ECO 162 MICROECONOMICS

CHAPTER 1 :
INTRODUCTION TO
MICROECONOMICS

DEFINITION OF
ECONOMICS
O L.Robbins a science that studies human

behavior as a relationship between ends

and scarce means which have alterntive
uses
O K.E Case & R.C Fair a study of how people
use their limited resources in trying to fulfill
unlimited wants
O David N. Hyman a study of how scarce
resources are allocated among alternative
uses

The foundation of economics.

Society has virtually UNLIMITED WANTS

But resources are limited or scarce

Resources:
Land all natural resources such as land, air, water, forest, etc
Labor services contributed by people in the production process

that involve bith mental & physical effort. Eg: lecturers,

construction workers, etc
Capital human made resources used in the production such as
machinery, raw material, buildings, tools
Entrepreneur human ability & capability to combine land, labor &
capital to develop production of G+S

The economic problems

O Scarcity wants always exceeds limited resources to satisfy

clients/ society
O Choices everyone cannot have what ever he/ she wants.
When there is scarcity, choices have to be made.
O Opportunity Cost second best alternative that has to be
forgone for another choice which gives more satisfaction.

Basic economic problems

O What to produce type and quantity of

goods and services that will be produced

O Should computers produced more than

radios?
O Should more clinics be built than schools?
O How many cars should be produced?
O Capitalist sys price mechanism
O Socialist sys central planning authority

(government)

Basic economic problems

How to produce?
Used the most Cheapest method of

production
Eg: factories (human power or robotics?)
For Whom to produce?
Distribution (who will benefits from your

production?)
How national income (NI) distributed?
Who will drive the latest model of an
imported cars?

Production possibilities
curve (PPC)
O Definition various possible combinations

of goods and services produced within a

specified time with all resources fully and
efficiently employed.
O It is used to explain the basic economic
concepts of scarcity, choices and
opportunity cost.

sKETcHING ppc.
PIZZA (hundred thousands)
ROBOTS (thousands)

0
10

1
9

2
7

3
4

Production Possibilities

robots (thousands)

12
10

B
C

8
6

4
2

0
0

pizza (hundred thousands)

4
0

ANALYZING PPC.
Q
10
9
8
7
6
5
4
3
2
1

Robots (thousands)

Robots (thousands)

Unattainable
B
C

W
D

Attainable and
efficient

attainable
but
inefficient

3
4
5
6
Pizzas (hundred thousands)

Q
7

Production Possibilities
O the production possibilities curve (frontier)

marks the boundary between attainable &

unattainable production levels
O points on the curve are attainable & efficient
(point A, B, C, D and E)
O points above the curve are unattainable (W)
O points below the curve are attainable &
inefficient (X)

Production Possibilities
O Any point inside the PPC (X)
O Attainable

O But waste of resources and inefficiency -

production not reach its maximum level

O underproduction of products
O Leads to UNEMPLOYMENT

Production Possibilities
O Any point outside the PPC (W)
O Demonstrates the main basic economic

concept: SCARCITY
O Unattainable (due to limited resources &
technology)
O Due to such hindrances, production cant be
achieved

Production Possibilities
O Any point along the PPC (A B C D E)
O Shows 2nd concept : CHOICES

O Choose any combinations that will maximize

satisfaction
O Any point along the PPC are attainable and
efficient

Production Possibilities
O Movement from one point to another (C to

D)
O Third concept: OPPORTUNITY COST
O Needs more pizza, firms has to forgo robots

O The opportunity cost of producing an

additional 100, 000 units of pizza is 3, 000

units of robots.

Factors that influence the shift of ppc

1. Economic growth
If country enjoys econ growth, the PPC bounds outward
Production capability increases as there is an

expansion of resources (L, C, Lb, Ep)

Increase in output is due to the availability of new
resources, machinery and an increase in productivity)
If country struck by a natural disaster natural
resources are either exhausted or declined
Decreased in output
PPC will shifts to the left

Factors that influence the shift of ppc

2. Improvements in technology
O New innovations

O Applications of new and efficinet technique of

production
O Development of better way of producing
goods and services

Factors that influence the shift of ppc

3. Population
O Increase in popultion will leads to an increase

in PPC (PPC shifts outward)

O BUT if population migrate to other countries
PPC shifts inward

Types of PPC
1. The concave PPC
2. The convex PPC

3. The linear PPC