Microeconomics

Introduction

• Economics is a social science that mainly deals with the description and analysis of production, distribution, and consumption of goods and services.
• It defines the principles of efficient allocation of scarce resources.

Economic Resources

• Economic resources are the inputs that are used to create goods or services.

Land is an economic resource. This also includes natural resources (water, fossil fuels, minerals etc.) that come from the land. While some of the natural resources (e.g. timber) are renewable, land itself is a fixed resource as well as fossil fuels and minerals.

Labor is the effort (mental and physical) that people contribute to the production of goods or services. It is a flexible resource. Human capital is the measure of ability (skill, education, experience) of workers to perform labor.

Capital is the physical asset that is used to produce goods or services. It includes production facilities and equipment etc.

Entrepreneurship is also considered a factor of production. Entrepreneur is an individual that uses economics resources and transforms them into goods and services and assumes all risks and rewards.

• Energy is considered secondary factor of production as it is obtained from land, labor and capital.
• Money is not considered a factor of production or a type of capital. It is not a productive resource as it cannot be used to create goods or services. It is rather a resource that facilitates acquisition of factors of production.

Markets & Circular Flow Model 

• Market is an actual or nominal place where buyers and sellers of a specific good or service interact to facilitate an exchange.

Product Markets

• Product market is the place where final (finished) goods and services are offered for purchase, e.g. pharmaceutical market, market for cars and market for financial services such as banks etc.
• Households are the main buyers of products and services in product markets.

Resource Markets

• These are the markets where factors of production are bought and sold, e.g. labor market is a resource market that deals with the interaction of workers and employers.

Firms purchase resources in resource (factor) markets to produce goods and services.

Circular Flow Model

• A simplified circular flow model is shown below. It illustrates how goods and services are exchanged in product and factor markets.

• Federal, state and local governments focus on maintaining economic stability and facilitating systems that generate economic activity. Governments make purchases, collect taxes from businesses and households, offer subsidies etc.

• Primary components in this model are households, businesses and government.

[pic 1]

Microeconomics & Macroeconomics