Chapter 1: Introduction

MICROECONOMICS
: THEORY AND
PRACTICE
Kriziel Grace V. Coronas

CHAPTER 1:
 Economics
 Scarcity
 Production
 Full Employment and Full Production
 Opportunity Costs
 Production Possibilities Curve
 Microeconomics
 Macroeconomics

LEARNING OBJECTIVES:
At the end of the discussion, you will learn
about the:
 Definition of economics
 Difference between microeconomics and
macroeconomics
 Scope of Microeconomics
 Importance of Microeconomics
 Limitations of Microeconomics

WHAT IS ECONOMICS?
 Is a social science which deals with how a society
utilizes the scarce resources to satisfy unlimited
wants and needs.
 (In UK English; US English) Economics is the social
science that studies the production, distribution,
and consumption of goods and services.

WHAT IS ECONOMICS?
In words of Paul A. Samuelson:
 "Economics is the study of
how societies use scarce resources to
produce valuable commodities and
distribute them among different people"In words of Alfred Marshall:
"Economics is the study of
people in the ordinary
business of life"In words of Lionel Robbins:
"Economics is the science which
studies human behaviour as a
relationship between given ends and
scarce means which have
alternative uses"

SCARCITY
 The imbalance between human needs and wants
and the means of satisfying them.
 Ex: Time, Money, Resources

UTILITY
 The total satisfaction received from consuming a
good or service
 Resource Utilization is a system of Economics
where the basic inputs to production are equitably
utilized. The objective is to take full advantage of
the scarce resources or supply from which benefit
is produced.

CONCERNS OF ECONOMICS
 Production – the creation or addition of utility

FOUR (4) FACTORS OF PRODUCTION:
Inputs used in the supply of goods and services,
namely;
 Land
 Labor
 Capital
 Entrepreneurship

LAND
 includes any natural resource used to produce
goods and services
 Ex: natural resources such as minerals, oil, coal,
soil, water and the ground in which resources are
found

LABOR
is the effort that people contribute to the production of
goods and services in which they are paid for their
work rendered via wages / salary.
 Wage – is the compensation based on the number
of hours worked multiplied by an hourly rate of pay.
 Salary – is the compensation quoted on a monthly
or annual basis.

CAPITAL
The definition of capital is different in economics.
 It means the human-made goods use to produce
other goods and services. Capital differs based on
the worker and the type of work being done. (and
NOT money like in accounting )
 Ex: machinery, tools, factories, equipments,
software and buildings

ENTREPRENEURSHIP
 is the effort a person puts to combine the other
factors of production - land, labor, and capital - to
produce goods and services. They occupy a central
position in the economy because they are the ones
who stimulates all economic activity to earn a profit.

DISTRIBUTION
The allocation of the total product (money incomes)
among factors of production. In general theory,
each unit of output corresponds to a unit of income.
 Land – Rent
 Labor - Wages/Salary
 Capital - Interest
 Entrepreneurship - Profit

THEORY OF DISTRIBUTION? OR THEORY OF
VALUE
 We determine the prices not of the factors of
production but of their services.
 Ex:
- It is not the size of land which is traded but the
value of use or service of land.
- wage/salaries is the value of the service or labor
- Interest is the value of the use of capital
- Profit is the return of entrepreneur’s services

CONSUMPTION
 Is the utilization of a good or a service for one’s
very own satisfaction. Without it, there would be no
need for production and distribution since the goal
of economics is to suffice the consumer wants and
needs.

OPPORTUNITY COST
 Is the forgone value of the next best alternative –
the value of things we give up. Economist assume
that we pick the choice we find more value.
 Law of Increasing Cost – as the output of one
good expands, the opportunity cost of producing
additional units of this good increases. You give up
fewer units of one good to get 1 unit more of
another good.

PRODUCTION POSSIBILITIES CURVE
 is a curve depicting all maximum
output possibilities for the economy. The PPF
assumes that all inputs are used efficiently, which
means there is full employment of resources and
full production.

 Any point outside the curve is Unattainable.
 Any point on the curve means mean there is Full
Employment of Resources and Full Production.
 Any point below the curve means Unemployed
Resources and Inefficient Production.

FULL EMPLOYMENT AND FULL PRODUCTION
 Full Employment is when a society’s available
human resources are being maximized efficiently.
Generally, a 4-6% unemployment rate is considered
full employment.
 Full Production is when resources are being
allocated in the most efficient manner. Generally, an
85-90% capacity utilization rate is considered full
production of a nation’s capital.

PRODUCTIVE EFFICIENCY
 Is an economic level at which the economy can no
longer produce additional amounts of a good
without lowering the production level of another
product.
 Note: As long as we operate along the curve,
productive efficiency is met.

ECONOMIC GROWTH
 Is an increase in the capacity of an economy to
produce goods and services, compared from one
period of time to another. Can be measured in
nominal terms which include inflation or in real
terms which are adjusted for inflation.

GDP GROWTH RATE | G20
This page displays a table with actual values,
consensus figures, forecasts, statistics and
historical data charts for - GDP Growth Rate.
This page provides values for GDP Growth
Rate reported in several countries part of Asia.
The table has current values for GDP Growth
Rate, previous releases, historical highs and
record lows, release frequency, reported unit
and currency plus links to historical data
charts.

TYPES OF ECONOMICS
 Microeconomics
 Macroeconomics

MICROECONOMICS
 Microeconomics focuses on micro or small
segment of economy and it studies the decision
making process and economic problems of
individuals ( household, firm, industry etc) in an
economy with respect to that how they use scarce
means or resources at their disposal for satisfying
their unlimited ends.

MACROECONOMICS
 studies the aggregate or overall
economic behavior of households, firms,
industries etc in any economy. It focuses on
broader economic issues like business
cycles, inlation, deflation, stagflation, issues related
to economic growth and development,
national income, employment, money and monetary
policy, fiscal policy etc.

UNDERSTANDING THE DIFFERENCE:
Microeconomics Macroeconomics
studies the economic behavior of
an individual firm, industry,
household, consumers etc in an
economy
studies the economic behavior of
firms, industries, household
consumers etc at an aggregate
level. In other words, we can say
that Macroeconomics is the study
of economy or economic systems
as a whole
studies issues like demand,
supply, production, production
efficiency, cost, cost minimization,
market structures, pricing,
distribution, profit
maximization etc at the individual
firm, industry, household or at
consumer level
studies the economic issues and
problems affecting economy at a
broader level. These issues can
be problem of inflation, deflation,
stagflation, business cycles,
problem of economic growth,
national income, employment etc.

BREAKING DOWN ‘MICROECONOMICS’:
 Microeconomics is the study of economic
tendencies, or what is likely to happen when
individuals make certain choices or when the
factors of production change.
 As a purely normative science, microeconomics
does not try to explain what should happen in a
market.

Chapter 1: Introduction

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Chapter 1: Introduction