Lecture 1 introduction
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The document outlines the fundamentals of microeconomics, contrasting it with macroeconomics and discussing the concepts of scarcity, choice, and opportunity cost. It employs the story of an individual named Rupert to illustrate self-interest and rational decision-making based on limited resources. Additionally, the document introduces basic economic principles, including the production possibility curve and the implications of resource allocation decisions.
Lecture 1 introduction
- 1. Microeconomics Lecture -1 - Nature of Economics
- 2. Learning Objectives • Discuss the difference between microeconomics and macroeconomics • Evaluate the role that self interest plays in economic analysis. • Distinguish between positive and normative economics
- 3. Did you Know • Word Economy comes from the Greek word - oikonomos, which means one who manages the household.
- 4. Story of Rupert • Gets a new job and earns monthly salary of $6000 • Now Rupert is in a problem - He has an individual has lot of needs - e.g to own
- 5. Option 1- Random Decision • Toss a coin and randomly make choices
- 6. Option 2 -Self Interest & Choices The other choice Rupert has to be rational - which means he can make economics decisions based on choices which are in best of his self interest and wants. So , if priority is car to comment to office he should by that and plan his next purchases on the basis of self interest with his limited income.
- 7. Why Rupert has to make Choice Unlimited Needs and Wants Limited Resources Choice which gives maximum Satisfaction
- 8. Basic Terminology • Resources : - Things used to produce goods and services to satisfy people wants • Wants : - What people would buy if their incomes were limited.
- 9. Scarcity • Scarcity arises when the resources are insufficient to satisfy everyone needs & wants - e.g. oil is a scarce resource from which petrol is made to feed the cars , no of free medicines in hospital • Note - Scarcity is something which occurs at zero price .
- 10. Choice • Whenever an individual , a business , a nation faces alternatives , a choice must be made e.g • Individual - how to spend your limited income • Business - company funds to be used for marketing or new product development • Government - to produce goods for domestic consumption or Defence to fight against war Limited Resource - Income Choice - What to buy for household Limited Resource - Funds with Company Choice - Funds to spend on marketing or product development Limited resource - Government Budget / Resources Choice - to produce goods for domestic consumption or for defence
- 11. What is Economics Economics is the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. As such, economics is the study of how people make choices.
- 12. Microeconomics Vs Macroeconomics • The study of decision making undertaken by firms and individuals or by firms is microeconomics . e.g. changes in salaries of employees , effect of change in sales tax on prices of specific commodities, profit results of specific companies. • The study of the behaviour of economy as a whole , include such economy wide phenomenon - changes in unemployment , the rise in general price level is macroeconomics.
- 13. The three Basic Questions • What and how much will be produced:Some mechanism must exist for determining which items will be produced. • How the items will be produced : to use more labor less capital or more capital less labor • For whom items will be produced : once produced who should obtain that item and mechanism of distribution
- 14. Centralised command and Control Price system Mixed Economic System Under this government or dictator decides what items to produce Under price system individual and families use scarce resources used in production Economic system of world nations are mixed economic systems that incorporate aspects of both centralised and price system
- 15. Opportunity Cost • The natural fact of scarcity implies we must make choices which in turn means that some opportunity must be sacrificed. • Every choice at producer level involves giving up an opportunity to produce . • Every choice at consumer level involves giving up an opportunity to consume. The highest valued , next best alternative that must be sacrificed to obtain something or to satisfy a want
- 16. Cost - Benefit Analysis Rupert inherited $100,000 from rich uncle which he used to start up-his own venture. Now , he uses this capital to incur production cost of raw material , payroll and other direct cost- These cost are referred to as explicit costs The opportunity cost of this capital would have been if Rupert have invested the ,money elsewhere with rate of return 10%- The opportunity cost would be $10,000 on this capital - Opportunity Forgone
- 17. 40300 2010 50 60 60 50 30 20 10 40 A B C D E F G Opportunity Cost - Graphically Production Possibility Curve: is a Curve representing all possible combinations of maximum outputs that could be produced assuming a fixed amount of productive resources of a given quantity
- 18. Assumptions Underlying PPC • Resources are fully employed • Production takes place over a specific time period • The resources inputs in both quantity and quality used to produce cell phone and iPod are fixed over this time period . • Technology does not change over this period
- 19. 40300 2010 50 60 60 50 30 20 10 40 A B C D E F G Opportunity Cost - Graphically Using this concept we can understand problem of resource allocation. The digram illustrates the different combinations of cell phone and iPod can be produced with given resources . If all resources are used for production of I pods - 50 million units will be produced and 0 cell phones If all resources used for production of cell phones - 60 million units will be and 0 iPods Points B , C , D , E and F - shows various combinations of cell phones and I pod production - where to produce additional unit of cell phone few units of iPod will be sacrificed
- 20. 40300 2010 50 60 60 50 30 20 10 40 A B C D E F G Inefficiency : Any point below PPC , at which the use of resources is generating the maximum possible output K Underutilisation of resources
- 21. 40300 2010 50 60 60 50 30 20 10 40 Economic Growth & Production Possibility Curve Owing to increase in resources PPC , Shifts to right . It shows the higher level of both the goods
- 22. Quiz - 1 • In a single sentence contrast microeconomics & macroeconomics. • Next Categorise each of the following issues as either a microeconomic issue or not an economic issue. • a. The national inflation rate • b. The decision of a firm to give bonus to workers. • c. The national government budget deficit. • d. A family choice to have a baby
- 23. Quiz -2 • Construct a production possibility curve for a nation facing increasing opportunity costs for producing food and video games. • Show how the PPC changes given the following events. • a) A new & better fertiliser is invented • b) Immigration occurs and immigrants labor can be employed in both the agricultural sector & video sector • c) A heat wave and draught result in 10% decrease in usable farm land
- 24. What you should Know The problem of scarcity even for the affluent Even richest people face scarcity &they end up making choices among various alternatives Why scarcity lead people to evaluate opportunity cost opportunity cost is the highest valued alternative that one must give up to obtain an item. Microeconomics & Macroeconomics microeconomics study of decision making by individual household.Macroeconomic s study of nationwide phenomenon
- 25. Thank youYou can mail your answers at - exploreconomics@gmail.com www.exploreconomics.in