Mod 1

BASIC MICROECONOMICS
MODULE 1, Lessons 1 to 3
1.1 Introduction
This lesson tries to acquaint students with basic economic concepts and
terminologies, which are necessary to understand any subject of economics (particularly this
one – microeconomics). The two fundamental facts, limited resources and unlimited wants,
which provide a reason for the existence of the subject of economics, are also briefly
explained.
The lesson will present the fundamental economic problems, which are common to
all countries, and how they are solved in different economic systems in some detail. The
lesson will also provide an illumination of some basic concepts like scarcity of economic
resources, opportunity cost and efficiency. The circular flow of economic activities presents
how decision-making units interact in the market economy system. Towards its end, the
chapter describes the concern of microeconomics.
Learning Outcomes
At the end of this module you should have:
1. defined economics;
2. explained the nature and scope of economics in general and microeconomics in
particular;
3. understood different methods of economic analysis;
4. explained what economics resources are, and the issue of scarcity;
5. understood the different economic systems and how each of them answer the
basic economic problems;
6. understood the concept of opportunity cost and efficiency;
7. had an overview of the different types of market structure.
Discussion
Outline:
1. definitions, scope and nature of economics

2. the fundamental economic problems and the alternative economic system
3. scarcity, opportunity cost and efficiency
4. decision-making units and the circular flow of economic activities
5. the concept of market structure
6. microeconomics theory and the price system
1.2 DEFINITIONS, SCOPE AND NATURE OF ECONOMICS
Why do you study economics?

Economics is a word commonly used in our daily conversation. What is economics and why
do you need to learn economics? Before defining economics, let us first try to see the
reasons why people want to study economics. Many people study economics for various
reasons. Some people want to study economics because they hope to make money. Some,
on the other hand, need to study economics because they feel illiterate if they cannot know
and understand the law of demand and supply. Many want to learn economics because they
want to know and understand how inflation and budget deficit will affect their future life.
Generally, knowledge about economics is important because each one of us faces
economic problems at different levels and makes economic decision throughout his/her life
knowingly or unknowingly. For instance, on a personal level, we often make some personal
decisions on issues like: which job should we take? How can we best spend our income?
Shall we buy or rent a house? And so on.
If someone enters into business, he/she will face many economic decisions like: what
to produce or what type of service to provide? How and in what quantity to produce? And
so on. Also in politics, we face many economic decisions like how much the nation should
spend on defence, on health care and environment, on education and on different physical
infrastructure? Even as a voter, we evaluate candidates partly on the basis of their economic
view, that is, on the basis of their view on unemployment, on inflation and over all on their
socio-economic programs.
In short, economic literacy is important because economic issues facing government and
individuals shape the future of the nation and affect the wellbeing of its citizens. Therefore,
for these and the like reasons, it is essential that economics be made accessible to
everyone.
What is Economics?
Before defining economics, again, we better first introduce some terminologies

which are necessary for better understanding of the definition of economics.
A. Resources - is anything that can be used to produce goods and services. Resources
are also called inputs or factors of production. Resources (factors or unit of
production) are divided into four categories, namely:
-Land
-Labor
-Capital
-Entrepreneurship
1. Land: is a natural gift, which includes all natural resources which are found inside
and on the surface of the land. These are like:
- Different materials
- Soil, river, lake and ponds
- Timber or forest resources and other natural materials necessary to produce
goods and services.
2. Labor: is mental and physical human effort (ability) i=used in the production
process. The skill and amount of labor will be important in determining level and
quality of production.
3. Capital: is a man-made means of production used in the production process.
Here belong resources like:
- Machineries, equipment, and tools used in the production process
- Buildings and materials attached to it, and
- Financial capital
4. Entrepreneurship: is a managerial skill of organizing and combining te above

three resources for production purposes. The above resources cannot be
productive and be changed into goods and services without the creative effort of
entrepreneur. Entrepreneur is an individual who organizes resources for
production, introduces new products or techniques of production.
The principal role of the entrepreneur includes:

 Introducing new product and new methods of production
 Setting the overall direction of the firm
 Being a risk taker
Factors of production are combined differently by entrepreneur in the production process

and will be converted into goods and services.
Summary
 Though different people have different motives to study economics to study

economics, knowledge about economics in general is essential because everyone
faces economic problems at different levels, and makes economic decision
throughout his/her life knowingly or unknowingly. Therefore, economic literacy is
important because economic issues facing government and individuals shape the
future of the nation and affect the wellbeing of its citizens.
 Limited economic resources and unlimited societal wants for material goods and
services are the two fundamental facts, which lay foundation for the economizing
problem and economics as discipline. Economic resources like, different types of
labor, land, capital and entrepreneurial skill are limited. Whereas society’s need for
goods and services are unlimited as wants are multiplicative, recurrent and as
human nature is accumulative. The limited availability of resources and the unlimited
wants give rise to the problem of scarcity. Scarcity forces us to make choices. Making
a choice, in turn, implies the need for the efficient utilization of resources.
 Economics is therefore, the study of how scarce resources are allocated among
alternative and competing ends in order to maximize the consumption of goods and
services.
 The basic divisions in economics are microeconomics and macroeconomics.
Microeconomics studies the behavior of individual components of the country;
households and business firms. Macroeconomics, on the other hand, deals with
issues at the overall economic level like unemployment, inflation and national
income. Economics can be positive or normative. Positive economics is limited to
making purely descriptive statements of scientific prediction. Normative economics
involves value judgments and tells us what should be done.
 The three major or fundamental problems of economics are what to produce, how
to produce, and for whom to produce. These problems are universal to all countries
regardless of their level of development. However, different countries having
different economic system use different approach to solve them. Economic systems
are different from each other on the basis of the ownership of economic resources
and the method by which economic activities are coordinated. The four economic
systems are free market economy, mixed economy, and traditional economy system.
 Opportunity cost is the amount of one product, which must be given up to obtain
additional unit of another product. Efficiency occurs when the economy is using its
resources so well that producing more of one good result in less of other goods, i.e.,
no resources are being wasted. But full production must also be realized. Full
production means producing the “right goods” (allocating efficiency0 in the “right
way” (productive efficiency).
 Households, businesses and government are the major decision-making units of an
economy. While households attempt to maximize their utility, firms seek to
maximize their profits. The link between them is shown by the circular flow diagram.

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BASIC MICROECONOMICS

1. definitions, scope and nature of economics

1.2 DEFINITIONS, SCOPE AND NATURE OF ECONOMICS

Why do you study economics?

Before defining economics, again, we better first introduce some terminologies

4. Entrepreneurship: is a managerial skill of organizing and combining te above

The principal role of the entrepreneur includes:

Factors of production are combined differently by entrepreneur in the production process

 Though different people have different motives to study economics to study

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