Basic-Microeconomics.pdf

Basic Microeconomics Chapter 1 : Some Basic Definitions Three Basic Economic Decisions The concepts of opportunity cost and scarcity are vital to understanding how the economy works. Because of the inevitable imbalance between limited productive resources and unlimited wants, three key questi...

Basic Microeconomics Chapter 1 : Some Basic Definitions Three Basic Economic Decisions The concepts of opportunity cost and scarcity are vital to understanding how the economy works. Because of the inevitable imbalance between limited productive resources and unlimited wants, three key questions must be considered by any economy. What Will Be Produced? 1 Productive Potential The productive potential of the economy must not be wasted by trying to do everything for everybody. Decisions must be made about what to produce and how much of each item to be produced with the limited resources available. 2 Prioritizing Needs Choices must be made about which goods and services are most important to produce, based on the needs and demands of the population. 3 Efficient Allocation Resources must be allocated efficiently to ensure the most valuable goods and services are produced to meet the economy's needs. How Will Goods and Services Be Produced? Production Methods Efficiency and Competition Price System and Incentives Alternative Method The efficient production of goods and services requires that no A functioning price system induces There is more than one way to resources be used in producing all participants in the economy to accomplish any given objective. one thing when they could produce steer their resources towards Machines or other products can be something more valuable activities that yield the highest substituted for labor or land when elsewhere, and that each product rewards, creating incentives for producing any mix of goods. This be made with the smallest-possible efficiency and innovation. involves a certain kind of amount of resources. technology. To Whom Will Goods and Services Be Distributed? Equality vs. Incentives The distribution of material goods is never perfectly equal. No society has yet discovered how to provide equally for everyone's needs and wants while still offering the incentives that encourage high-quality production and technological innovations. Role of Prices Prices play a crucial role in the distribution of goods and services, as they signal to consumers and producers where resources are most valued and should be directed. Balancing Priorities Economies must balance the desire for equality with the need to maintain incentives for productivity and innovation, which often leads to unequal distributions of wealth and resources. Microeconomics vs. Macroeconomics 1 Microeconomics Microeconomics deals with a close-up view of the economy by concentrating on the choices made by individual participants, such as consumers, workers, business managers, and inventors. One of its main goals is to understand how the prices of particular goods and services are determined and how prices influence decisions. It is also known as price theory. 2 Macroeconomics Macroeconomics looks at the economy from a broader perspective, considering its overall performance and the way various sectors of the economy relate to one another. The performance of the economy is measured by the total value of annual production, the capacity of the economy to provide jobs, changes in the purchasing power of the peso, and the growth of employment and output thus solving unemployment and inflation. 3 Complementary Approaches Both microeconomics and macroeconomics are essential in the study of scarcity, as they provide different but complementary perspectives on the functioning of the economy. Economic Analysis Positive Analysis Normative Analysis Weighing Gains and Losses Forecasts the impact of changes in Evaluates the desirability of Economic policies and changes economic policies or conditions on alternative outcomes according to often result in gains to some groups observable items such as underlying value judgments, and losses to others, requiring a production, sales, prices, and presenting a point of view about careful evaluation of the overall personal income, and determines what a policy should accomplish. impact. who gains and who loses as a result. The Importance of Scarcity 1 2 3 Limited Resources Unlimited Wants Opportunity Cost The economy must contend with Human wants and desires are The concept of opportunity cost, the reality of limited productive essentially unlimited, creating an where the choice of one resources, such as land, labor, and imbalance that must be addressed alternative means forgoing the capital. through economic decision- benefits of another, is central to making. understanding economic decision- making. Microeconomics in connection with Scarcity and Price The fundamental principle of microeconomics is the concept of scarcity - the reality that resources are limited while human wants are essentially unlimited. This imbalance between scarce resources and unlimited desires is what drives economic decision-making and the role of price in a market economy. Prices serve as signals, communicating information about the relative scarcity of different goods and services. When a product becomes more scarce, its price will rise, indicating to consumers that the item is in high demand and supplies are limited. This, in turn, encourages producers to shift resources towards producing more of that scarce item, restoring the balance between supply and demand. Conversely, when a product becomes more abundant, its price will fall, signaling to consumers that it is less scarce and they can afford to consume more of it. This guides the efficient allocation of resources, steering them towards the highest-valued uses as determined by the interaction of supply and demand in the marketplace. Importance of Microeconomics 1 Explains pricing 2 Evaluates impact of 3 Provides valuable mechanisms and government policies insights into individual resource allocation and regulations economic agents Helps businesses make Allows policymakers to design Helps us understand the informed pricing decisions and more effective interventions behavior of consumers, consumers navigate the and address market failures producers, and markets market