ECO101
Intro duction to
Micr oec ono mic s
Yamim Ras had Nawaz
BRAC Univers ity
Summer 2025
Credit: Cengage 2014
Week 1 learning objectives
• Why Ec on om ics ?
• Wha t is the differenc e between m icroec on omics a nd mac roecon om ics?
Betw een pos itive and n orma tive s tatements?
• Wha t are m od els? H ow do ec on omists u se th em?
• Wha t are th e elemen ts of th e Circula r -Flow Dia gra m? Wha t conc epts
does the diagram illus trate?
• How is the Produ ction Pos sibilities Fron tier rela ted
to op portu nity cost? Wh at oth er con cepts does it illustrate?
What Economics Is All About
What Economics Is All About
S c ar c ity: th e lim ite d na tu re of soc iet y’s re s o ur c es
Ec on omic s: th e stu dy of how soc iet y ma na ge s i ts s c ar c e res o u rc e s a n d th e
de c is io n s t h ey ta ke, e. g .
• ho w peo ple dec ide w ha t t o bu y
• ho w much to wo r k, sa ve , a nd sp end
• ho w f irms de cide h ow muc h to pro du ce
• ho w ma ny wo r ke rs t o h ire
• ho w so ciet y dec ides ho w to divid e its r eso ur ces be tw ee n na t ion al de f ens e ,
co nsu mer go od s, p ro te ctin g th e env iro nme nt , an d ot he r ne eds
Micr oeco no mics is the stu dy of h ow
ho us eh ol ds and f ir ms make decisi on s and
ho w they interact in markets.
Microeconomics
Macr oeco no mics is the stu dy of economy -
and w ide pheno men a, i nclu ding i nf lati on ,
un empl oymen t, an d ec on omic gr ow th.
Macroeconomics
These tw o bran ches o f eco no mics ar e
cl osel y i ntert win ed, yet di stin ct—th ey
addr es s dif fer ent quest io ns.
The Economist as a Scientist and as a Policy Advisor
As sci entis ts, eco no mists make positi ve stat ements , w hi ch attempt
to descri be t he wo rl d as it i s. (FACTS)
As po lic y advis or s, eco no mi sts make normati ve stat ements , w hi ch
attempt to prescr ibe ho w th e wo rld s ho uld be. (OPINIONS)
Po siti ve statements c an be co nf irmed o r refu ted, no rmati ve
sta tements cann ot.
A few principles of economics decision making
All deci sio ns i nvo lve tradeof fs. Ex amples:
• G oi ng to a p arty the ni ght befo re y o ur
PRINCIPLE #1: m id term lea v es les s tim e fo r st udy i ng.
• Ha v in g m o re m o ney to b uy s tu ff requi res
People Face w o rki ng lo n ger h ou rs , w h ic h lea ve s l es s
ti m e fo r le is ure.
Tradeoffs • P rote cti ng the env i ro nm en t requ ires
res o ur c es th at c o ul d o th er w i se be u se d to
pro du ce co n su m er go o ds .
Makin g decisi on s requi res compa rin g the
costs a nd benef its of al ternat ive ch oi ces.
PRINCIPLE #2: The o ppor tu nity co st of any item is
The Cost of Something Is w hatever mu st be given up to obt ain i t.
What You Give Up to Get It It i s the rel evant cost for deci sion
makin g.
Incen tive: somet hin g that i nduc es a
perso n to act , i. e. th e pr os pec t of a
PRINCIPLE #3: rewa rd o r pun ishment.
Ratio na l peopl e respo nd to inc en tives.
People Respond
Examples:
to Incentives Wh en g a s p r ic es r i se , c o ns ume r s b uy m or e hyb ri d
c ar s an d few e r g as g uz z li ng S UV s .
Wh en c i g ar ett e ta xe s inc r ea se ,
te en s m ok i ng fa ll s.
Rather than bei ng self -su ff ici en t,
peo ple can s pec iali ze in pro duci ng o ne
go od o r s er vice an d exc hange i t fo r o ther
PRINCIPLE #4: go ods .
Trade Can Make C ou ntri es also benef it f ro m tra de a nd
speci alizati on :
Everyone Better Off
G et a b et ter p r i ce ab r o ad for g oo d s the y p r od u ce
Bu y o ther g o o d s mo r e c he ap l y fr o m a b r oa d tha n
c o uld b e p r o d uc ed a t ho m e
Market: a gro up o f bu yers an d seller s
(need no t be in a sin gle lo cati on )
PRINCIPLE #5: “Orga nize ec on omic a ctivity” means
determini ng:
Markets Are Usually A Good • w hat g o od s t o p ro d uc e
Way to Organi ze Economic • ho w to p r o d uc e t hem
• ho w m uc h o f e ac h to p r o d uc e
Acti vity • w ho g et s them
A market economy al locates resour ces
th ro ugh th e dec en trali zed decis io ns o f many
ho us eh ol ds and f ir ms as they in tera ct in
markets.
PRINCIPLE #5:
Famo us in sigh t by Adam Smith i n
Markets Are Usually A Good
The Weal th o f Nat ion s (1776 ):
Way to Organi ze Economic
Ea ch o f the se ho us eho ld s a nd f ir ms a c ts as i f “ le d b y
Acti vity a n i nv is i ble ha nd ” to p r o mo te g ene ral e co no mi c
w el l- b ei ng .
PRINCIPLE #6:
Governments Impor tan t ro le fo r go vt: enforce pr oper ty
ri ghts (wi th poli ce, cour ts)
Can Sometimes Peopl e are less i ncl ined to wo rk, pro duce,
invest, o r pu rch ase if l arge ri sk o f thei r
Improve pro per ty bein g sto len.
Market
Outcomes
Assumptions & Models
• A ssu mpt ion s si mpl ify t he c om ple x w orl d, ma ke it e asi er to u nd erst a nd .
• Ex a mpl e: To stu dy in te rn at ion al t ra de, a ssum e tw o c oun t ries a nd t w o g oods.
U nr e a li sti c, bu t si mp le to l ea r n a nd g ive s u se fu l in si g hts a bou t th e r e a l w or l d.
• Mod el: a hi gh ly simp lif ied r epr esen t at ion of a m ore c omp lic a te d rea lit y.
Ec on omist s use m odel s t o st ud y ec on omic issu es.
Our First Model: The Circular-Flow Diagram
▪ The Circular-Flow Diagram: a visual model of the economy, shows how dollars flow through
markets among households and firms
▪ Two types of “actors”:
▪ Households
▪ Firms
▪ Two markets:
▪ The market for goods and services
▪ The market for “factors of production”
Factors of Production
The resources the economy uses to produce goods &
services, including
▪ labor
▪ land
▪ capital (buildings & machines used in production)
FIGURE 1: The Circular-Flow Diagram
Households:
▪ Own the factors of production,
sell/rent them to firms for income
▪ Buy and consume goods & services
Firms Households
Firms:
▪ Buy/hire factors of production,
use them to produce goods
and services
▪ Sell goods & services
FIGURE 1: The Circular-Flow Diagram
Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought
Firms Households
Factors of Labor, land,
production Markets for capital
Factors of
Wages, rent, Production Income
profit
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
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product or service or otherwise on a password-protected website for classroom use.
Our Second Model: The Production Possibilities Frontier
The Pr odu ction Possi bili ties Fronti er (PP F) :
a graph that s ho ws th e combin atio ns of two go ods t he econ omy can
po ssibl y pr odu ce given the avai labl e r esou rces an d the avai labl e
techn ol ogy
Example:
Two g o o d s: c o mp ut er s and wh eat
On e r es o ur c e: la b or ( me as ur ed i n ho ur s )
Ec o no my ha s 50, 000 l ab o r ho ur s p er m ont h avai la b le fo r p r od uc ti o n.
PPF Example
Pro du cing o ne computer requires 100 hou rs labo r.
Pro du cing o ne ton of w heat requ ires 10 hou rs labo r.
Employment of
Production
labor hours
Computers Wheat Computers Wheat
A 50,000 0 500 0
B 40,000 10,000 400 1,000
C 25,000 25,000 250 2,500
D 10,000 40,000 100 4,000
E 0 50,000 0 5,000
PPF Example
Wheat
Point Production
(tons)
on Com- 6,000
graph puters Wheat E
5,000
A 500 0 D
4,000 G
B 400 1,000
3,000 C
C 250 2,500
2,000 F
D 100 4,000 B
1,000
E 0 5,000 A
0
0 100 200 300 400 500 600
Computers
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Po ints on the PP F (like A – E)
The PPF: p o ss i b le
ef fi ci ent : a ll r es o ur ce s ar e full y ut il iz ed
What We Po ints under t he PP F (l ike F)
p o ss i b le
Know So no t e ffi c ie nt: so m e r es o ur c es und e ru til iz ed
(e .g ., w o rk er s un emp l oye d , f ac to ri es i d le )
Far Po ints above the PP F (like G)
no t p o s si b le
Rec a ll: Th e o pp o rt un it y c o s t o f an item
is w ha t m us t be give n u p to o bt ain th a t ite m.
Movin g a lo n g a P PF in vo lves s h if t ing r es o u rc es
( e. g ., la bo r ) f ro m th e pro d uc t io n o f o n e go o d to
t he ot he r.
The PPF and
Opportunity Cost S oc iety f a c es a t rad eo f f : G ett in g mo r e o f o n e
good r equ ir es s ac r if ic in g s o me o f th e o th er.
Th e slope o f th e P PF t ells yo u t h e o ppo r tu n ity
c ost of o ne g o o d in t erm s o f th e o t he r.
The PPF and Opportunity Cost
Wheat The slope of a line
(tons) equals the
–1000
6,000 slope = = –10 “rise over the run,”
100
5,000 the amount the line
4,000
rises when you
move to the right by
3,000
one unit.
2,000
Here, the
1,000 opportunity cost of
0 a computer is
0 100 200 300 400 500 600 10 tons of wheat.
Computers
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
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product or service or otherwise on a password-protected website for classroom use.
Economic Growth and the PPF
With additional Wheat
(tons) Economic
resources or an growth shifts
6,000
improvement in the PPF
technology, 5,000 outward.
the economy can 4,000
produce more
3,000
computers,
2,000
more wheat,
1,000
or any combination
in between. 0
0 100 200 300 400 500 600
Computers
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product or service or otherwise on a password-protected website for classroom use.
The Shape of the PPF
▪ The PPF could be a straight line or bow-shaped
▪ Depends on what happens to opportunity cost
as economy shifts resources from one industry
to the other.
▪ If opp. cost remains constant,
PPF is a straight line.
(In the previous example, opp. cost of a
computer was always 10 tons of wheat.)
▪ If opp. cost of a good rises as the economy
produces more of the good, PPF is bow-shaped.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
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product or service or otherwise on a password-protected website for classroom use.
Why the PPF Might Be Bow-Shaped
Take the economy of
Lassi
Bangshal. As the economy
shifts resources from lassi to
mountain bikes:
▪ PPF becomes steeper
▪ opp. cost of mountain
bikes increases
Mountain
Bikes
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product or service or otherwise on a password-protected website for classroom use.
Why the PPF Might Be Bow-Shaped
At A, opp. cost of
At point A,
Lassi
A mtn bikes is low.
most workers are
producing lassi,
even those who
are better suited
to building bikes.
So, do not have to
give up much lassi
to get more bikes.
Mountain
Bikes
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product or service or otherwise on a password-protected website for classroom use.
Why the PPF Might Be Bow-Shaped
At B, most workers
Lassi
At B, opp. cost
are producing bikes. of mtn bikes
The few left in lassi is high.
are the best
producers.
B
Producing more
bikes would require
shifting some of the
best producers away
from lassi production,
causing a big drop in Mountain
lassi output. Bikes
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product or service or otherwise on a password-protected website for classroom use.
Why the PPF Might Be Bow-Shaped
▪ So, PPF is bow-shaped when different workers have different
skills, different opportunity costs of producing one good in terms
of the other.
▪ The PPF would also be bow-shaped when there is some other
resource, or mix of resources with varying opportunity costs
(E.g., different types of land suited for
different uses).
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
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product or service or otherwise on a password-protected website for classroom use.