Hi everybody, microeconomics is a study of how to best solve the basic economic problem. The word basic is quite misleading here because the problem is very very severe and here it is. How to allocate scarce resources given unlimited wants. We live in a world where we have a lot of resources and we have a lot of money.
world where there are people, people, individuals with unlimited wants, real desires, unlimited desires. But there aren't enough resources that the planet gives us to fully satisfy those wants. Resources are scarce. What do we mean by resources in economics?
Well, another name for resources of factors of production and there are four types of these resources of these factors of production capital enterprise land and labor just think sell C E double L and we get to these factors of production and basically these are resources that when combined together can produce goods and services what do we mean by these four well let's take capital capital does not mean money in economics it's defined as man-made aids to production so things that man has made that allows allows for greater production of goods and services to take place. So good examples are machinery, tractors and vehicles, factories, shop premises, schools, hospitals, computers are all good examples of capital, man-made aids to production. Enterprise, just think entrepreneurs or entrepreneurship. These are people, risk takers, who innovate and produce goods and services. And they do it to make profits, real risk takers, but to make profit at the end.
Innovating to produce goods and services. Land, natural land like farmland, like rainforests where goods can be produced or goods can be taken. And labour, human resources, workers that can produce goods and services. So these are our scarce resources. Clearly, the world doesn't provide an infinite amount of these things.
So we have scarce resources and we have unlimited wants. How do we allocate our scarce resources to satisfy as many wants as we can? Well, it's difficult.
Choices need to be made, therefore. And economics really is a study. of choice. Given this problem, there are three fundamental choices that need to be made of how we allocate our scarce resources.
We need to make a choice of what to produce, how to produce it, and for whom to produce for. Fundamental choices. In a market economy, how do we answer those questions?
What to produce? Well, in a market economy, businesses decide based on consumer demand. How to produce it? Again, businesses decide based on what's most cost effective, what's most productive to minimize the... use of our scarce resources.
Businesses that are best at producing at lowest cost, minimising the use of scarce resources survive. And for whom to produce in a market economy, that question is answered by those who have got enough income to afford goods and services in a market. Well maybe that's not quite right, the government can step in and help out, but in a market economy if you can afford it, then you get it.
So that's how we answer that question for whom to produce for. But you see very, very difficult choices, very difficult choices. economics is a study of choice because of this basic economic problem. Well, we need to have a way of measuring whether the choices that we make are good choices or not. And that's where this concept of opportunity cost comes in.
And this is everything in economics because this is how we can measure whether choices that have been made are good or bad. Here is the definition of opportunity cost. It is the cost of the next best alternative foregone when a choice is made. So when we make a choice in economics, what was the next best alternative?
alternative that we have forgone, that we've given up. Put a value on that. If the value of our opportunity cost, i.e. the next best alternative, is greater than the value of our current choice, we made a bad decision, right? That's how we measure choice.
Whereas if the value of our current choice is greater than the value of our opportunity cost, i.e. the next best choice, then we have made an excellent decision. So this is how we measure whether the choices that we make in economics or in the world are good or bad. We use the concept of opportunity. cost, work out the value of our current choice and the value of our opportunity cost.
If the value of our current choice is greater than the value of our opportunity cost, great. But if it's the other way around, the value of our opportunity cost, the next best alternative, is greater than the value of our current choice, we made a bad choice and we should therefore allocate resources towards our opportunity cost instead of allocating resources towards our current choice. So this is a really fundamental concept to understand whether the choices that are being made in the world are good choices or not. This is what we study in economics. Stay tuned for the next video where we look at production possibility frontiers.
And we can actually analyze choices in more detail there. I'll see you all in that video. Thank you all for watching this very, very important video of what microeconomics is all about.