JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY
BFA201
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MICROECONOMICS
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JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY
Introducing "Microeconomics Exam Prep: Comprehensive Question Bank"
Prepare for success in your microeconomics exams with the "Microeconomics Exam Prep: Comprehensive Question Bank." This comprehensive resource is designed to enhance your understanding and mastery of key microeconomics topics. It ...
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MICROECONOMICS
Economics is a social science that has been in existence for about two centuries. Various economists
have tried to define it differently. Three types of definition can be identified.
a) Wealth definition
b) Welfare definition
c) Scarcity definition
a) Wealth definition
Adam smith and his discipline J.B. Say, Walker, J.S. Mill defined economics as an inquiry into the
nature and courses of wealth of nations. Such a definition has been criticized as follows.
(i) The definition is very selfish: it restricts economics to the study of wealth alone. The
definition does not state clearly how man comes into the study.
(ii) Since economics is defined in terms of material commodity, it doesn’t consider
service e.g. services offered by doctors, teachers, etc.
b) Material welfare definition of economics
Alfred Marshall and his discipline, Pigou and Cannon defined economics as the study of man’s
activities in the ordinary business of life. It tries to study how man acquires and uses his
resources aimed at improving the welfare of mankind. In this definition, it can be noted that on
the one hand, economics is the study of wealth and on the other hand, and more important, a
study of man.
Criticism of the definition
(i) The definition excludes the study of services, that is, it only takes human material
welfare.
(ii) Speaks of study of man’s activities during ordinary business of life. The question
remains, how about during extra ordinary business life?
c) Scarcity definition of economics
Leonel Robbin (1933) improved upon the above definition and explained economics as the
study of human behavior (as a relationship between scarce resources which have
alternative uses)
The definition has characteristics that are currently addressed in economics namely
Limited/scarce resources
Alternative uses
Unlimited wants
Scarcity: when we say that a resource is scarce, it means that it is there but cannot meet the
demand. The scarce productive resource would include, land, labor, capital, entrepreneurship, and
by extension technology used in the production process.
Alternative uses: some resources may be having more than one use. For example milk can make
butter, cheese, chocolate etc.
DOUGLAS RM. | MICROECONOMICS 1
,Unlimited wants: human needs are unlimited and they are recurrent in that when you satisfy a
need today, the same need has to be satisfied tomorrow. They are also competitive in that they
compete for the limited resources.
Based on the above definition, economists today agree on a general working definition of the
discipline. They conclusively define economics as the study of how man can use his scarce
resources to satisfy his needs.
Thus, we study economics in order to solve economic problem, which is that of allocating scarce
resources among competing and unlimited wants in such a manner that greatest satisfaction is
derived. To do this, the society will have to make a choice on what combination of goods and
services to produce and what therefore to sacrifice. The quality that one foregoes /sacrifice in order
to consume more of another is what is known as opportunity cost.
The production possibility frontier and opportunity cost.
The economic problem can be illustrated by means of production possibility frontier and the
concept of opportunity cost.
- A production possibility frontier joins together different combinations of goods and services
that a country can produce using all the available resources and most efficient techniques of
production.
Assume for simplicity that a country produces only 2 goods, food and cloth.
Food(tones)
(Tones
To ® Q
® P (Tones
(Ton To
es
To
0
B cloths (meters)
)000O
OOoo( (Tones
The figure shows the different combination of the 2 commodities which can be produced. The
tones To
vertical axis measures the quantity of food in tones and the horizontal axis measures the quantity of
cloth in meters.
To The straight line AB is the production possibility frontier. It shows that when all
resources are efficiently employed in the production of food, OA tones can be produced and when
all the resources are employed in the production of cloth, OB meters can be produced. All points on
DOUGLAS RM. | MICROECONOMICS 2
,the production possibility frontier represent combination of food and cloth which a country can just
produce when all the resources are employed.
All the points inside this line such as P represents combinations which can be produced using less
than the available resources or by using the available resources with less than the maximum
efficiency.
- Points outside the line, such as Q, represent combinations which are unattainable.
- If a country is producing at point A ,i.e. all resources are being used in the production of food .If it
now decide to produce cloth, it is obvious from the downward slope of the production possibility
frontier that some food production must be given up. The quantity of food which has to be forgone
is called the opportunity cost of producing cloth.
The slope of the line, equal to OA/OB measures the opportunity cost in terms of cloth of producing
1 extra tone of food. This means that every additional meter of cloth produced requires that OA/OB
tons of food be forgone.
- The slope of the production possibility frontier can be interpreted as the rate at which food can be
“transformed “into a meter of cloth by shifting resources from food production into cloth
production. It is sometimes called the marginal rate of transformation in this case food for cloth.
- Where the production possibility frontier is drawn as a straight line, the opportunity cost and the
marginal rate of transformation remain unchanged no matter how much cloth is produced. This is a
case of constant opportunity cost.
- The assumption of constant opportunity cost very unrealistic. It implies that all factors of
production can be used equally efficiently in either production of food or the production of cloth.
Suppose some of the factors are more efficient in the production of cloth. Suppose also that the
hypothetical country is using all of its resources in the production of food
If the country now decides to produce some cloth, we might expect that the opportunity cost of the
first few meters of cloth to be relatively small as those resources that are more efficient in the
production cloth move from food production into cloth production. As more and more meters of
cloth produced however, it becomes necessary to more into cloth production those factors which
are more efficient in the production of food.
As this happens, the opportunity cost of extra meters of cloths produced will get larger and larger.
This is the case of increasing opportunity costs.
THE DISTINCTION BETWEEN MICROECONOMICS AND MACROECONOMICS
Microeconomics-broadly speaking is concerned with the behavior of the individual firms, industries
and consumers (or households) and deals with the effects of the individual taxes and specific public
spending programs. A study of the determination of the level of output and the employment in the
Kenya textile industry for example would belong to the microeconomics.
Macroeconomics on the other hand concerns itself with large aggregates particularly to the
economy as a whole. It deals with factors which determine the national output and employment,
the general price level, total spending and saving in the economy, total and supply of money and
other financial assets.
DOUGLAS RM. | MICROECONOMICS 3
, NB These aggregates are the sum of the individual variables-total national output for example is the
sum of output of the individual business units; total consumption is the sum of all the consumption
spending of all the individuals.
Economic methodology
The term methodology refers to the way the economists go about the study of their subject matter.
They have followed two main lines of approach
1) Positive economics - concerned with the investigation in the way in which different economic
agents in the society seek to achieve their goals e.g. how a firm behaves in trying to make as much
profit as it can or how a household is trying to reach the highest attainable level of consumption.
Positive sentiments are concerned with what is ,was or will be.
2) Normative economics - Is concerned with making suggestions about the way in which society’s
goals might be more efficiently realized. The approach involves the economist in ethical questions
of what should or ought to be done .They take u strong moral positions on the propriety of goals
themselves e.g. the present high level of unemployment in Kenya ought to be reduced etc
DOUGLAS RM. | MICROECONOMICS 4
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