Microeconomics
Chapter 1 & Factors of Production
『 Definition and Nature of Economics 』
Economics: is a social science that studies how individuals, businesses, governments,
and societies allocate limited resources to meet their unlimited wants and needs.
Production, distribution, and consumption of goods and services.
Choices in various economic activities.
Well-being of individuals and society.
『 Economics Concepts 』
● Scarcity: Limited nature of resources. Unlimited human wants and needs. Land,
labor, capital. Allocate resources efficiently.
● Choice: Selecting among alternative courses of action. Preferences and
constraints. Trade-offs.
● Opportunity Cost: Value of next best alternative forgone. Real cost.
● Resource Allocation: Distributing limited resources among various uses or
sectors. Maximize overall welfare.
● Industry: Group of firms or businesses. Similar goods or related services.
Manufacturing, agriculture, healthcare, finance.
● Market: Mechanism or institution. Exchange of goods and services. Buyers and
sellers. Physical or virtual. Prices.
● Microeconomics vs. Macroeconomics:
○ Microeconomics: Behavior of individual consumers, firms, markets.
Supply, demand, pricing, individual economic agents.
○ Macroeconomics: Overall economy. Inflation, unemployment, economic
growth.
● Economic System: Set of rules, institutions, methods. Resources allocated.
Goods and services produced and distributed. Market economies, command
economies, mixed economies.
● Economic Resources: Factors of production. Inputs. Land (natural resources),
labor (human effort), capital (physical and financial assets).
● Human Wants: Desires and needs. Basic needs (food, shelter). Complex desires
(entertainment, luxury items).
● Goods and Services:
○ Goods: Tangible items. Consumption or use. Cars, clothing, smartphones.
○ Services: Intangible activities or actions. Provided by individuals or
businesses. Satisfy specific needs. Healthcare, education, transportation.
『 Factors of Production 』
Resources used for production
Types: [ Land, Capital, Human Resources ( Labour+Entrepreneurship) ]
1. Land
◼Natural resources
◼ Characteristics:
● A gift of nature
● Limited in supply
● Land is immovable
2. Capital
◼ Man-made resources used for further production
◼ Examples: machines, raw materials, tools
◼ Features:
● Man-made
● It raises the productivity of other factors
3. Human Resources
◼ Labour
◼ Entrepreneurship
『 Labour Supply 』
◼ Measured in terms of time (man hour)
◼ Labour supply = no. of workers × no. of working hours per worker
『 How to increase labour supply 』
◼ ↑ population growth (by natural growth or immigration)
◼ ↑ monetary rewards
◼ ↑ import of labour from other countries
◼ ↑ retirement age (e.g. from 60 to 70)
『 Labour Productivity 』
◼ Measured in terms of output per unit of labour
Average labour productivity = average output per man hour
June 2005 — Firm A vs Firm B:
● Working hours per worker: 240 vs 180
● Output: 7200 vs 6400
● Average labour productivity: 30 vs 35.6
Firm B has a higher labour productivity than Firm A
『 How to raise labour productivity 』
◼ Better education and training
◼ Other factors of production (↑ quantity & quality)
◼ Better management or organization (e.g. division of labour)
◼ Better working conditions
◼ Greater benefits (housing allowances, medical care, bonus, meal…)
『 Factor Returns 』
◼ Rent
◼ Interest
◼ Wage
◼ Profits
