RWS#1: Introduction to Microeconomics

What is Economics?
 Economics is the study of choice and decision making in a world where resources are scarce.
 Economics is a social science, it focuses on society and the people within it. Whilst it’s theories can be tested
with the scientific method, they are not always as ‘set in stone’ as natural sciences’ and often change as
society develops. Economists often suffer ‘physics envy’ out of jealousy for physics’ predictability and
‘harder’ theories.
 Economics can be split into 2 main subsections; Microeconomics and Macroeconomics. Microeconomics
focuses on economics at an individual, group or company level. Macroeconomics focuses on the economy at
a national level.
 A lot of economics revolves around positive and normative statements. Positive statements are objective
statements that can be tested, amended or falsified based on evidence. Whereas normative statements are
based on value judgement, they are an opinion rather than a fact and are more difficult to test. For example:
“Higher interest rates will reduce house prices” = positive
“Unemployment is more harmful than inflation” = normative
 A market is any structure that allows consumers and firms to exchange goods, services or information.
Markets are made up of 3 agents: Firms, Consumers and the Government. They all interact with one
another to make firms profit and consumers happy. The government sometimes interferes with the market
to ensure the trading is fair and ultimately to stay in power.

The Economic Problem

 The basic economic problem is assuming that because our resources are scarce, we do not have enough to
meet all out ‘wants’. This results in us having to make a sacrifice of the second-best choice – also known as
the opportunity cost.
 For example, if you had £1 you could buy a mars bar for 80p, however because you bought the mars bar you
can’t afford a KitKat too – this is your opportunity cost.
 Resources – All of the factors available to us to produce goods or provide services.
 Wants – Desires that can be satisfied by consuming a good, service or leisure activity.
 Economists make 3 key assumptions:
1. Wants are unlimited. Everyone desires to have something else, no matter how much they already
have.
2. Resources are scarce. The resources we need to produce the ‘wants’ are finite.
3. Agents are rational. Everyone makes decisions in their self-interest.
 Challenges to these assumptions:
1. Resources such as air, water and wind are unlimited.
2. Some agents such as charities act in the interest of others.
Production Possibility Frontiers

 A production possibility frontier is the limit of possible production given the resources available.

An increased production Types of Efficiency:

possibility frontier is
shown by the frontier
line moving outwards.
This could happen if a
firm has an intake of
more resources, or their
labour / machinery
becomes more efficient.
Any Point below the
frontier represents
underproduction. The
firm is either not using all
their resources, or not
using them efficiently.
This is the opportunity cost. As the firm decide The closer to the frontier,
to increase the production of mobile phones (Y1 the more productively
– Y2), the production of laptops falls (X1 – X2). efficient the firm is.
Productive Efficiency - Producing goods or
services using all available inputs or at
minimum cost. This type of efficiency can be
shown on a PPF.
Allocative Efficiency - Distributing and
allocating resources in the best way. This
type of efficiency cannot be shown on a PPF
as it relies on consumer preferences to
decide the ‘best’ way.
Why are PPF’s curved?
If the output of good Y is increased, then
fewer resources are available to produce
good X. However, more resources originally
used for good X are allocated towards Good
Y that are not necessarily specialised to this
production, meaning the opportunity cost of
good X rises alongside the production of
good Y, resulting in a curved PPF.

Solving the Economic Problem: Capitalism vs Socialism

Capitalism - an economic and political system in which a country's trade and industry are
controlled by private owners for profit, rather than by the state. Capitalism allows
businesses and individuals to strive, the markets are controlled by consumers and firms
where the two agents agree on prices that make the firms profit and keep the consumers
happy. To make a living in a capitalist society, an individual must work hard, there is no
government to give benefits to unemployed members of the community.

Socialism - an economic and political system in which a country's trade and industry are controlled by the state to share wealth evenly
in the community. Socialism revolves around everyone in the community being treated equally, and the wealth of the community is
shared rather than being kept by individuals. This ensures nobody is left in poverty and there is equality between everyone.

FOR CAPITALISM AGAINST CAPITALISM

Incentives to be rich encourage motivation and make people
work hard, this leads to more money being pumped into the
economy and overall economic growth. However, this can lead
to many people getting greedy and markets being controlled by
just a few individuals or businesses.
Consumers are free to choose the products they desire. This
means that consumers are kept happier and results in higher
standards of living. However, if most people choose the same
product (e.g. apple), it is difficult for new companies to enter the
market.
Entrepreneurs and firms seek to create and develop new
profitable products. Therefore, they will invest in new
technologies and create products that are popular with
consumers. However, more advanced technology is more
expensive, and consumers might not be willing to pay these
prices.
Often people are rich, simply because they inherit wealth or are
born into a privileged class, leading to immense inequality. In
socialism, everybody is born on an even playing field and the
whole community is equal.
A free market economy will under-provide goods with positive
impacts, such as healthcare, public transport and education. This
leads to an inefficient allocation of resources and high prices for
these services that ‘should’ be free.
Under capitalism, there is no prevention against harming the
environment. Large businessmen and greedy individuals will
damage the environment through pollution and deforestation.
They don’t care as long as they make a profit.
However, it could be argued that all property is privately owned
and pollution only diminishes it’s own value, which isn’t greedy.