The Basic Basis of Microeconomics

7/28/2019 The Basic Basis of Microeconomics

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MACROECONOMICS MICROECONOMICS

ECONOMICS

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MACROECONOMICS IS THESTUDY OF THE ECONOMY ASA WHOLE AND THE WAY ITFLUCTUATES AND EXPANDSOVER TIME.

IT LOOKS AT THE BIG PICTUREOF WHAT IS HAPPENING INTHE NATIONAL ANDINTERNATIONAL ECONOMY,RATHER THAN THEINDIVIDUAL BEHAVIOUR OF ACONSUMER OR FIRM.

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MICROECONOMICS ISTHE STUDY OF THEDECISIONS OFINDIVIDUALHOUSEHOLDS ANDFIRMS.

IT INCLUDES THE STUDYOF INDIVIDUALINDUSTRIES AND PRICESOF INDIVIDUAL GOODSAND SERVICES.


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Our wants for goods and servicesexceed the productive capacity of theresources used to produce these goodsand services.


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The resources that are used to producegoods and services are:

LabourLandCapitalEntrepreneurship - (Enterprise)


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Labour

The physical and mental effort we devote toproducing goods and services.

Land

The gifts of nature we use to produce goodsand services natural resources.


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CapitalThe goods we use to produce other goods and

services.

Includes physical capitalbuildings, machinery, PCs, and other

equipment

and human capitalthe knowledge and skill that people obtain

from education and on-the-job training


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Entrepreneurship

The resource that organises labour, land,and capital to produce goods and services.

The entrepreneur takes the risk to start upa business.


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Our wants are insatiable.

Humans, by nature, would like to have moreof those things they find desirable.


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We have limited resources.

We have unlimited wants.

This leads to scarcity Scarcity exists when there are insufficient resourcesto satisfy peoples wants.


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Economics is the study of the choicespeople make to cope with scarcity.


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THERE ARESCARCE RESOURCESANDUNLIMITED WANTS.AS A RESULT OF THE SCARCITY OF

RESOURCES, THERE ARE 4 BASICQUESTIONSTHAT HAVE TO BE ANSWERED.

THEY ARE:-

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1. Whatgoods and services are to beproduced ? Seeing resources are scarce an economy

has to make choices about what to produceand what not to produce.

In economies, like Australia, this is

basically determined by consumer demand,the profit motive with some governmentintervention.


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2. How much will be produced?Again limited resources limit output. Over

production means resources are wasted.The more resources used now the less theremay be in the future, eg oil, coal.The Price Mechanism allocates resources,

with some government intervention foressential services.


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3. Howare these goods and services to beproduced?This decision is made by businesses, who

generally consider the least costcombinationof resources to produce the quantity of goodsand services that they plan to sell.

The governmentmay set certain controls onresource use, eg pollution, land zoning,minimum award wages and conditions.


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4. How are these goods and services to bedistributedamong the population? People can not have all that they want sooutput is rationed.The distribution mechanism in Australia is a

persons income and wealth. The greater theincome the more goods and services can bepurchased.

The governmentintervenes to care for thoseonlow incomesor to provide basic services,eg. health, education, law and order.


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The Production Possibilities Curve (frontier)sets out what can be produced with theavailable resources in the firm or theeconomy. Some important concepts andissues that can be derived from the PPC are:

1. SCARCITY AND CHOICE


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The production possibility frontier for thewhole economycan be illustrated by lookingat the production of two goods - Cola andDVDs.

It is not possible to produce an unlimitedquantity of either product as resources arelimited.


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a 0 and 15b 1 and 14

c 2 and 12

d 3 and 9

e 4 and 5

f 5 and 0

DVDs Cola

(millions (millions of bottles

Possibility per year) per year)


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Cola(millionso

fbottlesperyear)

DVDs (millions per year)

0 1 2 3 4 5

5

10

15


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Cola(millionso

fbottlesperyear)


0 1 2 3 4 5

5

10

15a


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0 1 2 3 4 5

5

10

15 a b

Cola(millionsofbo

ttlesperyear)


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0 1 2 3 4 5

5

10

15 b

c

Co

la(millionsofb

ottlesperyear)

a


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0 1 2 3 4 5

5

10

15 a b

c

d

Cola(millionsofbottlesperyear)


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0 1 2 3 4 5

5

10

15 a b

c

d

e

Co

la(millionsofb

ottlesperyear)


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0 1 2 3 4 5

5

15 a b

c

d

e

f


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0 1 2 3 4 5

5

10

15 a b

c

d

e

f



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Attainable

Unattainable


0 1 2 3 4 5

5

10

15a

b

c

d

e

f

Cola(millions

ofbottlesperyear)


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Attainable

Unattainable


0 1 2 3 4 5

5

10

15 a b

c

d

e

f

Cola(million

sofbottlesperye

ar)

z


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In this case the firm or economy can produce15 million cans of cola or 5 million DVDs or acombination of each.

The firm/country can not produce outsidetheproduction possibilities frontier due to limitedresources.

If the firm or country produces inside thefrontier- Z, resources are not being used efficiently.

This firm/country faces increasing opportunitycosts. More cans of cola has to be given upeach time to get an extra million DVDs.


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The Production Possibilities Curve is usually concave inshape.

This demonstrates that the country faces INCREASINGOPPORTUNITY COSTS. If we start from point A an increasing amount of capital

goods need to be sacrificed, for each extra consumergood produced.

Increasing opportunity costs occur because not allresources are the same kind or quality.

Some resources are more efficient at producing consumergoods, while others are better at producing capital goods.


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0 1 2 3 4 5

5

10

15 a b

c

d

e

f

0 1 2 3 4 5

5

C

ola(millionsof

bottlesperyear) Increasing

opportunity

cost of DVDs...


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0 1 2 3 4 5

5

10

15 a b

c

d

e

f

0 1 2 3 4 5

5

C

ola(millionsof


opportunity

cost of DVDs...


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0 1 2 3 4 5

5

10

15 a b

c

d

e

f

0 1 2 3 4 5

5

C

ola(millionsof


opportunity

cost of DVDs...


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0 1 2 3 4 5

5

10

15 a b

c

d

e

f

0 1 2 3 4 5

5

C

ola(millionsof


opportunity

cost of DVDs...


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0 1 2 3 4 5

5

10

15 a b

c

d

e

f

0 1 2 3 4 5

5

C

ola(millionsof


opportunity

cost of DVDs...


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0 1 2 3 4 5

1

2

3

4

5

Margin

alcost(bottles

ofcolapertape)

means increasingmarginal cost of

DVDs.


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0 1 2 3 4 5

1

2

3

4

5MC

Margin

alcost(bottles

ofcolapertape)

means increasingmarginal cost of

DVDs.


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3. INVESTMENT Vs CONSUMPTION

Economies must make choices regarding the

proportion of resourcesdevoted to capital goods

V consumer goods.Greaterproduction of capital goodsin the

present will lead to higher growthand more

output in the future.

But who is willing to forgo consumption now???


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Economic Growth in

Australia and Singapore

Since 1965, Singapore has grown more

rapidly than Australia

Singapore has devoted a bigger fraction of itsresources to accumulating capital.

Economic Growth in Australia


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Economic Growth in Australia

and Singapore

Consumption goods (per person)

Capital

goods(perpe

rson)

aa

Singapore

in 1965

Australia

in 1965

c

b

Australia

in 2008

Singapore

in 2008


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The allocation of scarce resources in aneconomy such as Australia is basicallydetermined by the MARKET, with limitedGovernment intervention.


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A market is anyarrangement that

enables buyers and

sellers to get

information and to do

business or trade

with each other.


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GOODS

MARKETS

FACTOR

MARKETS

FINANCIAL

MARKETS

MARKETS


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THE GOODS MARKETThis is made up of the market for consumergoods and services.Households, firms, the government and the

overseas sectors purchase goods andservices.


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Documents

The Basic Basis of Microeconomics