC
or rise/run, or
Change of Y
divided by
change of X.
B
C
A
X
Exercise: calculate slope of the PPC on A, B, and C
points.
X
Key points to remember are:
(a) Slope can be expressed as a number.
(b) If the line is straight, its slope is constant
everywhere.
(c ) The slope of the line indicates whether
the relationship between x and y is direct or
inverse.
(d) Direct relationship occur when variable
move in the same direction; inverse
relationship occur when variable move in the
opposite directions. Thus a negative
relationship indicates the x-y relationship is
inverse.
Few definitions of Economics
• Economics asks what goods are produced, how
these are produced, and for whom they are
produced
• Economics analyzes movements in the overall
economy.
• Economics is the study of commerce among
nations.
• Economics is the science of choice.
• Economics is the study of money.
Main Branches of Economics
Macroeconomics
Economics
Microeconomics
What is Microeconomics
 Microeconomics is concerned with the
behaviour of individuals units. Examples of
units are – individuals (producers, and
consumers), firms, workers, producers etc.
Law of diminishing return
• In economics, diminishing returns (also called diminishing marginal
returns) refers to progressive decrease in the marginal (per-unit) output
of a production process as the amount of a single factor of production is
increased, while holding the amounts of all other factors of production
constant.
• For example, the use of fertilizer improves crop production on farms
and in gardens; but at some point, adding more and more fertilizer
improves the yield less and less, and excessive quantities can even
reduce the yield. A common sort of example is adding more workers to
a job, such as assembling a car on a factory floor. At some point, adding
more workers causes problems such as getting in each other's way, or
workers frequently find themselves waiting for access to a part. In all of
these processes, producing one more unit of output per unit of time will
eventually cost increasingly more, due to inputs being used less and
less effectively.
Law of Diminishing Returns
Units of labour
Total output (Units)
Extra output added by
additional unit of
labour
0
1
0
2000
2
3
3000
3500
2000
1000
500
4
5
3800
3900
300
100
The values
are
diminishing
According to the law of diminishing returns, as
additional units of labour are added, with land and
other inputs held fixed, the extra output tends to
decline.
Why law of diminishing returns works ?
• The primary reason is that the marginal product
of variable input declines with fixed input. The
fixed input imposes a capacity constraint on
short-run production. For example while adding
additional workers in a fixed area of land to
produce rice, the extra production attributable to
these workers is bound to fall as the capacity of
the fixed input (land) is exhausted. In fact,
adding too many workers actually results in a
negative marginal product, meaning total
product decreases.
Three Basic Problems of the Economy ?
1.
2.
3.
What commodities are to produced ?
How shall goods be produced ?
From whom shall goods to be produced ?
Market solves these economic problems. Here market
is not a place. Markets are mechanism by which buyers and
sellers meet to exchange things.
In a market system, everything has a price, which is
the value of the good in terms of money. Prices represent
their terms on which people and firms voluntarily exchange
different commodities.
Price coordinate the decisions of producers and
consumers in a market. Higher price encourages producers
and discourage consumers and vice versa.
How a market solves basic economic problems ?
What things will be produced is determined by the
consumer in their daily purchase decisions.
How things are produced is determined by the
competition among different producers.
For whom things are produced is determined by
supply and demand in the factor markets for
factor of production.
How an economy flow ?
What this this ?
What this this ?