BEC 170 Introduction to

Microeconomics
By Mr. Sikota Sharper.
Kwame Nkrumah University, Department
Economics and Finance.
 The Study and Methodology of
Microeconomics
1. Definition of Economics, Distinction
between micro and macroeconomics
2. Positive and normative economics.
3. Basic concepts: scarcity, rationality, Choice,
opportunity costs, PPF, marginal concepts,
sunk costs.
4. Actors in a market economy: households,
firms, government, external sector.
5. Models (static models, dynamic models and
comparative models), graphs and math.
 Definition of Economics
o Economics is the study of how individuals and societies
choose to use the scarce resources
o The resources that we are talking about here could be
labor, capital, and raw materials
o That they are scarce means there are not enough resources
to produce everything we want.
o Therefore, this means that one has to make a choice.
o For example, if you want to sleep an extra hour, it is
impossible to do so without giving up something else, such
as an hour of studying.
o . This type of cost is called opportunity cost (or alternative
cost).
o A classical saying in economics is that “there is no such
thing as a free lunch.”
 1.1 Distinction between micro and
macroeconomics
• Economics is a broad and diverse discipline with
many special fields of inquiry.
• The two broad fields include Microeconomics and
Macroeconomics
• Microeconomics deals with the functioning of
individual markets and industries and with the
behaviour of individual decision-making units
including business firms and households.
• Macroeconomics looks at the economy as a
whole. It deals with the economic behaviour of
aggregates including national output, national
income, the overall price level, and the general
rate of inflation.
 1. 1 Distinction between micro and
macroeconomics, Cont.’
• Since resources are scarce, choices have to be made by
individuals, groups or the government in order to
address what is called the three basic economic
questions:
I. Which goods and services to produce?
II. How to produce them?
III. Who should get them?
o Often in economic models, the prices of goods
automatically coordinate these decisions in a market.
o A market is any mechanism where buyers and sellers
meet. That could be, for example, a market square, a
stock exchange, or a computer network where one can
buy and sell things.
 Uses of Microeconomics
o While the uses of microeconomics are varied,
one useful way to categorize is by types of
users:
o Individuals making decisions regarding jobs,
purchases, and finances.
o Businesses making decisions regarding the
demand for their product or their costs.
o Governments making policy decisions
regarding laws and regulations.
1.2 Positive and Normative Economics
• Microeconomics is often based on models. We try to describe a
real phenomenon as simply as possible by only highlighting a
few central features .
• Many economic models can be used for predictions and can
therefore be tested against reality. Such models are called
positive
• The opposite kind of models, models that are about values, is
called normative.
• Positive economics attempts to understand behaviour and the
operation of economic systems without making value
judgments about whether the outcomes are good or bad.
• It strives to describe what exists and how it works.
• Economists must stick to objective facts and avoid value
judgments.
• Positive economic analysis, therefore, addresses factual
questions, also known as positive questions
1.2 Positive and Normative Economics
o Examples of Positive statements include:
I. What determines the wage rate for unskilled workers?
II. What would happen if we abolished the corporate income
tax?
o Many economic models can be used for predictions and can
therefore be tested against reality. Such models are called
positive
o The opposite kind of models, models that are about values, is
called normative.
• Normative economics looks at the outcomes of economic
behaviour and asks whether they are good or bad and whether
they can be made better.
• Normative economics involves judgments and prescriptions for
courses of action.
• Normative questions concern what ought to happen, rather
than what did, will or would happen.
1.2 Positive and Normative Economics
Examples of normative statements include:
I. Should the government subsidize or regulate
the cost of higher education?
II. Should the Zambia allow importers to sell
foreign-produced goods that compete with
Zambia-made products?
III. Should Zambia reduce or eliminate
withholding taxes?
1.4 Scarcity, Choice, opportunity costs
• The concepts of constrained choice and scarcity are
central to the discipline of economics.
• Given the scarcity of time and resources, individuals
are required to make choices and forgo other
alternatives.
• Individuals, society and government have to make
choices because resources are limited.
• Human wants and desires are unlimited.
• Resources are limited and scarce while human wants
are unlimited.
• At any one time, the world can only produce a limited
amount of goods and services.
1.4 Scarcity, Choice, opportunity costs
o The resources (factors of production) are broadly classified
as:
1) Human resource: the labor available both in number and
skill at any point of time is limited. Labor is limited by the
size of population.
2) Natural resource: land and raw materials are limited by
the area of a country.
3) Manufactured resource: The man-made resources like
capital and technology are limited by the scarcity of inputs
that go into their production, such as, Limited supplies of
factories, machines, transportation, telecommunication
and other equipment.
4) The productivity of capital is also limited by the state of
technology.
 Rationality, PPF, marginal concepts,
sunk costs.
o The production possibilities frontier is a graph that shows
the combinations of output that the economy can possibly
produce given the available factors of production and the
available production technology.
o Figure 1.1 shows a production possibility frontier where the
good goods are food and clothing produced per week.
o At point A, 10 units of food and 3 units of clothing can be
produced.
o At point B, 4 units of food can be produced and 12 units of clothing.
o Opportunity cost: The cost of a good or service as measured by the
alternative uses that are foregone by producing the good or service
o Without more resources, points outside the frontier are
unattainable e.g D
o This demonstrates a basic fact that resources are scarce.
1.1 Production Possibility Frontier

D=Unattainable

C=Inefficient
 Rationality, marginal concepts, sunk
costs
• Rational People Think at the Margin.
• Marginal changes are small, incremental adjustments
to an existing plan of action.
• People make decisions by comparing the costs and
benefits at the margins.
• When individuals make decisions, they face tradeoffs
among alternative goals.
• The cost of any action is measured in terms of
foregone opportunities.
• Rational people make decisions by comparing
marginal costs and marginal benefits.
 Rationality, marginal concepts, sunk
costs
• A sunk cost is an expenditure on an investment that
cannot be reversed and has no resale value.
• Sunk costs include expenditures on unique types of
equipment (machine) or job-specific training for
workers (developing the skills to use the machine).
• sunk costs are incurred only once in connection with
a single investment.
• sunk costs can never be recovered because the
• investments involved cannot be moved to a different
use.
Actors in a market economy: households,
firms, government, external sector