BA CORE COURSE 1

BASIC MICROECONOMICS

LEARNING OUTCOME
After studying the module, students shall be able to:
• Learn whether economics is a science or art
• Become familiar with economic terms
• Understand the basic economic problems, the elements of economic activity
• Distinguish between microeconomics and macroeconomics and positive and normative
economics.
• Evaluate the relations of economics to other subjects
• Understand the differences of economic systems and its implications on production
• Analyze the economic approach to the world around us especially the microeconomics approach

Lesson 1
1.1 Introduction
Economic problems are an inherent part of everyday life. The unemployment problems which surged to
covid 19 pandemic, the downfall of many businesses, global competition in the world markets, battles
against free trade agreements and control policies to restrain inflation are there to us this fact. The
social science of economics is an attempt to understand how political, social and environmental issues
affect society. Formally, it is economics that is concerned with the well-being of individuals in a society.
It is how the economy uses its limited resources to satisfy the unlimited material wants of people.

To understand economics, one must know its meaning:

• Economics comes from the Greek word oikos (house) and nomos (management)
• Economics is concerned with production, distribution and use of material goods and services
• Economics is the study of wealth, of how to improve society and make human civilization
possible and how people go about the business of organizing consumption and production
activities.
• Economics is a subject whose study assists individuals, groups, nations and even international
organization make important choices for material welfare, both short term and long term, under
limitations of constraints of resource.

The above concepts can be compressed into few lines to describe the course.
Economics as a social science deals with the proper utilization of our scarce productive resources (land,
labor and capital) in order to produce outputs or goods and services and distribute these to satisfy
human wants.

1.2 what subjects does economics relate to?

Mathematics and statistics are tools of economics used for theoretical as well as empirical study.
Pioneers like Alfred Marshall used verbal exposition as well as graphs to make these points, say about
the demand curve or the various cost curves but in contemporary times it is impossible to study
economics theory without knowledge of mathematical technique such as geometry, algebra, calculus
that is only for higher reaches of economic theory that mathematics is needed.

Political Science too, help in the study of Economics which originally was called Political Economy.
Knowledge of history and geography too are essentials for a group of economics sociology.

1.3 The Key Elements of Economic Activity

• Human Wants
Any economic activity in geared towards the satisfaction of human wants. These wants are the
motivators and their satisfaction are the goal of economic activity. Wants are varied and
insatiable. Insatiability of wants arises from what a person has to sustain living and the most
apparent example is the desire for food. Wants arise from the culture and which man lives,
which may include the standard of living a person needs to maintain. The individual’s status in a
society depends upon his/her level of consumption, wherein his wants are great when he/she
desires to improves his status. The best example is a person pursuing higher education after a
bachelor’s degree. The creation of new wants in the process of satisfying an old want plays an
important role in multiplying human desires.

• Resources
Resources are the means for providing goods in order to satisfy human wants. These may
include land, labor and capital. Resources are classified into two categories: labor or human
resources both mental and physical, are used in producing goods and non-human resources that
facilitate placement of goods in the hands of ultimate consumers include land, buildings,
machinery, raw materials, or mineral resources. The three basic characteristics of resources are:
that most are limited in quantity, are versatile and can be combined in varying proportions to
produce a given commodity.

• Production Techniques
Production techniques are the knowledge and physical means of transforming resources into
want-satisfying form. In the production of any commodity a given range of techniques is
available but the least costly technique will usually be used for any quantity of the commodity
produce. The economist may have a choice between a labor-intensive or capital-intensive
production techniques. Labor-intensive techniques rely heavily on human effort as basic
resources to produce output; capital-intensive techniques rely on machinery and equipment in
their production process.

1.4 Macroecomics vs. Microeconomics

Microeconomics is the branch of economics that studies economics issues in small individual details as if
under a microscope.
Macroecomics studies economic issues in aggregative and overall form, looking at a broad picture.
Microeconomics deals with the economic activities of individual economic units as consumers, resource
owners and business firms. It analyzes the flow of goods and services from business firms to consumers;
the composition of the flow and the evaluation or pricing of the component parts of the flow. It is study
of the price system, the individual consumers and the individual company.
Macroeconomics is a division of economics that deals with macroaggregates of income, output,
employment, spending and price level. This is the study of the total economy. Macroeconomics is
concentrated on the causes of change in aggregate flow of goods, the nature of economic growth, the
conditions necessary for the expansion (or productive capacity) and national income over time.

1.5 The Law of Scarcity and The Economic Problem

Scarcity of resources requires people to economize. If an infinite amount of every good could be
produced or if human wants are fully satisfied, then it wouldn’t matter if a surplus of any particular good
were produced, or if materials are combined unwisely to produce that good. Since everyone could have
so much as they desired, it wouldn’t matter how goods and incomes are distributed among different
people and classes. In this case, all goods are free goods and there will be no more need to, study
economics. However, scarcity exists-it exists because goods and services are not enough in supply for
those who want them. This situation gives rise for man to decide, thus facing the economic problems of
what and how much to produce, how to produce and for whom to produce.
1. What and how much to be produced? The economic problem is in choosing the unlimited wants
that are most important or in setting up an acceptable hierarchy of values for different goods
and services. Once certain wants are deemed most important and the degree of satisfaction for
these is made. Since resources are scarce in the economy, all wants cannot be fully satisfied.
This valuation process is measured by price, where the more urgently certain goods are desired,
the more customers are willing to spend therefore they have higher prices. A good with great
supply less important to consumers than when supply is low. Consumers tastes and preferences
influence their income spending pattern. Thus highly-desired goods tend to have high prices.
While those less desirability to consumers decline in price.
2. How shall the goods to produced? This is the determination of how resources are to be
organized in order to produce adequate quantities of the desired goods. This is the decision on
which resources or technology is to be used in the production of the highly desired goods.
Companies producing these goods and services may command higher prices and will be more
profitable, while companies producing goods and services that consumers desire less may incur
losses. Therefore, the more profitable companies are, the greater the probability that they can
offer higher prices for resources, in order to expand their business. The guest for profits
provided the incentive for efficient production. The more efficient the company (given the price
of the product) the greater the profits will be. Economic efficiency involves choices made during
the production process. The goal of any company is to produce output as cheaply or efficiently
as it can. Thus, if labor is expensive and/or capital is cheap, it may decide to use much capital
and little labor, or vice versa. Thus, this involves a choice between being a labor-intensive or
capital-intensive organization.
3. For whom shall these goods be produced? Distribution of output in a private economy is
accomplished simultaneously with the determination of what/how much to produce, and how
shall be produced. Distribution of output depends on personal income. Those with higher
income get a larger share of the output than those with lower income. Incomes of individuals
vary with the amount of personal resources they put into productive processes, and the prices
they receive for their labor. If a person has more resources. Aside from labor (e.g. renting
houses or land to others), or receives higher income, then that person will have more money to
spend and will get larger share of the output in the economy.