 Definition of Economics o Study of choices due to problem of scarcity  Basic economic problems o Scarcity  Unlimited wants and needs  Limited resources  Require us to choose.  Opportunity cost: cost of giving up the second-best option  Fundamental question of economics:  What should we produce? o Production of a particular good → cannot produce another good → opportunity cost arises  How should we produce it?  For whom should we produce it? o Distribution of goods  Factors of production (FOP) / resources o Land  Natural resources o Labour  Human workers / all human efforts used in production o Capital  Physical Capital – all physical assets used by human for production  Human Capital – Knowledge and skills obtained by labours o Entrepreneurship  Combine other 3 FOPs for production  Take risk  Market o Buyers and sellers of a particular good or service interact  3 Key Economic Ideas: o People are rational  Use all information to make best possible decisions to max benefits o People react to economic incentive  People will react to benefits / costs / changes. Eg. If price increases → people buy less o Optimal decisions are made at the margins  Most decisions involve reaction to change  When there are changes, best decisions can be made by comparing change in benefit (marginal benefit) and change in cost (marginal cost)   Economic systems o Who should own the resources?  Centrally planned / command economy (govt owns all the resources directly or indirectly)  Free market / laissez faire / capitalism (private markets own all the resources)  Mixed economy (resources owned by govt and private markets)

 Efficiency o Definition: All resources / FOP = fully utilized without wastage o Types:  Productive efficiency  Production with lowest average cost  Allocative efficiency  Production is in accordance with consumer choices  Usually, market economy = efficient o However, market economy may still have inefficiency due to:  Imperfect information  Irrational consumers  Govt interference  Externalities (third party effects – impacts of a transaction to bystanders that are not directly involved in the production / consumption of a transaction)  Equity o Fairness in distribution of resources o May contradict efficiency  Positive and normative statements o Positive statements: statement of facts. o Normative statements: statement of opinion and judgement

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Chapter 1 Course: Microeconomics

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Definition of Economics

oStudy of choices due to problem of scarcity

Basic economic problems

oScarcity

Unlimited wants and needs

Limited resources

Require us to choose.

Opportunity cost: cost of giving up the second-best option

Fundamental question of economics:

What should we produce?

oProduction of a particular good → cannot produce another

good → opportunity cost arises

How should we produce it?

For whom should we produce it?

oDistribution of goods

Factors of production (FOP) / resources

oLand

Natural resources

oLabour

Human workers / all human efforts used in production

oCapital

 Physical

Capital – all physical assets used by human for production

Human Capital – Knowledge and skills obtained by labours

oEntrepreneurship

Combine other 3 FOPs for production

Take risk

Market

oBuyers and sellers of a particular good or service interact

3 Key Economic Ideas:

oPeople are rational

Use all information to make best possible decisions to max benefits

oPeople react to economic incentive

People will react to benefits / costs / changes. Eg. If price increases →

people buy less

oOptimal decisions are made at the margins

Most decisions involve reaction to change

When there are changes, best decisions can be made by comparing change

in benefit (marginal benefit) and change in cost (marginal cost)



Economic systems

oWho should own the resources?

Centrally planned / command economy (govt owns all the resources directly

or indirectly)

Free market / laissez faire / capitalism (private markets own all the

resources)

Mixed economy (resources owned by govt and private markets)

Chapter 1

Microeconomics

Taylor's University Lakeside Campus

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Chapter 1

Course: Microeconomics

University: Taylor's University Lakeside Campus

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