Introduction to Microeconomics

Scarcity and choice: the central problems of an economy, the production possibility frontier and opportunity cost, how economies are organised, and positive and normative economics.

Key ideas

• Resources are scarce and have alternative uses, so every economy must choose what to produce, how to produce and for whom to produce.
• The production possibility frontier (PPF) shows the largest combinations of two goods an economy can make with all resources fully used.
• Moving along the PPF, more of one good means giving up some of the other: that is the opportunity cost.
• The PPF is usually bowed out because resources are not equally suited to both goods, so opportunity cost rises.
• A point inside the PPF means unused or wasted resources; a point outside cannot be reached; more resources or better technology shift the PPF outward.
• In a market economy prices coordinate decisions; in a centrally planned economy a central authority decides; a mixed economy combines both.
• Positive economics describes how things work; normative economics judges what ought to be. Microeconomics studies individual markets; macroeconomics the whole economy.

Remember

Watch out

• Adding up all the alternatives given up: opportunity cost is only the next best one.
• Saying unemployment shifts the PPF inward: it puts the economy at a point inside it.
• Calling “prices of books ought to be lower” a positive statement.

Worked example