Microeconomics

(literally, very small economics) is a social science which involves study of the economic
distribution of production and income among individual consumers, firms, and
industries. It considers individuals both as suppliers of labour and capital and as the
ultimate consumers of the final product. It analyzes firms both as suppliers of products
and as consumers of labour and capital. It is the study of the behavior of individuals and
firms that are using scarce resources. Scarcity refers to the situtation that none of us as
individuals or companies, can have it all - unlimited land, capital, labour, etc.

Scarcity

Scarcity means not having sufficient resources to produce enough to fulfill unlimited
subjective wants.

Resources scarcity" is defined as there being a difference between what people desire
and the demand for a good. Thus, a good is scarce if people would consume more of it if
it were free. Scarcity (S) can also be viewed as the difference between a person's
desires (D) and his possessions (P). Mathematically, this can be expressed as S = D - P.
If P > D, a state of negative scarcity exists which is abundance. For most people desire
exceeds possession and this provides the spur to material success. In others an excess
of desire over possession can also lead to conflict, crime and war.

Unlimited Wants

Humans have many different types of wants and needs. Economics looks only at man's
material wants and needs. These are satisfied by consuming (using) either goods
(physical items such as food) or services (non-physical items such as heating).

There are three reasons why wants and needs are virtually unlimited:

1. Goods eventually wear out and need to be replaced.

2. New or improved products become available.
3. People get fed up with what they already own.
Limited Resources

Commodities (goods and services) are produced by using resources. The resources
shown in Table 1.1 are sometimes called factors of production.

Table 1.1 Different types of resource

Type Description Reward

Land All natural resources Rent
Labour The physical and mental work of people Wages
Capital All man-made tools and machines Interest
Enterprise All managers and organisers Profit

Factors of production are resources used in the production of goods and services in
economics. Classical economics distinguishes between three factors:

• Land or natural resources - naturally-occurring goods such as soil and minerals that are used in the
creation of products. The payment for land is rent.
• Labor - human effort used in production which also includes technical and marketing expertise. The
payment for labor is a wage.
• Capital goods - human-made goods (or means of production) which are used in the production of other
goods. These include machinery, tools and buildings. In a general sense, the payment for capital is called
interest.

The Economic Problem

The economic problem refers to the scarcity of commodities. There is only a limited
amount of resources available to produce the unlimited amount of goods and services
we desire.

Society has to decide which commodities to make. For example, do we make missiles or
hospitals? We have to decide how to make those commodities. Do we employ robot
arms or workers? Who is going to use the goods that are eventually made? Do we build
a sports hall in Wigan or Woking?

Opportunity Cost
The opportunity cost principle states the cost of one good in terms of the next best
alternative. For example, a gardener decides to grow carrots on his allotment. The
opportunity cost of his carrot harvest is the alternative crop that might have been grown
instead (eg potatoes). Further examples are given in Table 1.2.

Table 1.2 Examples of opportunity cost decisions

Group Decision
Individual Should I buy a record or a revision book?
School Should we build a music block or tennis courts?
Country Should we increase police pay or pensions?

Economic Systems

An economic system is the way a society sets about allocating (deciding) which goods to
produce and in which quantities. Different countries have different methods of tackling
the economic problem. There are three main types of economy.

Market Economies

A market or capitalist economy is where resources are allocated by prices without

government intervention. The USA and Hong Kong are new examples of market
economies where firms decide the type and quantity of goods to be made in response to
consumers. An increase in the price of one good encourages producers to switch
resources into the production of that commodity. Consumers decide the type and
quantity of goods to be bought. A decrease in the price of one good encourages
consumers to switch to buying that commodity. People on high incomes are able to buy
more goods and services than are the less well off.

Command Economies

In a command-planned or socialist economy the government owns most resources and

decides on the type and quantity of a good to be made. The USSR and North Korea are
examples of command economies. The government sets output targets for each district
and factory and allocates the necessary resources. Incomes are often more evenly
spread out than in other types of economy.

Mixed Economies
In a mixed economy privately owned firms generally produce goods while the
government organises the manufacture of essential goods and services such as
education and health care. The United Kingdom is an example of a mixed economy.

This page is based on original material written by Richard Young of Wood Green School
Witney. Content has been updated by Biz/ed.