PRINCIPLES OF MICROECONOMICS Wajid Ali Qureshi
1
CHAPTER 1
Limits, Alternatives, and Choices
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Chapter Contents
The Economic Perspective
Theories, Principles, and Models
Microeconomics and Macroeconomics
Individual’s Economizing Problem
Society’s Economizing Problem
Production Possibilities Model
Unemployment, Growth, and the Future
1-3
ECONOMICS
Economics is a social science concerned with
making optimal choices under conditions of
scarcity.
Economic wants exceed society’s productive
capacity.
1-4
THE ECONOMIC PERSPECTIVE
A viewpoint that envisions individuals and institutions
making rational decisions by comparing the
marginal benefits and marginal costs.
It considers:
• Scarcity and choice
• Opportunity cost
• Purposeful behavior to increase utility
• Marginal analysis
1-5
SCARCITY AND CHOICE
Resources are scarce.
Choices must be made.
Opportunity cost.
There is no free lunch.
1-6
PURPOSEFUL BEHAVIOR
Rational self-interest.
Individuals and utility.
Firms and profit.
Desired outcome.
1-7
MARGINAL ANALYSIS
The comparison of marginal benefits and
marginal costs, usually for decision making.
Marginal means “extra” or “additional.”
1-8
THEORIES, PRINCIPLES, AND MODELS
The scientific method is the procedure for the systematic
pursuit of knowledge involving the observation of facts and the
formulation of testing hypotheses to obtain theories, principles,
and laws.
It consists of several elements:
• Observe.
• Formulate a hypothesis.
• Test the hypothesis.
• Accept, reject, or modify the hypothesis.
• Continue to test the hypothesis, if necessary. 1-9
ECONOMIC PRINCIPLES
Generalizations
Other-things-equal assumption: The assumption
that factors other than those being considered did
not change. (Also called the “ceteris paribus
assumption.”)
Graphical expression
1-10
MICROECONOMICS AND MACROECONOMICS
Microeconomics: The study of the individual
consumer, firm, or market.
Macroeconomics: The study of the entire
economy or a major aggregate of the economy.
1-11
POSITIVE AND NORMATIVE ECONOMICS
Positive economics: Economic statements that are
factual.
Normative economics: Economic statements that
involve value judgments.
1-12
THE ECONOMIZING PROBLEM
The economizing problem: Limited income and
unlimited wants.
The budget line
• Attainable and unattainable combinations
• Trade-offs and opportunity costs
1-13
A CONSUMER’S BUDGET LINE
The Budget Line: Combinations of Movies
12
and Books Attainable with $120
10
Units of Units of Income = $120
=6
Movies Books Pm = $20
(Price = $20) (Price=$10) Total Expenditure 8
Quantity of movies
Unattainable
6 0 $120 (=$120+$0)
6
5 2 $120
(=$100+$20) Income = $120
4 = 12
4 4 $120 (=$80+$40) Pb = $10
Attainable
3 6 $120 (=$60+$60) 2
2 8 $120 (=$40+$80)
0
1 10 $120 2 4 6 8 10 12
(=$20+$100) 14
Quantity of paperback books
0 12 $120 (=$0+$120)
1-14
GLOBAL PERSPECTIVE 1.1
1-15
Source: [Link]
SOCIETY’S ECONOMIZING PROBLEM
Four categories of economic resources:
1. Land: Includes all natural resources used in the
production process.
2. Labor: Physical actions and mental activities that people
contribute to production.
3. Capital (investment): All manufactured aids used in
production.
4. Entrepreneurial ability: Special human resource distinct
from labor.
LO1.5 1-16
FUNCTIONS OF ENTREPRENEURS
Employ the other factors of production.
Take initiative.
Make strategic business decisions.
Innovate.
Take risk.
LO1.5 1-17
PRODUCTION POSSIBILITIES MODEL: OVERVIEW
An economic model that shows different combinations
of two goods that an economy can produce.
Assumptions:
• Full employment
• Fixed resources
• Fixed technology
• Two goods
1. Consumer goods
2. Capital goods
LO1.6 1-18
THE PRODUCTION POSSIBILITIES CURVE
Production Possibilities of Pizzas and Q
11
Industrial Robots A
10
9 B
Production Alternatives Unattainable
Industrial robots (thousands)
Types of Product 8
A B C D E 7 C W
6
Pizzas 5
0 1 2 3 4
(in hundred thousands) 4 D
3
Attainable
2
Industrial Robots 10 9 7 4 0
(in thousands) 1
E
0 1 2 3 4 5 6 7 8 9
Q
Pizzas (hundred thousands)
LO1.6 1-19
INCREASING OPPORTUNITY COSTS
Law of increasing opportunity costs: As
more of a particular good is produced, its
marginal opportunity costs increase
Production possibilities curve
• Concave shape
• Economic rationale
LO1.6 1-20
OPTIMAL OUTPUT: MB = MC
MC
Marginal benefit and marginal cost
a c
$15
e
10
b d
5 MB = MC
MB
0
100,000 200,000 300,000
LO1.6 Quantity of pizza 1-21
UNEMPLOYMENT, GROWTH, AND THE FUTURE
Q
Economic growth and the production 14
A′
possibilities curve 13
B′
12
11
Types of Production Alternatives
Robots (thousands)
10
Product 9
C′
A' B' C' D' E'
8
Pizzas 7
(in hundred 0 2 4 6 8 6
D′
thousands) 5
4
Industrial
14 12 9 5 0 3
Robots
2
(in thousands)
1 E′
Q
0 1 2 3 4 5 6 7 8
9 Pizzas (hundred thousands)
LO1.7 1-22
PRESENT CHOICES, FUTURE POSSIBILITIES
Future Future
Goods for the future
Goods for the future
Curve Curve
F
P
Current Current
curve curve
0 0
Goods for the present Goods for the present
Presentville Futureville
LO1.7 1-23
INTERNATIONAL TRADE
Specialization
Increased production possibilities
LO1.7 1-24