Basic Microeconomics PDF

BASIC MICROECONOMICS BY KIMBEARLY R. CHENG, MBA “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” - Lionel Robbins British Economist  Alternatively: Economics is the st...

BASIC MICROECONOMICS BY KIMBEARLY R. CHENG, MBA “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” - Lionel Robbins British Economist  Alternatively: Economics is the study of why Kim doesn’t have her own house.  ECONOMICS Study of choice in a world of scarcity Study of how scarce resources are managed by individuals and society Study on how to best allocate finite resources ESSENTIALLY, IT’S A SUBJECT TEACHING US HOW TO MAKE DO WITH WHAT WE HAVE! WE CAN’T HAVE EVERYTHING WE WANT! SCARCITY All goals – Having finite resources Not all resources are renewable of society Value is important. Thus, if one has need but have none of equal value due to limit of resources, cannot be trade will not commence pursued at – Poor resource allocation Results in less production of goods and services the same – To have scarcity, things must be LIMITED and WANTED! There are some goods that are plentiful but they’re not wanted, time! so they’re not scarce!  Alternatively: Economics is the study of why Kim doesn’t have her own house duplex. her own house duplex townhouse her own house duplex townhouse mansion her own house duplex townhouse mansion Victorian mansion with a handsome butler named Sebastian. THE WANTS NEVER END!!!  THE ECONOMIC PROBLEM: Wants are infinite but resources are finite. FUNDAMENTAL FACT #1 FUNDAMENTAL FACT #2  ECONOMIZING: INDIVIDUAL Reduce your wants* Sacrifices – Trade-offs Allocate your available resources – Prioritizing  ECONOMIZING: SOCIETY Economic growth – Increase ability to produce! More resource, better resource, better technology Improve allocation of resources – Use available resources wisely! Reduce expectations – Reduce wants! Worst option. Only when in dire need.  IMPROVING USE OF AVAILABLE RESOURCES Production Efficiency – Producing at a minimum cost Using only necessary resources Using resources where they are best suited Using appropriate technology Allocation Efficiency – Produce the right mix of goods; more of what people want; less of what people don’t want Full Employment – Use of ALL available resources, not just labor. (+ Full Production) Equity – “Fair” distribution of income.  Regarding Full Employment... Full employment – Does not mean no unemployment or underemployment – People who are willing and able to work can get a job – Highest amount of skilled and unskilled labor at a given time – All available labor is being used efficiently Unemployment rate is from 4% - 5%.  Regarding Full Production... Doesn’t mean that all plants and equipment are working 100% at any given time. Ideally 90% - 100% At 100% is a bit impossible since PPE may break down at some point As long as all available resources are fully used, constraints withstanding, there is maximum production capacity (Production Possibilities Frontier/PPF) Constraints: Institutional, legal, custom, repairs and damage to PPE  KEY QUESTIONS TO SOLVE THE PROBLEM What to produce? – To satisfy wants How to produce? – To maximize production to meet as many wants as possible Whom to produce?/Who to produce for? – Whose wants is the most deserving to allocate towards ADDITIONAL: How to accommodate change? How to promote progress? Who owns and controls the factors of production?  ECONOMIC RESOURCE: LAND - Any natural resource used to create a product - Ground where resources originate Retrieved from: https://www.smm.co.jp/en/corp_info/location/domestic/ ECONOMIC RESOURCE: LABOR - Exertion of a person’s mind and body to produce a good or service - Work and time wherein a person is duly compensated - Human resource  ECONOMIC RESOURCE: CAPITAL Manufactured aids to production Tools or machinery that that produce goods and services  ECONOMIC RESOURCE: ENTERPRISE - A profitable combination of all economic resources - Promotes innovation necessary for production - A project, a willingness to take on a new project, an undertaking or business venture (Sole Proprietorship, Partnership, Private Limited Companies/Ltd., Public Limited Companies/PLC)  Making Economic Decisions IS IT WORTH Two things to remember: IT? – A human being has no satisfaction – A human being always chooses what would be most personally beneficial A person will always make sure that the benefit will be greater than the cost! You’re considering: Example: - Your budget If a shop 10 km away is offering a discount on - Transportation cost the new iPad, you may decide not to buy one at - Time a local shop after you have worked out that the - Effort cost of traveling 20 km is less than the discount.  THE TRADE-OFF If I choose the house, I will not be getting a car! Sacrificing an option to choose another Describes what we have to give up in order to get another You’ve got 700k saved up and you’re debating whether or not to buy a car or a house. Which one would you choose? a. House (you want your own place) b. Car (comfort when commuting)  THE OPPORTUNITY COST If I choose the house, Implicit cost of the alternative good foregone. I will not get the opportunity to have comfort Value of missed opportunity. When commuting! Cost incurred as a result of selecting an option. You’ve got 700k saved up and you’re debating whether or not to buy a car or a house. Which one would you choose? a. House (you want your own place) b. Car (comfort when commuting) TRADE-OFF: - If I choose 7 units of A, I cannot have any of B! - If I choose 3 units of B, I can only have 4 units of A! The heavy black line OPPORTUNITY COST: represents the results - If I choose 7 units of A (pt I), of the scarcity of I’m sacrificing 7 units of B! resources. - If I choose a combination of 3 units of B and 4 units of A (pt F), In it are trade-off I’m sacrificing 3 units of A or 4 points that are units of B! present in scarcity. LEGEND: A = Quantities of product A B = Quantities of product B LAW OF INCREASING OPPORTUNITY COST Opportunity cost increases as one additional unit of the good is produced. Let’s say you want to eat with your colleagues at the Burj Al Arab in Dubai but you also want to buy some computers for your new business... Note the change from Point Q to Point R, as well as Point T to Point V - You’ll notice that as you increase the number of computers you buy by A unit of or two, you have increased your opportunity cost! REMEMBER: The movement of opportunity cost is along the line/curve! ENDE  This work is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License. It makes use of the works of Mateus Machado Luna.