PRINCIPLES OF

MICROECONOMICS
Lecturer: Mr Felix Maluleke
 Learning Unit: One

What economics is all about

 Outcomes:
After you have studied this learning unit, you will know what economics is all
about. You must be able to:
✓ explain what economics is all about
✓ define the term “economics”
✓ explain the difference between wants, needs and demand
✓ define the concept of opportunity cost
✓ explain the economic problem by using a production possibilities curve
✓ explain why economics is a social science
✓ distinguish between microeconomics and macroeconomics
✓ distinguish between positive and normative statements
 Learning Unit: One

Scarcity, choice and opportunity cost

What Economics is Economics as a science

all about Some common mistakes made in reasoning

about economic issues
 1.1 What is economics all about?
It’s about: SCARCITY, CHOICE AND OPPORTUNITY COST
The cornerstones or key concepts of economics are:
SCARCITY: resources are limited
CHOICE: because of limited resources, people have to make choices.
OPPORTUNITY COST: whenever a choice is made an opportunity cost is
incurred.
• Since resources are limited it means that goods and services to satisfy our wants are also limited.
• Individuals are therefore confronted with choices of how to satisfy unlimited wants with limited means.
• The economic problem deals with scarcity and therefore choice
• The cost of not choosing the alternative is called THE OPPORTUNITY COST
• DEFINE OPPORTUNITY COST:
❖ The opportunity cost of a choice is the value to the decision maker of the best alternative that
could be chosen but was not chosen. i.e. the opportunity cost is the value of the best
foregone opportunity.
 1.1 What is economics all about?
Defining economics:
“Economics is the study of the use of scarce resources to satisfy unlimited
human wants” Richard Lipsey
Differentiate:
Wants: these are unlimited (individuals have a biological, spiritual, material, cultural
and social wants). (groups have collective wants, law and order, education and social
security) i.e. are human desires for goods and services – example: a holiday home in
Ballito.
Needs: Necessities, essential for survival, clothing, food, water, and shelter.
Demand: there is only a demand for a good or services if those who want to purchase
the good or service have the ability and willingness to do so.
 Why are resources limited?
LIMITED RESOURCES: Called factors of production
1. Natural resources: (agricultural land, minerals and fishing): LAND.
2. Human resources: LABOUR
3. Man-made resources: (machines): CAPITAL
4. Vision, risk-taking: ENTREPRENEURSHIP

These resources are the means with which goods and services can be produced.
In economics we call these resources factors of production. Since the resources
are limited, it follows that the goods and services with which we can satisfy our
wants are also limited.
 1.3 The Production Possibilities Curve
• Scarcity, choice and opportunity cost can be illustrated with the aid of a
production possibilities curve (PPC), also called a production possibilities
frontier (PPF).

• The production possibility curve indicates the combinations of any two goods or
services that are attainable when the community’s resources are fully and
effectively employed.
 1.3 The Production Possibilities Curve
Potatoes
(kg per
day)
(a)

(b)

Fish (Baskets per day)

The diagram above shows a production possibility curve for an economy that produces potatoes
and /or fish. The community can use all its resources to produce only potatoes and will then have
no fish, or it can choose to apply all its resources to only fish and will have no potatoes. However,
it is more likely that the community will select some combination of both goods……fish and chips!

Note: Please read the section in the prescribed textbook and make sure you can
understand how the PPC can illustrate scarcity, choice and opportunity cost.
 1.3 The Production Possibilities Curve
Potatoes
(kg per
day)
(a)

(b)

Fish (Baskets per day)

• The opportunity cost of fish will be the amount of potatoes (see (a) in above diagram) that must
be sacrificed to gain additional units of fish (see (b) in above diagram) and vice versa. Notice
that the opportunity cost of each additional basket of fish increases as we move downward on
the production possibilities curve. This means that as the amount of potatoes becomes less,
fish becomes more expensive in terms of potatoes.
• Opportunity cost involves trade-off between two goods.
 1.4 Further application of the Production Possibilities
Curve
This again reminds us that resources are limited and choices regarding products will have to
be made.
Note that the curve can also be called the production possibilities frontier (PPF) or the
transformation curve.
DRAWING GRAPHS: Make sure you are able to use the PPC graph to show each of the following:

i. Economic growth (same as increase in the productivity or quantity of available resources

Qty of The PPC curve shift

Product outward
A

Qty of Production B
 1.3 Production Possibility Curve
NB: You must be able to indicate each of the following on the PPC diagram:
i. Points that are attainable and efficient
ii. Points that are unattainable
iii. Points that are attainable but inefficient.
 1.3 The Production Possibilities Curve
ii. Unemployment – any point inside the PPC, e.g. point H.

Qty of
Product • G
A • E
• H
PPC

Qty of Production B

iii. Choices which are efficient and attainable – any point on the PPC, e.g. point G.
iv. A position that is unattainable for a specific economy – any point outside of the PPC, e.g.
point E.
 1.3 The Production Possibilities Curve
v. What happens when the production of only one of the goods increases, e.g. production
techniques for product B improve. This means that more of product B can be produced, while
the quantity of product A produced remain the same.

Qty of PPC
Product
A

Qty of Production B
 1.3 The Production Possibilities Curve
v. What happens when the production of only one of the goods increases?
 Class Exercise: Production possibilities for a Durban Coast community
Possibility Pizza (Large size per day) Sugar (kg per day)
A 0 100
B 1 95
C 2 85
D 3 70
E 4 40
F 5 0
1. Draw a production possibility curve for the Durban Coast community
2. Label the horizontal and vertical axis.
3. What is 0 on the diagram called?
4. What does the movement from point A to point B on the curve represent?
5. Look at movement from point C to point D. how much Sugar need to be sacrificed in order to produce
more large Pizza per day?
6. Study the movement from point C to point B. How many Large Pizza need to be sacrificed in order to
produce how much Sugar per day?
7. if G is inefficient and H represent scarcity, show them on the graph
 120

A B
100 H
C

Sugar (kg per day)

80
G D

60

E
40

20

F
0
0 1 2 3 4 5 6
Pzza (Large size per day)
Origin
1.5 Economics – a Science?
Economics is a social science:
• Economics is a science and involves a systematic attempts to discover regular patterns of behaviour
• These patterns are used to explain what is happening (the level of the petrol price and why), to predict
what might happen (future prices and impact on the economy), so that decision makers can choose the
right economic policies (in respect of the petrol prices)
• Economics is a social science. It involves the study of behaviour in human beings, both individually and
as groups.
• The difference between natural sciences and social sciences is the what and how things are studied.
For example, natural sciences use laboratories under controlled experiments while in economics the
behaviour of societies and individuals is studied under constantly changing environments.
• Another difference between natural sciences and economics is in the nature of their generalisations
(law of gravity states that if an apple falls from the tree it will always fall to the ground). Economics can
best say that if the price of the apple falls then more apples should be purchased (Law of demand:
outcome that if price falls demand for apple increases)
• Law of demand is not absolute: Conditional on all others things to remain the same. i.e. ceteris
paribus.
• Economics is an empirical science. Actual experiences are studied and measured.
1.6 Micro - and Macroeconomics
Microeconomics: focuses on individual parts of the economy
• The decisions or functioning of decision makers such as individual consumers, households (what
to do, what to buy), firms (what to produce, how to produce them, what prices to change etc) or
other organisations are looked at individually
• Includes the study of demand, supply and prices of individual goods and services like petrol,
haircuts and medical services.

Macroeconomics: concerned with the economy as a whole.

• The emphasis is on Total production, income and expenditure, economic growth, aggregate
unemployment, the general price level, inflation and the balance of payments.
1.7 Positive and normative economics

• Because economics is a social science this implies that value judgements or opinions play an
important role in many economic issues

• Positive Statement: An objective statement of fact. It can be proved correct or incorrect. (The
price of a hamburger is R10)

• Normative Statement: Involves an opinion or value judgement. (Hamburgers at McDonalds are

cheap)
END OF LEARNING
UNIT ONE