Chapter 1: Introduction to Microeconomics

1.1 A Simple Economy

• Societies require a variety of goods and services for daily life (e.g., food, clothing, shelter).
• No individual has all the resources they need; they must exchange goods and services.
• Goods vs. Services:
  • Goods: Tangible objects (e.g., food, clothing).
  • Services: Intangible assistance (e.g., education, healthcare).
• Resources are limited, requiring individuals to make choices based on scarcity.
• Key Concept: Individuals and societies must decide how to allocate their limited resources to satisfy maximum needs.

1.2 Central Problems of an Economy

• Scarcity leads to basic economic problems concerning production, exchange, and consumption.
• Three Central Economic Questions:
  1. What is produced and in what quantities?
  2. How are these goods produced?
  3. For whom are these goods produced?
• Production Possibility Frontier (PPF):
  • Demonstrates the maximum possible output combinations of two goods/services an economy can achieve using its resources efficiently.
  • Highlights the concept of opportunity cost.

1.3 Organization of Economic Activities

• Economic activities can be organized through different systems:
  • Centrally Planned Economy:
    • Central authorities (government) make all key economic decisions.
  • Market Economy:
    • Decisions arise from the interaction of consumers and producers in the market.
  • Mixed Economies:
    • Combination of market and government-driven decisions.

1.4 Positive and Normative Economics

• Positive Economics: Focuses on describing and explaining economic phenomena.
• Normative Economics: Evaluates outcomes and suggests policies based on their desirability.
• The distinction is not absolute; both aspects often interlink in economic analysis.

1.5 Microeconomics and Macroeconomics

• Microeconomics:
  • Studies individual agents and markets, focusing on pricing and quantities.
• Macroeconomics:
  • Looks at the economy as a whole, analyzing aggregate measures such as total output and employment.

1.6 Plan of the Book

• The book introduces microeconomic concepts such as consumer and producer behavior, cost, and market dynamics.
• Upcoming chapters will cover consumer behavior, production and cost, producer behavior, competitive markets, and market forms.

Key Concepts

• Consumption
• Production
• Exchange
• Scarcity
• Production possibilities
• Opportunity cost
• Market systems
• Economic planning
• Mixed economy
• Positive and normative analysis
• Microeconomics vs. Macroeconomics

Discussion Questions

1. Discuss the central problems of an economy.
2. What do you mean by the production possibilities of an economy?
3. What is a production possibility frontier?
4. Discuss the subject matter of economics.
5. Distinguish between a centrally planned economy and a market economy.
6. What do you understand by positive economic analysis?
7. What do you understand by normative economic analysis?
8. Distinguish between microeconomics and macroeconomics.