Unit 2.1 - 2.

2 : Basic Microeconomics
Basis for the study of Economics:
Society's material wants are unlimited;
The economic resources which are the ultimate means of satisfying these wants are scarce
in relation to the wants
1. Economic resources are classified as land, capital, labor and entrepreneurial ability.
2. The payments received by those who provide the economy with these four resources
are rental income, interest income, wages and profits, respectively.
3. Because these resources are scarce / limited the output the economy is able to produce
is also limited.
Fundamental Economic Problems of Every Society:
Five Fundamental Questions: (McConnell)
1. The level at which the resource will be utilized.
2. What will be produced
3. How it will be produced
4. How the output shall be distributed among the society's citizens
5. How to organize the economic system to accommodate changes in the tastes,
resources and technology.
Concepts:
Inputs/outputs
Law of Diminishing Returns
Altenative Economic systems/organization schemes
Market
Prices
Government ?
DKNY
Didn't
know yet
Inputs = ideas, commodities or services used by firms in their production processes
Outputs = the varied array of useful goods or services that are either consumed or used for
further production
The Law of Diminishing Returns (and its close cousin The Law of Increasing Costs)
= " When successive equal increments of a variable resource are added to the fixed
resources, beyond some level of employment, [then] the marginal product of the
variable resource will decrease. "
= " As the amount of a product produced is increased, the marginal cost of
producing an additional unit of the product increases. "
Marginal = adj. that incremental amount over and above a certain prescribed original amount.
(e.g. If you currently have 5 25-c coins in your pocket, and you found
another one on the floor beside you, than that extra coin you picked up is a
marginal whatchamacallit?-- barya !?)
= This law explains why having more ice cream after the first few ones isn't so
satisfying ; or having too many cars, houses, children , partners ....

ECONOMY lecture notes: Basic Microeconomics concepts. page 1 of 3
Alternative Economic Systems :
Concerned with the mechanisms in a society that decide how scarce resources are
allocated.
Tradition Economy= Economic choices are decided by the past
= As before , so it is now. This production level then and this level
now.
= Custom rules every facet of behavior
Command Economy = where the society's government makes all economic decisions
concerning production and distribution.
= Government controls all factors of production.
= (Ex) Communism set-up
Market Economy = a system of prices, (how much is paid for products)
markets,
profits and losses,
incentives and rewards determine the economic answers.
= Firms produce commodities that yield the highest profits, by the
techniques of production that are least costly.
= People's consumption arises from their decision on how to spend wages
and other incomes.

= (Ex) Capitalism , our country's economic set-up, to a certain degree.
The Economic Role of Government
Any government should promote :
Efficiency = correct market failures such as monopoly and externalities
[Externalities = n. spillovers in the economy which occur when firms or
people impose costs or benefits on others without those others
receiving proper payment. Robbing Peter to pay Paul.
(Ex) externalities : water pollution, hazardous wastes ]
Equity = make sure that income is equally distributed
How ? Taxes
Transfer payments - health care for elderly
welfare and social work, etc
Stability = attempts to shave the peaks and troughs of the business cycle,
reducing unemployment and inflation and promoting economic
growth
3 Features of an Advanced Industrial Economy
1. Specialization = occurs when people concentrate their efforts on a particular set
of tasks. (Division of Labor)
" A fly can't bird, but a bird can fly. "
--- The Tao of Pooh
Everything has its own place and function. The folly is in the
way that he who would be the angel, wants to be the brute.
2. Money = medium of exchange; the measuring rod of material values.
3. Capital = represents "produced" goods that can be used as factor inputs for
further production. (E.g. machines, tools)
ECONOMY lecture notes: Basic Microeconomics concepts. page 2 of 3
Elements of Supply and Demand
Demand Schedule = the quantity of that commodity that person is willing and able to
purchase at each possible price during a time period
Price
Quantity
L a w o f D e m a n d
mare Q |ar |ess
Market Demand Schedule = the sum of the quantities that all individual consumers in
the market demand at each price
Factors that affect Market demand:
10. Jazz 5. Elasticity
9. Income 4. Demographics
13. Minds and Money 8. Habit 3. Cost or Price
12. Loyalty 7. Greed 2. Bandwagons
11. Knowledge 6. Fashion or fads 1. Aptness
Supply Schedule = the list of prices and the quantities that a supplier or a group of suppliers
would be willing and able to offer for sale at each price in the list during a
period of time.
Factors that affect Supply :
1. Technology = how are products made
2. Prices of factors of production = how much do inputs cost
3. Prices of related goods in production = substitutable goods, and resources used incidentally
through the course of production
4. Expectation of producers
Equilibrium price (specific to a competitive market !)
= that price in a competitive market at which the Quantity demanded and the
quantity supplied are equal; at which there is neither a shortage nor a surplus;
at which there is no tendency for price to rise or fall.

ECONOMY lecture notes: Basic Microeconomics concepts. page 3 of 3
Price
Quantity
L a w o f S u p p l y
mare Q |ar mare