MICROECONOMICS

Lecture 1Charm Sanglay

ECONOMICS

• Comes from the Greek word “Oikonomia” which means

“management of the household”

• The study of how societies choose to use scarce productive resources that have alternative uses, to produce commodities of various kinds, and to distribute them among different groups. (Paul Samuelson and William Nordhaus)

• The study of how individuals and society in general make choices that involve the use of scarce resources from among alternative wants that need to be satisfied.( Gerardo Sicat)

• A social science that studies the optimum allocation, over time, of scarce human and non-human resources among their alternative uses in order to satisfy unlimited human wants and needs. (Bernardo Villegas)

Economics -

• A social science that deals with the allocation of scarce resources to the production of goods and services to satisfy unlimited human wants.

Economic Activity

• Is the interaction among economic units involved in the production, exchange and consumption of goods and services

3 Key Elements of an Economic Activity

• Human wants• Resources• Techniques of production

A. HUMAN WANTS

• Is the motivating force of economic activity: their fulfillment maybe thought of as end or goal of economic activity

Origin of Wants

• They arise for what the human organism need in order to continue functioning

• They arise too, from the culture in which we live for every society dictates certain requisites for the “good life”

• Finally, wants are generated by the activity necessary to satisfy other wants

Characteristic of Human Wants:•Varied (different kinds

•Insatiable (cannot be satisfied)

B. RESOURCES (factors of Production)

• Are the means available for producing goods that are used to satisfy wants

a. Types of Resources

• Land Resources- Consist of lands and natural resources used to produce goods

• Labor Resources – consist of labor power or the capacity for human effort both mind and muscle used in producing goods

• Capital Resources – consist of all goods that are used to produced other goods

• Entrepreneur

b. Characteristics of Resources

• Most resources are limited in quantity or scarce

• They are versatile• They can be combined in varying

proportions

C. TECHNIQUES OF PRODUCTION

• Know-how and the physical means of transforming resources into want-satisfying form.

BRANCHES OF ECONOMICS

• Microeconomics – deals with the problems and analysis of individual economic unit.

a. consumer/householdb. producer/sellerc. resource owner

• Macroeconomics- deals with the problems of the whole economy and interrelationships of aggregate economic units.

a. household sectorb. business sectorc. government sectord. foreign sector

Figure 1 The Circular Flow of Economic Activity

Spending

Goods andservicesbought

Revenue

Goodsand servicessold

Labor, land,and capital

Income

Factors ofproduction

Wages, rent,and profit

FIRMS•Produce and sellgoods and services

•Hire and use factorsof production

•Buy and consumegoods and services

•Own and sell factorsof production

HOUSEHOLDS

•Households sell•Firms buy

MARKETSFOR

FACTORS OF PRODUCTION

•Firms sell•Households buy

MARKETSFOR

GOODS AND SERVICES

Economic System

- An institutional framework with which economic activity is carried out

- Particular, body of laws, habits, ethics, and customs (religious or otherwise) that a group of people observe to satisfy their material wants

General Types of Economic Systems

• Free Enterprise Economy – characterized by private ownership of resources as well as goods and services

• Command Economy – resources, goods, and services are owned by the state and controlled by the government

Four Basic Problems of any economy/economic System

1. What to produce?2. How to produce?3. How much to produce?4. For whom the goods are to be

distributed?

Market- A place where buying and selling

takes place or a point where the forces of price mechanism could take place

Types of Market• Perfect Competition• Monopoly• Oligopoly• Monopolistic Competition• Monopsony

A. Perfect Competition• Occurs in an industry when there

are many small producers who are selling an identical product with easy entry.

Characteristics:• Many buyers and sellers• The product is homogeneous( the

goods and services sold by different firms are largely the same.)

• Freedom of entry and exit• Perfect information about market

conditions ( buyers & sellers are well informed about what products are available and at what prices)

B. Monopoly• Is a market situation in which only

one firm sells a product for which there is no good substitute

Ex. meralco PAL

C. Oligopoly• A market structure in which there

are few sellers.

Example: oil and telecommunications industries

D. Monopolistic Competition• A market structure in which many

firms sell products that are close but not perfect substitutes. Products are differentiated by quality, packaging, and supplementary services.

Ex. Textile products, soap, perfumes

E. Monopsony• A market situation in which

there is only one buyer.–ex. Agricultural products, Co-

say is using monopsony (offers low-price on commodity)