Lecture:Microeconomics

Definition: Economics

1. Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.

2. the study of how society manages its scarce resources

Scarcity:

1. The limited nature of society’s resources

2. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have.

3. A situation of scarcity is one in which goods are limited relatives to desires.

Nature of economics: 2 types

1. Positive economics: it describes the facts of an economy.

2. Normative economics: it involves value judgments.

Branches of economics: 2

1. Microeconomics
2. Macroeconomics

Definition: Microeconomics

1. Microeconomics (from Greek prefix micro- meaning "small" + "economics") is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources.

2. It concerned with the behavior of individual entities such as markets, firms and households.

3. The study of how households and firms make decisions and how they interact in markets.

Founder: Adam Smith (1723 –1790), a Scottish social philosopher and a pioneer of political economy and Scottish Enlightenment.

Book: The Wealth of Nation (1776)

Definition: Macroeconomics

1. Macroeconomics (from Greek prefix "macro (o)-" meaning "large" + "economics") is a branch of economics dealing with the performance, structure, behavior, and decision-making of the entire economy. This includes a national, regional, or global economy.

2. It concerned with the overall performance of the economy.

3. Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance.

4. The study of economy-wide phenomena, including inflation, unemployment, and economic growth.

Begun: 1860 (Early Period)

Modern Macroeconomics: Begun in 1936

Book: The General Theory of Employment, Interest and Money (1936)- John Maynard Keynes

Types of economy:

1. Market Economy: is one in which individuals and private firms make the major decision about production and consumption Market economy: an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

2. Command Economy: is one in which the government makes all important decisions about production and consumption.
3. Mixed Economy: it includes the elements of both market and command economy.
4. Islamic Economy: the economy which runs according to the law of welfare, justice and Islamic shariah.

Input: inputs are commodities or services that are used to produce. An economy uses its existing technology to combine inputs to produce outputs.

Output: outputs are the various useful goods or services that result from the production process and are either consumed or employed in further production.

Production Possibility Frontier (PPF): it shows the maximum amounts of production that can be obtained by an economy, given its technological knowledge and quantity of inputs available.

Efficiency:

1. the property of society getting the most it can from its scarce resources

2. Efficiency denotes the most effective use of a society’s resources in satisfying people’s wants and needs.

3. An economy is producing efficiently when it cannot make anyone economically better off without making someone else worse off.

Productive Efficiency: it occurs when an economy cannot produce more of one good without producing less of another good; this implies that the economy is on its PPF.

Opportunity cost:

1. Whatever must be given up to obtain some item.

2. The opportunity cost of an item is what you give up to get that item. When making any decision, such as whether to attend college, decision makers should be aware of the opportunity costs that accompany each possible action.

3. The opportunity cost of a decision is the value of the good or service forgone.

Welfare state: is one in which markets direct the detailed activities of day to day economic life while govt regulates social conditions and provides pensions, health care and other necessities for poor families.

Market: is a mechanism through which buyers and sellers interact to determine prices and exchanges goods and services.

 Market equilibrium: Market equilibrium represents a balance among all different buyers and sellers.

Externality:

1. The impact of one person’s actions on the well-being of a bystander
2. It occurs when firms or people impose costs or benefits on other outside the market place, also called spillover effects.

Public goods: are commodities which can be enjoyed by everyone and from which no one can be excluded. Example: National defense or Military.