FTU- MICROECONOMICS Chapter 1

For Undergraduates

Prepared by Kieu Minh Tran T.(MSc)

SYLLABUS
 Objectives: to improve economic literacy as well
as critical thinking and problem solving skills to
explain and predict economic issues.
 Pre-requisites: Math
 Student task:
 Class attendance (90%)
 Actively participate in-class activity
 Complete all homework and other tasks
 Don’t have private conversation or arrive at class late,
which can disrupt the learning environment of the
class

BOOKS AND READING

 Mankiw,N.Gregory,(2009) Principles of Economics

-Fifth edition, South Western CENGAGE Learning.
 Mankiw,N.Gregory,(2009) Study Guide
 Lecture’s slides

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FTU- MICROECONOMICS Chapter 1

TOPICS IN MICROECONOMICS
1. Basic concepts in economics and
microeconomics.
2. Demand and supply
3. Consumer Behavior
4. Producer Behavior.
5. Market structures
6. The role of the Government in the
economy.

Contact:
 Tran Thi Kieu Minh
 [email protected]
 0943170439

Chapter 1
Basic concepts in economics
and microeconomics

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FTU- MICROECONOMICS Chapter 1

Contents of Chapter 1
1. Basic concepts
2. Economics
3. The optimum economic
choices

•Economy
•Resources
•Individuals

1. Basic concepts
1. Economy – “oikonomos” (Greek): “One
who manages a household”
 Household - many decisions of allocate
limited resources
 Society - many decisions
 Allocate resources
 Allocate output

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FTU- MICROECONOMICS Chapter 1

1. Basic concepts
2. Individuals
 Household = consumers
 Firms = Producers
 Government

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1. Basic concepts
3. Resources
 Land: Nature resources
 Labor (L):
 Capital: Physical capital (K)
 Entrepreneurship

Resources are scarce

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1. Basic concepts
4. Scarcity - limited nature of society’s resources
Scarcity means that society has limited resources and
therefore cannot produce all the goods and services
people wish to have.
5. Goods
 Economics goods
 Free goods
 Economics bads

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FTU- MICROECONOMICS Chapter 1

• Principles
• Microeconomics and Macroeconomics
• Positive vs Normative Analysis
• Models

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2. Economics
 Physicists try to explain the existence of black holes
in outer space.
 Biologists try to explain why dinosaurs became
extinct,
 Economists try to explain puzzling observations
and facts about the economy.

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Three Questions of an economy

1. What is to be produced?
2. How are the goods to be produced?
How can resources be used efficiently?
3. For whom are the goods to be
produced?

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Definition of Economics
 Economics is to study of how society
manages its scarce resources
 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
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FOUNDATIONS OF MODERN
ECONOMICS
CLASSICAL
 ADAM SMITH: The Wealth of Nations (1776)
 ALFRED MARSHALL: Principles of Economics (1890).
NEOCLASSICAL
 During the 1940s - 1950s
 Modern classical school of economics with 5 key ideas.

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2.1Ten principles of economics

How People Make Decisions
1: People Face Trade-offs
2: The Cost of Something Is What You Give Up to Get It
3: Rational People Think at the Margin
4: People Respond to Incentives
How People Interact
5: Trade Can Make Everyone Better Off
6: Markets Are Usually a Good Way to Organize Economic Activity
7: Governments Can Sometimes Improve Market Outcomes
How the Economy as a Whole Works
8: A Country’s Standard of Living Depends on Its Ability to Produce
Goods and Services
9: Prices Rise When the Government Prints Too Much Money
10: Society Faces a Short-Run Trade-off between Inflation and
Unemployment
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FTU- MICROECONOMICS Chapter 1

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

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How People Make Decisions

Principle 2: The cost of something is what you give up to
get it
 People face trade-offs
 Make decisions
 Compare cost with benefits of alternatives
 Opportunity cost
 Whatever most be given up to obtain one item

THERE IS NO FREE LUNCH!

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How People Make Decisions

Principle 3: Rational people think at the margin
 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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How People Make Decisions

Principle 4: People respond to incentives
 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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How People Interact

Principle 5: Trade can make everyone better off
 Trade
 Specialization
 Allows each person/country to specialize in the activities
he/she does best
 People/countries can buy a greater variety of goods and
services at lower cost

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How People Interact

Principle 6: Markets are usually a good way to organize
economic activity
 Market economy - allocates resources
 Decentralized decisions of many firms and households
 As they interact in markets for goods and services
 Guided by prices and self interest
 Adam Smith’s “invisible hand”

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How People Interact

Principle 7: Governments can sometimes improve
market outcomes
 We need government
 Enforce the rules
 Maintain institutions - key to market economy
 Enforce property rights

 Property rights
 Ability of an individual to own and exercise control over
scarce resources

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How People Interact

Principle 7: Governments can sometimes improve
market outcomes
 Government intervention
 Change allocation of resources
 To promote efficiency
 Avoid market failure

 To promote equality
 Avoid disparities in economic wellbeing

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How the Economy as a Whole

Works
Principle 8: A country’s standard of living depends on its
ability to produce goods and services
 Large differences in living standards
 Among countries
 Over time
 Explanation: differences in productivity

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How the Economy as a Whole Works

 Productivity
 Quantity of goods & services produced from each unit of
labor input
 Higher productivity
 Higher standard of living
 Growth rate of nation’s productivity
 Determines growth rate of its average income

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How the Economy as a Whole Works

Principle 9: Prices rise when the government prints too
much money
 Inflation
 An increase in the overall level of prices in the economy
 Causes for large / persistent inflation
 Growth in quantity of money
 Value of money falls

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How the Economy as a Whole

Works
Principle 10: Society faces a short-run trade-off between
inflation and unemployment
 Short-run effects of monetary injections:
 Stimulates - overall level of spending
 Higher demand for goods and services
 Firms – raise prices; hire more workers; produce more
goods and services
 Lower unemployment
 Short-run tradeoff between inflation and
unemployment
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FTU- MICROECONOMICS Chapter 1

How the Economy as a Whole

Works
Principle 10: Society faces a short-run trade-off between
inflation and unemployment
 Short-run trade-off between unemployment and
inflation
 Key role – analysis of business cycle
 Business cycle
 Fluctuations in economic activity
 Employment
 Production

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2.2 Microeconomics and

Macroeconomics
 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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2.3 Positive vs. Normative

economic analysis
 Positive statements
 Attempt to describe the world as it is
 Descriptive
 Confirm or refute by examining evidence
 Answer for “What be”
 Normative statements
 Attempt to prescribe how the world should be
 Prescriptive
 Answer for “What should be”

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2.4 The scientific method of economics

Observation, theory, and more observation
 Observation
 Theory
 Conducting experiments
 Observation

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Economics model
 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
Come in many forms:
 Numerical tables
 Graphs
 Algebraic equations
 Wordy descriptions

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FTU- MICROECONOMICS Chapter 1

Our first model: The circular-flow diagram

 Visual model of the economy
 Shows how dollars flow through markets
among households and firms
 Decision makers
 Firms & Households
 Markets
 For gods and services
 For factors of production

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The circular flow

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Second model: The production possibilities frontier

 Production possibilities frontier
 A graph
 Combinations of output that the economy
can possibly produce
 Given the available
 Factors of production
 Production technology

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FTU- MICROECONOMICS Chapter 1

The production possibilities frontier

Quantity of
Computers
Produced The production possibilities
frontier shows the
combinations of output - in
C this case, cars and
3,000 F
computers - that the
Production
economy can possibly
A Possibilities
2,200 produce.
B Frontier
2,000 The economy can produce
any combination on or
inside the frontier.
D Points outside the frontier
1,000
are not feasible given the
E
economy’s resources.

0 300 600 700 1,000 Quantity of

Cars
Produced
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Second model: The production possibilities frontier

 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

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Second model: The production possibilities frontier

 Bowed out production possibilities frontier

 Opportunity cost of one good= Give up the
other good
 Resource specialization

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FTU- MICROECONOMICS Chapter 1

Second model: The production possibilities frontier

 Technological advance
 Outward shift of the production
possibilities frontier
 Economic growth
 Produce more of both goods

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A shift in the production possibilities frontier

Quantity of
Computers
Produced A technological advance in
4,000 the computer industry
enables the economy to
produce more computers
3,000 for any given number of
2,300 G cars. As a result, the
2,200 production possibilities
A frontier shifts outward. If
the economy moves from
point A to point G, then the
production of both cars and
computers increases.

0 600 650 1,000 Quantity of

Cars Produced

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FTU- MICROECONOMICS Chapter 1

3.1 Why people choice?

 People want to maximize their benefit.
 People face the fact that resources are scared

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3.2 Purposes of the choices

 Households (consumers): maximizing benefit (utility)
 Firms (producers): maximizing profit
 Government: maximizing social welfare

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MATHEMATICS REVISION

 Slope of the curve

y

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

1 2 x

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FTU- MICROECONOMICS Chapter 1

Revision (cont.)
 Six types of relationship

Increasing
positive Decreasing
slope Positive
slope

Decreasing
negative
Increasing slope
negative
slope

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Math revision (Cont.)

 Constant slope

Constant Constant
positive slope negative slope

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Facts and impacts

 Movement along the curve vs. shift of the curve
 Movement along the curve:
 When x and y changes. The line
y
 Shift of the curve: shifts when
Z changes
 When another variable
other than x and y change. Z2
A third variable shift the
curve. z1

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