Contents of course
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Module 1.Fundamental concepts in Microeconomics
Module 2. Individual and society economic problem
Module 3.Demand and Supply
Module 4.Market Equilibrium.
Module 5.Elasticity of Demand and Supply
Module 6.Consumer behavior.
Chapter1: fundamental
concepts in microeconomics
Lecture 1
INTRODUCTION
Some examples that makes the study of economics very
important:
 The decision of individuals to buy products
 The decision of firms
 The International Monetary Fund(IMF)
 Tax policies or subsidies
 The World Trade Organization
 Cooperation Council for the Arab Gulf States
 Organization of Petroleum Exporting
Countries(OPEC(
Three questions to answer
There are three types of decisions that
need to be made in economy:
 Which goods and services to produce,
 How to produce them,
 for whom should get them.
Definition of economics

Economics is the study of how
individuals and societies use limited
resources to satisfy unlimited wants.
Economic Theory


Theory: an organized system of
accepted knowledge that applies in a
variety of circumstances to explain a
specific set of phenomena.
Economic theory: attempts to abstract
from human behavior (producer and
consumer)
Economic Analysis

Economic analysis is both based on
deduction and induction.
o
o
Deduction: is a method of reasoning in
which one deduces a theory based on a set
of almost self-evident principles.
Induction: is a method of reasoning in
which one develops general principles by
looking from patterns in the data.
Economic Model

scientific method that consists of the
following steps:
o
o
o
o
observe a phenomenon,
make simplifying assumptions and
formulate a hypothesis,
generate predictions, and
test the hypothesis.
Simplifying assumptions


ceteris paribus – holding everything
else constant
abstraction in economics used to
simplify reality
Economic Model
The extraction of a model can be in the
form of words, abstractions,
assumptions (ceteris paribus), diagrams
or mathematical equations.
Microeconomics and Macroeconomics


microeconomics - the study of
economic behavior of individual human
beings and firms.
macroeconomics - the study affecting
the entire economy, including
unemployment, inflation, economic
growth, and monetary and fiscal policy.
Microeconomics Agents

Firms:
•
•

Produce and sell goods and services
Buy inputs (labor, capital and raw
materials)
Consumers:
•
•
Buy goods and services
Sell inputs (labor services, loanable funds)
Positive and normative economic

positive economic
o
o

attempt to describe how the economy
functions
relies on testable hypotheses
normative economic
o
relies on value judgments to evaluate or
recommend alternative policies.
Individual economic problem
Example:
 The consumer A have a limited
budget:120 dollars
 Individuals have unlimited wants,
 2goods:
•
•
book (10$)
DVD (20$)
Figure 1 :The graph of the consumer budget
DVD
($20)
Book
($10)
Total cost
6
0
120 = 120 + 0
5
2
120 = 100 + 20
8
4
120 = 80 + 40
3
6
120 = 60 + 60
2
8
120 = 40 + 80
1
10
120 = 20 + 100
0
12
120 = 0 + 120
DVDs
4
6
4
2
0
0
2
4
6
8
10
12
14
Books
Rational self-interest
Individuals select the choices that
makes them happiest, given the
information available at the time of a
decision.
Society economic problem
resources scarcity
land

all natural resources

•
•
•
•
land
minerals
water
wildlife
labor:
Consists of the physical and intellectual services provided by
human beings.
Society economic problem
scare resources

capital

physical capital



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goods used to make other goods
Factories
Machines
Infrastructure
Financial capital
stocks, bonds, bank loans


entrepreneurial ability

Refers to the ability to organize production and risks
Resource payments
Economic Resource
Resource payment
land
rent
labor
wages
capital
interest
entrepreneurial ability
profit
Scarcity
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
the basic economic problem is scarcity:
wants are unlimited, but resources
are limited.
so with scarcity, we must make choices.
Model of possibilities
production Frontier(PPF)

Assumptions:
 model of scarcity, choice, &
opportunity cost
 choice between 2 goods
 PPF shows maximum possible output
with combination of 2 goods, given
current resources
Production Possibilities
Curve
0
10
Robots (thousands)
Pizzas (00,000s)
Robots (000s)
1
9
2
7
3
4
4
0
12
10
8
6
4
2
0
0
1
2
3
4
Pizzas (hundred thousands)
5
Production Possibilities
Curve
Pizzas (00,000s)
Robots (000s)
0
10
1
9
2
7
3
4
4
0
Production possibilities curve
Robots (thousands)
12
10
8
6
4
2
0
0
1
2
3
4
Pizzas (hundred thousands)
5
Production Possibilities
Curve
production possibilities curve
12
Robots (thousands)
10
attainable
8
W
6
unattainable
4
Attainable
2
0
0
1
2
3
4
Pizzas (hundred thousands)
5
Using the PPF
points on or inside the PPF are possible
points INSIDE the PPF
are inefficient(do not use all resources)
points ON the PPF
are efficient(use all resources)
 points outside the PPF are not possible at
this time
scarcity & tradeoffs


the PPF shows limits to production
so must choose between Robot & Pizza
combinations
-- give up Robots to get more Pizzas
-- give up Pizzas to get more Robots
-- TRADEOFF
Opportunity Cost

Opportunity cost is the process of
choosing one good or service over
another.
Opportunity Cost

on PPF there are tradeoffs
-- how much is given up?
= opportunity cost
opportunity cost of 1
Pizza:



A to B
= 1 Robot
B to C
= 2 robots
C to D
= 3 robots
A
10
0
B
9
1
C
7
2
D
4
3
E
0
4
opportunity costs are increasing

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
cost (in robots) increases
as pizza production increases
PPF is concave (bowed out)
why?
-- harder to switch resources
between robots and pizza
opportunity costs are increasing
•
At first when making more pizza

•
switch the best resources from robot production
But as we make more pizza

resources switched are less and less suitable for
robot production
Shifts in the PPF



if we get more resources
if technology improves
then the PPF will shift out

produce more CDs and more water

economic growth!
Shifts in the PPF
robots
With economic growth,
the unattainable becomes
attainable
pizza