FNB 108: Microeconomics
Department of Finance & Banking, FBS-JU
Chapter 01| What Is Economics?
Learning Objectives
▪ Define Economics and distinguish between microeconomics
and macroeconomics
▪ Explain the two big questions of economics
▪ Explain the key ideas that define the economic way of thinking
▪ Explain how economists go about their works as social scientists
Definition of Economics ▪ Economics is the social science
that studies the choices that
individuals, businesses,
governments and entire societies
make as they cope with scarcity
and the incentives that influence
and reconcile those choices
Microeconomics and Macroeconomics
▪ Microeconomics is the study of the ▪ Macroeconomics is the study of
choices that the individuals and the performance of the national
businesses make, the way these economy and global economy.
choices interact in markets, and the
influence of governments. ▪ Macroeconomics deals with
various issues like national
▪ Examples are- income, distribution, employment,
– How a local business decides to general price level, money, and
allocate their funds. more.
– How a city decides to spend a
government surplus.
– The housing market of a particular
city/neighborhood.
Economic Questions
▪ Two big questions summarizes the scope
of economics:
1. How do choices end up determining
what, how, and for whom goods and
services get produced?
2. When do choices made in the pursuit of
self-interest also promote the social
interest?
What, How and For Whom?
▪ What?
– Goods and services are the objects that people value and produce to satisfy human wants.
– What we produce changes over time
▪ How?
– Goods and services are produced by using productive resources that economists call factors of
production; grouped in four categories- land, labor, capital, and entrepreneurship
▪ For Whom?
– Who gets the goods an services that are produced depends on the incomes that people earn
– People earn their income by selling the services of the factors of production they own
When is the pursuit of self-interest in the social interest?
▪ Self-interest means the choices that you think are best for you.
– You use your time and other resources in the way that makes most sense to
you.
▪ Social interest is the choices that are the best for the society as a
whole
– When you act on your economic decisions, you come into contact with
thousands of other people who produce and deliver the goods and services
that you decide to buy
The Economic Way of Thinking
▪ Choices and Tradeoffs
– Your choices can be seen as a
tradeoff
– Tradeoff is an exchange- giving up
one thing to get something else
– The idea of tradeoff is central to the
whole of economy
▪ The questions what, how and
for whom goods and services
are produced all involve
tradeoffs
Opportunity Cost
▪ Opportunity costs represent the
potential benefits that an
individual, investor, or business
misses out on when choosing one
alternative over another.
Opportunity Cost= FO − CO
where:
FO = Return on best forgone option
CO = Return on chosen option
Choosing at the Margin
▪ Margin refers to the focus on the cost or benefit of
the next unit
– The benefit that arises from the increase in an activity is
called marginal benefit
– The cost of an increase in an activity is called marginal cost
– To make your decision, you compare marginal benefit with
its cost
– Thus we use our scare resources in the way that makes us as
well off as possible
Economics: A Social Science (1/3)
▪ Economic Model
– An economic model is a simplified representation of a real-world economic
situation or phenomenon that is used to analyze and understand the
underlying economic principles at work.
– Economic models are used to understand and explain micro and macro
economic phenomena, to make predictions about future economic events, and
to evaluate the effects of different economic policies.
– Supply and demand model: This model is used to understand the
relationship between the quantity of a good or service that is available and the
price at which it is offered.
– Utility maximization model: This model is used to understand how
consumers make decisions about what goods and services to purchase.
Economics: A Social Science (2/3)
▪ Economic Theory
– An economic theory is a model that is used to explain how economies
function as well as describe various economic phenomena.
– Keynesian economics is a macroeconomic theory of total spending in the
economy and its effects on output, employment, and inflation. It was
developed by British economist John Maynard Keynes during the 1930s in
an attempt to understand the Great Depression.
Economics: A Social Science (3/3)
▪ Obstacle and Pitfalls in Economics
– It is often difficult to formulate theories in economics
– It is often impractical to perform experiments in economics
– The scientific method cannot be applied to the study of economics
▪ Ceteries paribus- other things being equal
▪ Fallacies- errors of reasoning that lead to wrong conclusion
Thank you all.
Next Discussion Topic: The Economic Problem
