Contents of course Module 1.Fundamental concepts in Microeconomics Module 2. Individual and society economic problem Module 3.Demand and Supply Module 4.Market Equilibrium. Module 5.Elasticity of Demand and Supply Module 6.Consumer behavior.

Chapter1: fundamental concepts in microeconomics Lecture 1

INTRODUCTION Some examples that makes the study of economics very important: The decision of individuals to buy products The decision of firms The International Monetary Fund(IMF) Tax policies or subsidies The World Trade Organization Cooperation Council for the Arab Gulf States Organization of Petroleum Exporting Countries(OPEC(

Three questions to answer There are three types of decisions that need to be made in economy: Which goods and services to produce, How to produce them, for whom should get them.

Definition of economics Economics is the study of how individuals and societies use limited resources to satisfy unlimited wants.

Economic Theory Theory: an organized system of accepted knowledge that applies in a variety of circumstances to explain a specific set of phenomena. Economic theory: attempts to abstract from human behavior (producer and consumer)

Economic Analysis Economic analysis is both based on deduction and induction. Deduction: is a method of reasoning in which one deduces a theory based on a set of almost self-evident principles. Induction: is a method of reasoning in which one develops general principles by looking from patterns in the data.

Economic Model scientific method that consists of the following steps: observe a phenomenon, make simplifying assumptions and formulate a hypothesis, generate predictions, and test the hypothesis.

Simplifying assumptions ceteris paribus – holding everything else constant abstraction in economics used to simplify reality

Economic Model The extraction of a model can be in the form of words, abstractions, assumptions (ceteris paribus), diagrams or mathematical equations.

Microeconomics and Macroeconomics microeconomics - the study of economic behavior of individual human beings and firms. macroeconomics - the study affecting the entire economy, including unemployment, inflation, economic growth, and monetary and fiscal policy.

Microeconomics Agents Firms: Produce and sell goods and services Buy inputs (labor, capital and raw materials) Consumers: Buy goods and services Sell inputs (labor services, loanable funds)

Positive and normative economic positive economic attempt to describe how the economy functions relies on testable hypotheses normative economic relies on value judgments to evaluate or recommend alternative policies.

Individual economic problem Example: The consumer A have a limited budget:120 dollars Individuals have unlimited wants, 2goods: book (10$) DVD (20$)

Figure 1: The graph of the consumer budget DVD ($20) Book ($10) Total cost 6 120 = 120 + 0 5 2 120 = 100 + 20 4 120 = 80 + 40 3 120 = 60 + 60 8 120 = 40 + 80 1 10 120 = 20 + 100 12 120 = 0 + 120 impossible to obtain possible to obtain

Rational self-interest Individuals select the choices that makes them happiest, given the information available at the time of a decision.

Society economic problem resources scarcity land all natural resources minerals water wildlife labor: Consists of the physical and intellectual services provided by human beings.

Society economic problem scare resources capital physical capital goods used to make other goods Factories Machines Infrastructure Financial capital stocks, bonds, bank loans entrepreneurial ability Refers to the ability to organize production and risks

Resource payments Economic Resource Resource payment land rent labor wages capital interest entrepreneurial ability profit

Scarcity the basic economic problem is scarcity: wants are unlimited, but resources are limited. so with scarcity, we must make choices.

Model of possibilities production Frontier(PPF) Assumptions: model of scarcity, choice, & opportunity cost choice between 2 goods PPF shows maximum possible output with combination of 2 goods, given current resources

Production Possibilities Curve Pizzas (00,000s) 1 2 3 4 Robots (000s) 10 9 7

Production Possibilities Curve Pizzas (00,000s) 1 2 3 4 Robots (000s) 10 9 7 Production possibilities curve

Production Possibilities Curve attainable W unattainable Attainable

Using the PPF points on or inside the PPF are possible points INSIDE the PPF are inefficient(do not use all resources) points ON the PPF are efficient(use all resources) points outside the PPF are not possible at this time

scarcity & tradeoffs the PPF shows limits to production so must choose between Robot & Pizza combinations -- give up Robots to get more Pizzas -- give up Pizzas to get more Robots -- TRADEOFF

Opportunity Cost Opportunity cost is the process of choosing one good or service over another.

Opportunity Cost on PPF there are tradeoffs -- how much is given up?

opportunity cost of 1 Pizza: A to B = 1 Robot B to C = 2 robots C to D = 3 robots 10 A 1 9 B 2 7 C 3 4 D E

opportunity costs are increasing cost (in robots) increases as pizza production increases PPF is concave (bowed out) why? -- harder to switch resources between robots and pizza

opportunity costs are increasing At first when making more pizza switch the best resources from robot production But as we make more pizza resources switched are less and less suitable for robot production

Shifts in the PPF if we get more resources if technology improves then the PPF will shift out produce more CDs and more water economic growth!

Shifts in the PPF the unattainable becomes attainable robots pizza With economic growth, the unattainable becomes attainable