Course Code: EN 111

Course Name:
Introductory Microeconomics Analysis I
Topic 1: Introduction to Microeconomics

Monday at 07:30am – 09:30am, Venue: CT1

Dr. William George - DOE, UDOM
+255 764 675 073
wgeorgelumwaga@gmail.com
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Meaning of Economics
◦ Is the study of how scarce resources can be
allocated in the best possible way among
alternative uses to meet unlimited human
needs and wants.
◦ Is the study of how individuals and societies
make decisions about using scarce resources
to fulfill wants and needs.
◦ Is the study of how society chooses to allocate
its scarce resources in order to satisfy
unlimited wants.

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Levels of Economics
◦ Economics is studied on two levels:
◦ Microeconomics focuses on details and studies
part of the economy
It focuses on the behavior of individual
household, firm, and government in
allocating limited resources.
◦ Macroeconomics studies issues pertaining to the
whole economy
◦ Unemployment, Inflation, economic growth

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Microeconomics vs Macroeconomics

Aspect Microeconomics Macroeconomics

The study of
individual economic
The study of the economy
units and their
Definition as a whole and large-scale
interactions, such as
economic factors.
consumers and
firms.
Analyzes supply Analyzes national
and demand, price income, total output,
Focus
determination, and inflation, unemployment,
individual markets. and economic growth.
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Microeconomics vs Macroeconomics…

Aspect Microeconomics Macroeconomics

GDP, national
Prices, quantities, income, inflation
Key
individual incomes, rates, unemployment
Variables
and costs. rates, and fiscal
policies.
Consumers,
Governments, central
Decision- businesses, and
banks, and large
Makers individual
economic entities.
economic agents.
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Microeconomics vs Macroeconomics…

Aspect Microeconomics Macroeconomics

Consumer behavior, Economic growth,
pricing strategies, and inflation, monetary
Example
market structures and fiscal policies,
Topics
(perfect competition, and international
etc.) trade.
Long-term trends
Short-term decisions
Time and cycles affecting
and outcomes in
Frame the economy as a
specific markets.
whole.
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 Microeconomics vs Macroeconomics…
Aspect Microeconomics Macroeconomics
Affects government
Policy Affects pricing and
policy, such as
Implication production strategies of
monetary and fiscal
s individual firms.
policy decisions.
Microeconomic Macroeconomic
decisions can affect conditions influence
Interconnec macroeconomic microeconomic
tions outcomes (e.g., behavior (e.g.,
consumer spending inflation affects
impacts GDP). purchasing power).
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Scarcity
◦ Scarcity – in economics – is the fact that we
can’t always get what we want.
◦ To the economist, all goods and services that
have a price are relatively scarce.
◦ Price is used to ration available goods.

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Why is SCARCITY considered
a problem?
◦ People have UNLIMITED wants and needs,
but there are a LIMITED amount of resources
to meet their demands.
◦ That is resources (time, money, raw materials)
are limited, meaning individuals and firms
(businesses) face constraints in satisfying their
needs and wants.
◦If there were no resource scarcity, a choice
would not be necessary.

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What is the affect of scarcity
for economics? - Choice in a World of
Scarcity
◦ Due to the scarcity of resources, people have to
make a lot of CHOICES.
◦ Choices made by:
Consumers: What to buy, trade, or use?
Businesses/Firms: What resources to use and
what products to produce?

◦These decisions are based on maximizing

utility (for consumers) or profit (for
Businesses/Firms).

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Fundamental Economic Questions

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The Basic Economic Questions
◦ Scarcity forces every economy in the world to
make choices through answering 3 basic
questions:
1. What to produce and in what quantities?
2. How to produce?
3. For whom to produce?

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The Basic Economic Questions…
◦ What to produce?
◦ Society must decide which goods and services
should be produced with its limited resources.
◦ Example: Should resources go toward producing
more food, or more Tractors?
◦ How to produce?
◦ This question addresses the methods or
technologies used in production.
◦ Example: Should a firm use labor-intensive
methods or capital-intensive ones?
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The Basic Economic Questions…
◦ For whom to produce?
◦ Refers to how the output is distributed among
members of society.
◦ Example: Should more goods be produced for
the wealthy or should society focus on the needs
of the poor?
◦ In this economic problem, a fair distribution of
goods or services is emphasized.

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What does each economic choice we
make have?
◦ Choices have CONSEQUENCES and VALUE:
1. Benefit
2. OPPORTUNITY COST

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What is Opportunity Cost?
◦ Is the value of the next best alternative
foregone when making a choice
◦ Is the missed opportunity or what you gave
up for making the choice or purchase.

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Economic Theories and Models
◦ Economic theories – are simplified frameworks
designed to explain how economic agents (such as
consumer, firms, or government) behave and
interact in markets.
◦ Example: Law of Demand – as the price of a
good increases, the quantity demanded
decreases.
◦ Economic model – are re tools that economists
use to understand and explain the complexities of
the real world.
◦ It simplifies reality by focusing on a few
variables while holding others constant.

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Types of Economic Models
◦ Graphical models: Such as supply and demand
curves to illustrate how prices are set.
◦ Mathematical models: Use equations to represent
relationships between economic variables.
◦ Computational models: Simulate complex
interactions in an economy using algorithms.

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Assumptions in Economic Models
◦ Ceteris paribus:
◦ A Latin expression meaning all else equal
◦ When studying the relationship between two
variables, other variables should be kept
constant
◦ Example: examining the impact of a price
change on demand, holding preferences
constant enable you to isolate and understand
the direct influence of price.

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Assumptions in Economic Models…
◦ Rational economic decision-making
◦ Individuals are assumed to act in their best
self-interest, trying to maximize the
satisfaction they expect to receive from their
economic decision.
◦ For example, workers will want to secure the
highest possible wage when they get a job.

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Positive & Normative Concepts
◦ In economics, positive statements are objective
and fact-based which describe the world as it is
and can be tested using data and evidence.
◦ Examples:
◦ “Increasing the minimum wage will lead to
higher labor costs for businesses” - this can be
analyzed and measured, making it a positive
statement.
◦ “A rise in fuel prices leads to an increase in
transportation costs” - this statement can be
tested by observing the relationship between fuel
prices and transportation costs.

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Positive & Normative Concepts…
◦ In economics, normative Statements are subjective and
value-based.
◦ They express opinions or beliefs about how things ought
to be, and they cannot be tested or proven true or false.
◦ Examples:
◦ “The government should reduce income inequality by
increasing taxes on the wealthy” - this is an opinion on
how income distribution should be addressed.
◦ “The central bank should lower interest rates to
encourage economic growth” - this is a suggestion
based on a belief about what economic policy should aim
to achieve.

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Applying the Cost-Benefit Principle
◦ The Cost-Benefit Principle states that an action
should be taken if, and only if, the benefits
exceed the costs.
◦ Example: If a consumer is deciding whether to
buy a product, they will compare the satisfaction
they expect from the product (benefit) with the
price they have to pay (cost).

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Steps in Cost-Benefit Analysis
◦ Five main steps:
1. Identify the costs and benefits associated with
a decision or action.
2. Quantify the costs and benefits (often in
monetary terms)
3. Compare the total costs and total benefits
4. Compute the net benefit by subtracting total
costs from total benefits
5. Make decision (accept vs. reject)

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Simple Table with Cost-Benefit Comparison of
Two projects for generating Electricity
Option 1: Solar Option 2: Wind
Criteria Comments
Energy Energy

Initial Costs $50,000 $60,000 Wind energy requires higher setup costs.
Maintenance Solar energy has slightly higher maintenance
$2,000/year $1,500/year
Costs costs.
Energy Output 15,000 kWh/year 18,000 kWh/year Wind energy produces more energy.

Environmental Both options have minimal environmental

Low Very Low
Impact impact, but wind energy is slightly better.

Lifespan 20 years 25 years Wind energy systems tend to last longer.

$200,000 over $250,000 over Wind energy offers higher total benefits over
Total Benefits
lifespan lifespan time.
Net Benefit $148,000 $188,500 Wind energy provides higher net benefits.

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Economic Reasoning
◦ Economic reasoning involves making choices
based on rational decision-making processes that
weigh costs and benefits.
◦ Rational choice theory: Assumes that individuals
aim to maximize utility or profit by making rational
decisions based on available information.

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Economics and Society
◦ Economics is not only about numbers; it has a
profound impact on society.
◦ Policy decisions: Governments use economic
reasoning to make decisions on taxation,
healthcare, education, and welfare.
◦ Market failures: Sometimes markets fail to
allocate resources efficiently, leading to issues
like poverty, inequality, and pollution, which
require government intervention.

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Economics and Well-Being
◦ Economic well-being refers to the standard of
living and quality of life enjoyed by individuals
and societies.
◦ Income distribution: Affects overall societal
welfare—unequal distributions may lead to
social tensions.
◦ Social welfare: Governments often use policies
to enhance welfare through public goods
provision, redistributive programs, and
regulation of monopolies.

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