Introduction to Microeconomics: Scarcity, Choice, and Opportunity Cost

Course Overview and Evaluation

This section outlines the objectives and evaluation methods for a college-level Microeconomics course. Students are expected to understand core economic principles, apply economic thinking, and analyze current economic issues.

• Course Objectives:

  • Understand how to think like an economist using core economic principles.

  • Apply economic thinking to decision-making for consumers, businesses, and government policy makers.

  • Gain a deeper understanding of current economic events and critically interpret research, opinion, and journalism on economic and business matters.

• Course Evaluation:

  • 10% Assignments

  • 20% Online Homework

  • 30% Midterm

  • 50% Final Exam

Introduction to Microeconomics

Scarcity and Choice

Microeconomics is the study of the choices that individuals and businesses make, how these choices interact in markets, and the influence of governments.

• Scarcity: The fundamental economic problem of having limited resources to meet unlimited wants.

• Choice: Because resources are scarce, individuals and societies must make choices about how to allocate them.

• Incentives: Rewards that encourage actions or penalties that discourage actions.

Two Big Questions in Economics

• How do choices determine what, how, and for whom goods and services are produced?

• 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 produced by using productive resources, which economists call factors of production.

Factors of Production

• Land: Natural resources used to produce goods and services. Earns rent.

• Labour: The work time and effort people devote to producing goods and services. Earns wages.

• Capital: Tools, instruments, machines, buildings, and other constructions used to produce goods and services. Earns interest.

• Enterprise (Entrepreneurship): The human resource that organizes land, labour, and capital. Earns profit.

For Whom?

Who gets the goods and services depends on the incomes that people earn from the factors of production.

• Land earns rent

• Labour earns wages

• Capital earns interest

• Entrepreneurship earns profit

Self-Interest and Social Interest

Definitions

• Self-interest: Choices that are best for the individual making them.

• Social interest: Choices that are best for society as a whole.

Social interest has two dimensions:

• Efficiency: Resources are used in a way that makes someone better off without making someone else worse off.

• Equity: Fairness in the distribution of economic benefits.

Four Topics Illustrating Tension Between Self-Interest and Social Interest

• Globalization

• Information age monopolies

• Climate change

• The gender pay gap

The Economic Way of Thinking

Six Key Ideas

• Tradeoff: A choice is a tradeoff; to get one thing, you must give up something else.

• People make rational choices by comparing benefits and costs.

• Benefit: What you gain from something.

• Cost: What you must give up to get something.

• Most choices are made at the margin (considering the effect of a small change).

• Choices respond to incentives.

Opportunity Cost

The opportunity cost of something is the highest-valued alternative that must be given up to get it.

• Formula:

$\text{Opportunity Cost} = \text{Value of Next Best Alternative}$

Economics as a Social Science and Policy Tool

• Positive statements: Statements about what is. They can be tested by checking against facts.

• Normative statements: Statements about what ought to be. They express opinions and cannot be tested.

• Economists act as both scientists (analyzing facts) and policy advisers (recommending actions).

Summary Table: Factors of Production and Their Incomes

Factor of Production	Description	Income Earned
Land	Natural resources used in production	Rent
Labour	Human effort and skill	Wages
Capital	Manufactured resources (tools, machines, buildings)	Interest
Entrepreneurship	Organization and risk-taking in production	Profit

Example: Opportunity Cost in Everyday Life

If you spend an hour studying economics instead of working at a part-time job that pays $15 per hour, your opportunity cost of studying is $15.

Conclusion

Understanding scarcity, choice, and opportunity cost is fundamental to microeconomics. These concepts help explain how individuals and societies allocate limited resources and the tradeoffs involved in every economic decision.