Microeconomics Chapter 1 handouts Prepared by Dr. L.

Al Khalifa

Chapter 1 main points Economics Economics is the study of how societies choose to use scarce productive resources to produce goods and services of various kinds. Economics is a science that studies choices individuals have to make because of scarcity Scarcity Scarcity is the fundamental economic problem Because our productive resources are limited and our wants (needs) are unlimited, these resources can not satisfy all our wants. In other words wants exceed resources. What is a Choice? A choice is a trade-off. You get something and give up something else. Each choice we make has alternatives. Therefore, each choice has an opportunity cost. The meaning of opportunity cost Opportunity cost is the best alternative you gave up. Productive resources Our productive resources are the resources we use in the production of goods and services. We also call them factors of production and economic resources. These resources include: A. Labor (mental and physical work of people) B. Land (gifts of nature) (air, water, minerals, fruits, vegetables.) (raw materials) C. Capital (goods we use to produce other goods or services) (machines and equipments) Capital also includes human capital which is the knowledge and skills that people obtain from education and training. D. Entrepreunership or managers (the resource that organizes labor, land and capital) What are the economics questions (problems)? A. What are the goods and services are we going to produce and in what quantities? B. How we are going to produce goods and services? C. For whom we are going to produce goods and services? Microeconomics Microeconomics is the branch of economics that studies: a. The decisions of individual households (Kanoo, Al Zayani, Al Hariri, ) and firms (Alba, Bapco, Batelco, National Bank of Bahrain, HSBC, Alcoa, Chevron) b. The way individual (national or global) markets (gas, oil, aluminium) work

Microeconomics Chapter 1 handouts Prepared by Dr. L. Al Khalifa

c. How government actions (regulations and taxes) affect particular industries (aluminium, oil, education..) Macroeconomics Macroeconomics is the branch of economics that examines: a. National and global economies. It looks at determination of the overall level of economic activity such as the amount of total employment. b. c. How government actions affect the aggregate economy. Macroeconomics focuses today on four long-term problems which are: 1. Economic growth 2. Unemployment 3. Inflation 4. Government budgets and international deficits

Marginal Benefit The marginal benefit of an activity is the additional benefit that results from an increase in one activity. Suppose that you work part time 5 hours per week and you earn 10 BD per hour. The marginal benefit from working an additional hour per week (6 hours instead of 5) is 10 BD per week. Marginal cost The marginal cost of an activity is the added cost from an increase in one activity. Suppose that you work part time 5 hours per week and you decided to work 6 hours instead of 5. The marginal cost of the extra hour you work is giving up one hour of studying per week. What is marginal analysis? Choices are made in small steps (at the margin). When we make a choice we compare between marginal benefit and marginal cost of an activity. If marginal cost exceeds marginal benefit, you decrease the activity (work less hours). If marginal benefit exceeds marginal cost, you increase the activity (work more hours). If marginal cost equals marginal benefits, you do not increase or decrease the activity (you use your resources and time efficiently). 12. What does economic as a science do? Economics is a positive science. It attempts to understand the economic world like it is. Economists usually follow the following steps: 1. Observation of economic variables (examples: the price, the quantity demanded of a good, tax.) 2. Building models (example: a positive or a negative relationship between two economic variables) 3. Testing models (to see whether they are right or wrong) 4. Constructing an economic theory. The difference between positive statements and normative statements - Positive statements describe what is or in other words how the world actually is. Therefore, they can be tested (economic science uses positive statements). - Normative statements describe what should be or in other worlds what ought to be. Therefore these statements can not be tested.

Microeconomics Chapter 1 handouts Prepared by Dr. L. Al Khalifa

ceteris paribus clause Ceteris paribus are two Latin words that mean other things equal. In developing models about the relationship between income and expenditure as example, economists must study income and expenditure in isolation from other factors like prices and interests rates.so they assume that off the other factors are being equal (do not change). Chapter 1 Quiz Economics & Scarcity 1. The most fundamental economic problem is ________________________. a. reducing unemployment. b. health and health care. c. scarcity d. decreasing the inflation rate. 2. The fact that wants cannot be fully satisfied with available resources is called the problem of _____________________. a. opportunity cost. b. scarcity. c. what to produce. d. for whom to produce 3. Scarcity can be eliminated through _______________________. a. competition b. markets. c. voluntary exchange. d. none of the above because scarcity cannot be eliminated. Economic Resources & Questions 4. When the economy produces fish for sale at the international market, it most directly is answering the _________question a. what b. when c. where d. how 5. As you study for your economics test you are increasing your ____________. a. ownership of wants b. human capital c. entrepreneurship d. ability to create scarcity The Concept of Opportunity Cost 6. When we choose a particular option, we must give up alternative options. The highest-valued alternative forgone is the ________________. a. opportunity cost of the option chosen b. comparative advantage of the option chosen c. non monetary cost of the option chosen d. absolute advantage

Microeconomics Chapter 1 handouts Prepared by Dr. L. Al Khalifa

7. When the government chooses to use resources to build a dam, these resources are no longer available to build a highway. This choice illustrates the concept of.. a. a market. b. macroeconomics. c. opportunity cost. d. marginal benefits. Microeconomics & Macroeconomics 8. Studying how an individual firm decides to set its price is primary a concern of ____________. a. normative economics. b. macroeconomics. c. microeconomics. d. all economists. Marginal benefit and Marginal Cost 9. Marginal cost is the opportunity cost____________. a. that your activity imposes on someone else b. that arises from producing one more unit of a good or a service c. of a good or a service that exceeds its benefit d. of a good or a service divided by the number of units produced Economics science 10. Normative statements are statements about______________. a. prices b. quantities c. what is d. what ought to be Chapter 1 Exercise 1. Scarcity exists because__________________________. a. peoples wants exceed their ability to meet those wants. b. peoples wants do not exceed their ability to meet those wants. c. peoples wants are limited. d. peoples resources are unlimited. 2. The issue of scarcity exists ________________________. a. only in the past but not anymore. b. only in very poor economy. c. in all economies. d. now and in the past, but will be eliminated at some point in the future because of economic growth. 3. People have different amounts of income. This observation is directly related to which of big economic questions? a. The What questions. b. The How question. c. The for whom question. d. Both b and c

Microeconomics Chapter 1 handouts Prepared by Dr. L. Al Khalifa

4. From 9 to 10 A.M., Ali can sleep in, go to his economics lecture, or play tennis. Suppose that Ali decides to go to the lecture but thinks that, if he hasnt, he would otherwise have slept in. the opportunity cost of attending the lecture is ______________. a. sleeping in and playing tennis. b. playing tennis. c. sleeping in. d. one hour of time. 5. Which of the following is a microeconomic topic? a. The reasons why Faten buys less orange juice. b. The reasons for a decline in average prices. c. The cause of an increase in total production. d. The effect of a government budget deficit. 6. To make a choice, an individual________________________________. a. ignores any opportunity cost if the marginal benefit from the action is high enough b. will choose to use his or her scarce resources only if there is a very large total benefit from so doing. c. compares the marginal cost of a choice to the marginal benefit. d. makes the choice with the smallest opportunity cost. 7. A positive statement is ______________. a. about what ought to be. b. can be tested c. always true. d. can not be tested 8. The Latin term ceteris paribus means __________________. a. false unless proven true. b. other things the same. c. after this, then because of this. d. not correct, even though it is logical. 9. Which of the following, which is Not a resource used to produce goods and services? a. Labor b. A companys money in the bank c. Capital equipment d. Entrepreneurship 10. Economic is a science that studies ________________________. a. how societies choose to use scarce productive resources. b. international relations. c. human behaviors d. domestic laws