CHAPTER 1: GENERAL INTRODUCTION
I. Definition:
1. Economics:
Economics is the study of how society manages its scarce resources. In most societies,
resources are allocated not by an all-powerful dictator but through the combined
actions of millions of households and firms.
Scarcity means that society has limited resources cannot produce all the goods and
services people wish to have (land, labor, capital goods, entrepreneurship)
Individuals: what to buy?, how much to work, save and spend?
Firm: how much to produce?, how many workers to hire?
Society: how to divide resources?
2. Classification:
The field of economics is traditionally divided into two broad subfields:
Microeconomics is the study of how households and firms make decisions
and how they interact in specific markets.
Households increasing demand firms increase the quatity to meet the
demand create market
Firms create the trend customers follow the trend
Households create the trend
Macroeconomics is the study of economy wide phenomena, including inflation,
unemployment, and economic growth.
Microeconomics and macroeconomics are closely intertwined. Because changes in
the overall economy arise from the decisions of millions of individuals, it is
impossible to understand macroeconomic developments without considering the
associated microeconomic decisions.
During COVID 19: economic crisis government: increase the amount of
money to cap, decrease VAT to boost demand of buying increase economic
growth
The impact of cigarette (specific market) taxes on the smoking behaviour of
teenagers: Micro
The role of Microsoft’s (specific and unique case) market power in the pricing
of software: Micro
The effectiveness of antipoverty programs in reducing homelessness (consider
economy as a whole): Macro
The influence of the government budget defivit on economics (economic
growth): Macro
II. Subject and research methods of Microeconomics
1. Subject:
Microeconomics is the study of how households and firms make decisions and how
they interact in markets.
2. Research methods:
Assumption: Judgements about features that can be ignored to make the world easier
to understand
Ceteris paribus assumption: All other things being equal, except the
considered thing.
Economic model: An explanation of how the economy or part of the economy works.
The Circular-Flow Diagram:
In this model, the economy is simplified to include only two types of decision makers
—firms and households.
Firms produce goods and services using inputs, such as labor, land, and capital
(buildings and machines). the factors of production.
Households own the factors of production and consume all the goods and services that
the firms produce.
Households and firms interact in two types of markets:
In the markets for goods and services, households are buyers, and firms are
sellers. In particular, households buy the output of goods and services that firms
produce
In the markets for the factors of production, households are sellers, and firms
are buyers. In these markets, households provide the inputs that firms use to
produce goods and services
3. Fundamental economic issues
What is to be produced?
Enterprises must determine the goods and services that they will produce or provide
by do market researches and making specific plans.
How are the goods to be produced?
How can resources be used efficiently?
For whom?
For whom are the goods to be produced?
4. Optimal economic choice
4.1. Choice’s principles
Need to choose because of scarce resources. If resource is already spent on A, it can
not be spent on B → People face trade-offs: Make decisions: Compare cost with
benefits of alternatives
4.2. Choice’s target
Household: Optimize utility
Firm: Optimize profit
Government: Optimize social welfare
4.3. Choosing tool
Opportunity cost (OC): Opportunity cost whatever must be given up to obtain some
item → cannot see
For example: enter university = not get a job with a high salary
Marginal cost (Chi phí cận biên)
Marginal cost (MC): the change in total cost resulting from a change from
quantity: do additional things
If the MC < benefit: Do it
If the MC = benefit: Consider
If the MC > benefit: Not do
Marginal benefit (MB): the change in total benefit resulting from a change
from quantity
4.4 The Production Possibilities Frontier – PPF
PPF is a graph that shows the combinations of output that the economy can possibly
produce given the available factors of production and the available production
technology.
Assumptions:
An economy produces only two goods;
All of the economy’s factors of production are used
I: not optimal can produce more but you do not do it
U: cannot produce more
