Micro Economics Chapter 1

Topics: Economics, Opportunity cost, Scarcity Pages: 24 (2151 words) Published: November 1, 2012
Chapter 1:
Limits, Alternatives and

The fundamental economic problem
– The basic economic problem arises because
resources are limited, but human wants are
– Scarcity. . . means that society has limited
resources and therefore cannot produce all
the goods and services people wish to have.

What is economics?
• Economics is the study of how individuals and
economies deal with the fundamental problem of
• Scarcity forces individuals, firms, governments and
societies to make choices.

• Choice, therefore, is a direct result of scarcity.
• Because resources are both desirable and scarce, we
must choose how we will allocate them among
various uses.

Allocation of resources: 3 fundamental
• Any individual, organization or nation has to
make three fundamental types of choices about
how to allocate the scarce resources available:
1. What to produce – food or industrial machinery,
books or newspapers…
2. How to produce – how many workers will be used,
with what machinery…
3. For whom to produce – will some people get a
bigger share of resources than other?

Allocation of resources: 3 fundamental

Production is the process that transforms
scarce resources into useful goods and services.

Factors of production
The basic resources that are available to a society are factors of production:
1. Land: natural resources, the “free gifts of nature”
2. Labor: the contribution of human beings
3. Capital: plant and equipment
4. Entrepreneurial ability: takes initiatives, makes decisions, innovates, and takes risks
- Resources or factors of production are the inputs into the process of production.
- Goods and services are the outputs of the process of

Resource payments
Economic Resource

Resource payment







entrepreneurial ability


Capital Goods and Consumer
• Capital goods are goods used to produce
other goods and services.
• Consumer goods are goods produced for
present consumption.

• Investment is the process of using resources
to produce new capital.

Efficiency and Equity
– Efficiency means society produces what

people want at the least possible cost.
– Equity means the benefits of those resources

are distributed fairly among the members of

The Economic Perspective
• Thinking like an economist:
– The study of economics teaches us a way of thinking
and helps us make decisions.
– Choices involve tradeoffs.
– Tradeoffs involve opportunity costs.

• How people make decisions?

1: People Face Tradeoffs
“There is no such thing as a free lunch!”

1: People Face Tradeoffs
To get one thing, we usually have to give up
another thing.
– Food v. clothing
– Leisure time v. work

Making decisions requires trading
off one goal against another.

2: The Cost of Something Is What You
Give Up to Get It
• Decisions require comparing costs and benefits of
– Whether to go to college or to work?
– Whether to go to class or sleep in?

• The opportunity cost of an item is what you give up
to obtain that item.

• It is the value of the second best alternative forgone.
• It is the benefit that is lost in making a choice
between two competing uses of scarce resources.

2: The Cost of Something Is What You
Give Up to Get It

2: The Cost of Something Is What You
Give Up to Get It
• Everything has an opportunity cost.

3: Rational self-interest
• Individuals select the choices that make them
happiest, given the information available at the
time of a decision.
• Because they weight costs and benefits, their
economic decisions are ‘rational’.

4: Rational People Think at the Margin
• Economic thinking is marginal thinking.
• The word marginal means ‘one more’:
• If I consider eating one more slice of pizza, I
ask myself, what is the benefit of one more
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