Introduction to Microeconomics: First Class Lecture

Course Title: ECO 101 - Introduction to Microeconomics

Topic: Introduction to Economics and Microeconomics
Lecturer: Mr Mark Achukwu
Class Level: 100 Level
Course Unit: 3 Credits

Introduction to Economics

Economics is a social science that studies how individuals, businesses, and

governments make choices when faced with limited resources. These choices
determine how goods and services are produced, distributed, and consumed.
Economics helps us understand human behavior, resource allocation, and how
to make the best decisions in a world of scarcity.

Introduction to Microeconomics (First Lecture)

Topics:

 Definition and Scope of Economics

 Basic Economic Problems: Scarcity, Choice, and Opportunity Cost
 Types of Economic Systems (Market, Command, Mixed Economies)
 Microeconomics vs. Macroeconomics

1. Definition and Scope of Economics

Definition of Economics:
Economics is a social science that examines how people make choices in the
face of limited resources to satisfy their unlimited wants. It focuses on the
allocation of scarce resources, production, and distribution of goods and
services, and the decision-making processes of individuals, businesses, and
governments.

There are several definitions of economics, but two prominent ones are:

 Lionel Robbins' Definition (1932): Economics is the science that

studies human behavior as a relationship between ends (wants) and
scarce means (resources) which have alternative uses. This definition
emphasizes scarcity and choice, two key concepts in economics.
 Alfred Marshall's Definition (1890): Economics is the study of
mankind in the ordinary business of life. This definition highlights
economics as the study of how people earn their income and spend it,
covering both wealth and human welfare.
Scope of Economics:
Economics is divided into two broad categories:

 Microeconomics: Focuses on individual units such as households,

firms, and markets. It studies how decisions are made by these entities
regarding the allocation of resources, pricing, and production.
 Macroeconomics: Deals with aggregate economic variables such as
inflation, unemployment, national income, and economic growth. It
studies the economy as a whole and the interrelations between various
sectors.

2. Basic Economic Problems: Scarcity, Choice, and Opportunity Cost

Every economy, regardless of its size or structure, faces three fundamental

economic problems due to limited resources and unlimited human wants:

a. Scarcity:
Scarcity is the situation where resources (land, labor, capital, and
entrepreneurship) are limited, but human wants are unlimited. Since
resources are insufficient to produce everything people desire, decisions have
to be made on how best to allocate them.

Example:
Think of a village with only one well. The water is a scarce resource because
everyone in the village needs it, but there is not enough to meet everyone's
demands at the same time.

b. Choice:
Since resources are scarce, individuals, businesses, and governments must
make choices about what to produce, how to produce, and for whom to
produce. Every decision to allocate resources to one use means forgoing the
opportunity to use those resources for another purpose.

Example:
If a government decides to spend money on building a school, it may have to
reduce funding for healthcare. This involves making a choice based on which
need is considered more important at the time.

c. Opportunity Cost:
Opportunity cost is the value of the next best alternative that is forgone when
a choice is made. It reflects the cost of the lost opportunity to use resources in
a different way.

Example:
If you choose to spend your weekend studying instead of going out with
friends, the opportunity cost of studying is the fun and relaxation you miss by
not going out.
Basic Economic Problems:

1. What to produce? (Which goods and services should be produced?)

2. How to produce? (What methods of production should be used?)
3. For whom to produce? (Who will receive the goods and services?)

The fundamental problems in economics arise from the reality of scarcity —

the fact that resources (land, labor, capital, and entrepreneurship) are limited,
while human wants are unlimited. These problems exist in every economy,
whether it’s a developed or developing one, and can be categorized into three
main questions:

1. What to Produce?

This problem refers to deciding which goods and services should be produced
and in what quantities. Since resources are scarce, societies must prioritize
certain goods over others. For example, should more resources be allocated
to producing food, housing, healthcare, or luxury items? In a market economy,
this decision is typically made through consumer demand and market prices.
In a command economy, the government might make these decisions.

Example: A society may need to decide whether to produce more industrial

goods (like machinery) or consumer goods (like clothing and food).

2. How to Produce?

This problem deals with choosing the production methods. Resources can be
combined in various ways to produce goods and services. This decision
depends on available resources, technology, and the need for efficiency. For
instance, should production be labor-intensive (using more workers) or
capital-intensive (using more machinery)? The answer to this question often
depends on the country's resource endowment and level of technology.

Example: In a developing country with abundant labor but limited capital, it

might be more efficient to adopt labor-intensive methods, whereas an
advanced economy might prefer capital-intensive methods due to its
technological advancements.

3. For Whom to Produce?

This problem focuses on how the goods and services produced should be
distributed among the population. Who gets access to the limited goods and
services produced? This is a question of distribution and equity. Societies
need to decide whether goods and services should be distributed equally,
based on need, or through market systems where individuals’ purchasing
power determines access.

Example: In a market economy, those with higher incomes can afford more
goods and services, whereas in a command economy, the government might
ensure more equal distribution through rationing or subsidies.
Opportunity Cost

This concept is central to all three fundamental problems. When a decision is

made to allocate resources in one way, the opportunity cost is the value of
the next best alternative that is forgone. Every choice has an associated
opportunity cost, reflecting the trade-offs that must be made because of
limited resources.

Example: If a country allocates more resources to military spending, the

opportunity cost might be fewer resources available for healthcare or
education.

3. Types of Economic Systems

An economic system refers to the way a society organizes the production,

distribution, and consumption of goods and services. There are three main
types of economic systems:

a. Market Economy (Capitalist Economy):

In a market economy, economic decisions are made by individuals and
businesses based on supply and demand. The government plays little to no
role in regulating the economy. Prices are determined through the interaction
of buyers and sellers in free markets.

Key Characteristics:

 Private ownership of resources.

 Profit motive drives economic activities.
 Minimal government intervention.

Example:
The United States and the United Kingdom are examples of countries with
market-oriented economies.

b. Command Economy (Planned Economy):

In a command economy, the government makes all major economic decisions.
It controls resources, production, and distribution, and determines prices and
wages.

Key Characteristics:

 Centralized control of the economy by the government.

 No private ownership of production resources.
 Government plans dictate production and distribution.

Example:
North Korea and Cuba are examples of command economies.

c. Mixed Economy:
A mixed economy combines elements of both market and command
economies. While most decisions are made by individuals and businesses, the
government plays a significant role in regulating the economy and providing
public goods.

Key Characteristics:

 Coexistence of private and public sectors.

 Government intervenes in areas like education, healthcare, and social
security.
 Market forces determine prices, but government regulations may be
imposed.

Example:
Most modern economies, including Nigeria, France, and India, are mixed
economies.

4. Microeconomics vs. Macroeconomics

Economics is broadly divided into two branches: microeconomics and

macroeconomics.

Microeconomics and macroeconomics are two major branches of economics

that examine different aspects of the economy, each with its own focus,
scope, and tools of analysis. Below is a detailed comparison between
microeconomics and macroeconomics:

1. Scope and Focus

Microeconomics focuses on the behavior of individual units, such as

consumers, firms, workers, and investors. It examines how these economic
agents make decisions regarding resource allocation, production, and
consumption at a small scale.
Macroeconomics, on the other hand, studies the economy as a whole. It
analyzes large-scale economic factors such as national output (GDP),
unemployment rates, inflation, fiscal policies, and overall economic growth. It
aims to understand the broader aggregates of the economy.

Example:

 Microeconomics examines how a household decides what to buy with

its income, or how a business determines its pricing strategy.
 Macroeconomics explores why the overall level of prices in an economy
rises (inflation) or what causes an economy to grow over time.

2. Key Questions

 Microeconomics:

o How do consumers decide what to buy?

o How do firms decide what to produce and at what price?
 o How do markets allocate resources efficiently?

 Macroeconomics:
o What causes inflation and unemployment?
o How does government policy impact the economy as a whole?
o What are the long-term determinants of economic growth?

3. Main Economic Agents

 Microeconomics: Focuses on individual decision-makers like

households, firms, and industries. It explores their specific behaviors,
preferences, and interactions in markets.
 Macroeconomics: Deals with aggregate measures and includes
analysis of broad economic entities like the government, central banks,
and entire economies. It studies collective behavior rather than
individual decisions.

4. Key Concepts

 Microeconomics:

o Demand and Supply: How prices are determined in markets

and how they adjust when there is a surplus or shortage.
o Elasticity: How responsive consumers and producers are to
changes in prices.
o Market Structures: Examines various types of markets like
perfect competition, monopolies, and oligopolies.
o Production Costs and Revenue: How firms analyze costs to
make production decisions and maximize profits.

 Macroeconomics:
o Gross Domestic Product (GDP): The total value of goods and
services produced in an economy over a specific period.
o Inflation: The rate at which the general level of prices for goods
and services is rising.
o Unemployment: The percentage of the labor force that is
unemployed but actively seeking work.
o Monetary and Fiscal Policy: The use of government spending
and taxation (fiscal policy) and central bank actions (monetary
policy) to influence economic activity.

5. Level of Analysis

 Microeconomics operates on a bottom-up approach, starting with

individual decision-makers and working upwards to see how their
actions affect the entire market.
 Macroeconomics uses a top-down approach, beginning with overall
economic conditions and examining how they influence individual
entities within the economy.
Example:
Microeconomics would analyze how a change in the price of coffee affects
individual consumers and coffee shops, while macroeconomics would look at
how changes in national income or inflation influence the entire coffee
industry.

6. Goals and Objectives

 Microeconomics aims to understand how to achieve efficiency in

resource allocation and how individual markets function. It seeks to
explain price formation and how resources are distributed across
various sectors.
 Macroeconomics focuses on achieving goals such as economic
growth, price stability, and full employment. It is also concerned with
stabilizing the economy through policy interventions.

7. Tools of Analysis

 Microeconomics:

o Partial Equilibrium Analysis: Studies individual markets in

isolation, assuming that changes in one market do not
significantly affect others.
o Marginal Analysis: Looks at the impact of small incremental
changes in decision-making (marginal utility, marginal cost).

 Macroeconomics:

o Aggregate Demand and Supply: Looks at the total demand

for and supply of goods and services in an economy.
o IS-LM Model: Explores the relationship between interest rates
and output in the goods and money markets.
o Phillips Curve: Examines the trade-off between inflation and
unemployment.

8. Policy Implications

 Microeconomics: Guides policies that improve market efficiency and

competition. For example, antitrust laws to prevent monopolies or
pricing regulations.
 Macroeconomics: Informs decisions related to fiscal and monetary
policies, such as tax reforms, government spending, or adjusting
interest rates to control inflation and stimulate economic growth.

9. Real-Life Examples

 Microeconomics:

o Pricing strategy of a company like Apple when launching a new

iPhone.
o How Uber sets dynamic prices based on the supply of drivers
and demand from passengers.
  Macroeconomics:

o The impact of the 2008 global financial crisis on worldwide

unemployment and economic growth.
o How government stimulus during the COVID-19 pandemic
helped stabilize economic output.

Conclusion:

While both microeconomics and macroeconomics deal with resource

allocation and human behavior, they do so on different scales.
Microeconomics looks at the smaller, individual units, focusing on consumers,
firms, and specific industries, while macroeconomics addresses the bigger
picture, analyzing the overall performance and structure of the economy.

Both branches complement each other, and a comprehensive understanding

of economics requires knowledge of both micro and macro perspectives.

Summary

In this first class, we have introduced the key concepts of economics,

including the definition and scope of economics, the basic economic problems
faced by all societies, the different types of economic systems, and the
distinction between microeconomics and macroeconomics. Understanding
these foundational ideas is crucial as they will form the basis of all future
discussions in this course.

As we move forward, we will dive deeper into microeconomics, examining

how individual consumers and firms make decisions, and how these decisions
shape market outcomes. By the end of this course, you will be able to analyze
economic issues in your everyday life, businesses, and government policies.

Discussion Questions:

1. Can you think of a recent decision you made that involved opportunity
cost? Explain.
2. Which economic system do you think works best in modern economies,
and why?
3. How do you think microeconomics affects your daily life?

This first class provides a clear introduction to the subject, setting the stage
for deeper exploration of microeconomic principles in future lectures.