KINH TẾ VI MÔ Chapter 1 microeconomics 2015

5 Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have... 9 KieuMinh-FTUOur first model: The circular-flow diagra

Chapter 1: Basic Concepts in Economics

and Microeconomics Basic Microeconomics For Undergraduates

Contents

1. Basic Concepts

2. Economy and Three basic questions

3. The optimum economic choices

1.1.Basic Concepts

• Economy

• Resources

• Individuals

Resources

1. Land: Nature resources

2. Labor (L):

3. Capital: Physical capital (K)

4. Entrepreneurship Limited nature of society’s resources.

Resources are scarce.

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Scarcity means that society has limited resources and

therefore cannot produce all the goods and services

people wish to have

Limited Resources

Unlimited Wants

Economy

a household”

 Household - many decisions of a llocate

limited resources

Ability, effort, desire

 Society - many decisions

Allocate resources

Allocate outputs (goods and services)

Individuals

 Household = Consumers

 Firms = Producers

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Our first model: The circular-flow diagram

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Visual model of the economy

Shows how dollars flow through markets among households and firms

Firms & Households

For goods and services

For factors of production

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The circular flow

1.2 Economics and Three Basic Questions of the Economy

• Principles

• Microeconomics and Macroeconomics

• Positive vs Normative Analysis

• Models

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1.2.1 Three Questions of an economy

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What to produce?

• Using the economy’s scarce resources to produce one good requires giving up/sacrificing/trade off another good Every society must decide what it must produce with its scarce resources.

How to produce?

• Society has to make best decision or choices in determining how goods and services should be produced

For whom?

• If goods or services are produced, a decision who will get it A decision to have one person or group receive a good or services usually means

it will not be available

to someone else

Scarcity raises three questions, which every economy must answer.

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1.2.2 Economics Definition

Economics is to study of how society allocates its scarce

resources for competitive goals (D.Begg)

Economics is to study of how society manage its scarce

resources (G.Mankiw)

Economics

Economics is a social science

Economists try to explain puzzling observations and facts about the economy

Economists study:

 How people make decisions: how much they work, what they buy, how much they save, and how they invest their savings

 How people interact with one another

 Analyze forces and trends that affect the economy as a whole

FOUNDATIONS OF MODERN

ECONOMICS

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CLASSICAL

ADAM SMITH: The Wealth of Nations (1776)

ALFRED MARSHALL: Principles of Economics (1890)

NEOCLASSICAL

During the 1940s - 1950s

Modern classical school of economics

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1.2.3 Microeconomics and Macroeconomics

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Microeconomics

 The study of how households and firms make decisions

 And how they interact in markets

Macroeconomics

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

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Microeconomics

Studies how households (or individuals), business (or

firms, enterprises) and the government make decisions,

given scarcity of resources

Studies the interactions among those market members

and how these interactions have impacts on their

economic benefits and the economy

focuses on how the markets work.

1.2.4 The scientific method of economics

Observation, theory, and more observation

Economics model

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Economic model: an explanation of how the economy or

part of the economy works

Assumption: Judgements about features that can be

ignored to make the world easier to understand

 Ceteris paribus assumption: All other things being equal The

term refers to holding all other variables constant when one

variable is changed.

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Economic model

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Come in many forms:

Numerical tables

Graphs

Algebraic equations

Wordy descriptions

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Positive vs Normative economic

analysis

Positive statements

 Attempt to describe the world as it is

 Descriptive

 Confirm or refute by examining evidence

Normative statements

 Attempt to prescribe how the world should be

 Prescriptive

Answer for “What should be”

1.3 The optimum economic choice

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1.3.1 Why people choice?

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People face the fact that resources are scared

People want to maximize their benefit.

 Households (consumers): maximizing benefit (utility)

 Firms (producers): maximizing profit

 Government: maximizing social welfare

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1.3.2 How People Make Decisions

Principle 1: People face trade-offs

Making decisions

 Trade off one goal against another

 Student – time

 Parents – income

 Society

 National defense vs consumer goods

 Clean environment vs high level of income

 Efficiency vs equality

Opportunity Cost

Principle 2: The cost of something

is what you give up to get it

Make decisions

Compare cost with benefits of alternatives

Opportunity cost

Whatever most be given up to obtain one item

Principle 3: Rational people think at the

margin

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Rational people

 Systematically & purposefully do the best they can to achieve

their objectives

Marginal changes

Small incremental adjustments to a plan of action

Rational decision maker – take action only if

 Marginal benefits > Marginal costs

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Principle 4: People respond to incentives

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Incentive: Something that induces a person to act

 Higher price

 Buyers - consume less

 Sellers - produce more

 Public policy

 Change costs or benefits

 Change people’s behavior

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Second model:

The production possibilities frontier-PPF

A graph

Combinations of output that the economy

can possibly produce

Given the available

Factors of production

Production technology

The production possibilities frontier Quantity of

Computers Produced

3,000

A B C

D

E

F

1,000

2,200

Production Possibilities Frontier

The production possibilities frontier shows the combinations of output - in this case, cars and computers - that the economy can possibly produce

The economy can produce any combination on or inside the frontier

Points outside the frontier are not feasible given the economy’s resources.

Second model: The production possibilities

frontier

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Bowed out production possibilities frontier

Opportunity cost

Resource specialization

Efficient levels of production

Points on the PPF

Trade-off: The only way to get more of one good

is to get less of the other good

Inefficient levels of production

Points inside PPF

A shift in the production possibilities frontier Quantity of

Computers Produced

Quantity of Cars Produced

0 600 650 1,000

3,000

A 2,200

A technological advance

in the computer industry enables the economy to produce more computers for any given number of cars As a result, the production possibilities frontier shifts outward If the economy moves from point A to point G, then the production of both cars and computers increases.

4,000

G

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MATHEMATICS REVISION

Slope of the curve

y

8 1 20

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Slope= (28-20) = 8 2-1

Revision (cont.)

Six types of relationship

Increasing positive slope Decreasing Positive

slope

Increasing negative slope

Decreasing negative slope

Math revision (Cont.)

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Constant slope

Constant

positive slope

Constant negative slope

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Facts and impacts

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Movement along the curve vs.shift of the curve

Movement along the curve:

When x and y changes

Shift of the curve:

When another variable other than x and y change

A third variable shift the curve

x

y

z1

Z 2

The line shifts when

Z changes

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