MICROECONOMICS

• Basic Economic concepts

• Supply, Demand and Market equilibrium
• Supply, Demand and Government Policies
• International trade
• Elasticity
• Market Failures: Externality and public goods
• Production and Cost
• Market structures
Learning outcomes
CLO1.1 Explain and discuss economic concepts
CLO2.1 Identify, calculate, discuss opportunity cost, absolute advantage,
comparative advantage, specialization and exchange
CLO3.1 Analyze and evaluate the impact of specialization and Exchange
 BASIC ECONOMIC CONCEPTS
• Factors of production
• Basic economic questions
• Circular flow diagram
• Production Possibility frontier
• Microeconomics vs. Macroeconomics
• Normative vs. Positive analysis
• Absolute advantage and comparative advantage.
• Specialization and Exchange
LIFE is about making CHOICES
GOOD CHOICE?

COST BENEFIT
 OPPORTUNITY COST
• Potential forgone profit from a missed opportunity.
• I’d rather do …
• Often, hidden cost
• Anything could be opportunity costs: Money, time, choice of studying
before exam (you could go for a movie or work)
• CRITICAL concept. Everything you do has a cost. Everything you do has a
next good thing you could have done instead.
• How about going to a college?
Did you make a good choice?
 Is going to college a better decision?

What are the opportunity costs of going to college?

1) Tuition
2) Money you could have earned by working

1) - 350 million
2) + 140 million per year from 18 to 70

No college + work = 140m/yr, from 18 to 70

college diploma + work = 200m/yr, from 22 to 70
No college + work = 140m/yr, from College + work = 200m/yr, from 22
18 to 70 to 70

140 x 52 = 7,280 m 200 x 48 = 9,600m

HOWEVER, $1 now and $1 next year is different. Money received in the future forgoes the
possibility of investing it today

Present Value = Future Value / (1+i)t

If, your interest rate is 10%(i=0.1) and the money you receive next year = $ 100, the present value
of the money is $ 90.9.
If you put 90.9$ today in the bank at a 10% interest rate, you will get $ 100 in the next period.
You want me to loan you $30 and pay back $10 each in the next three years. When i = 0.1, the
future value of the money is… 10/1.1 + 10/(1.1)2 + 10/(1.1)3 = $24.87. So I would rather not loan
you the money
 Is going to college a better decision?
Interest rate for 12months saving in VN = 5% (BIDV, Vietin, Agribank, 2024)

No college + work = 140m/yr, from College + work = 200m/yr, from 22

18 to 70 to 70

140 x 52 = 6,240 m 200 x 48 = 9,600m

w/ Interest rate 5%, you will earn VS w/ Interest rate 5%, you will earn
32,599 m 37,605 m

w/ Interest rate 8%, 93,985 m w/ Interest rate 8%, 98,026 m

w/ Interest rate 10%, 197,460 m w/ Interest rate 10%, 192,000 m

If the interest rate is => 10%, going to

college is a worse off deal
Principles of Economics
• Scarcity: Society has limited resources, cannot
produce all the goods and services people wish to
have
• Economics: The study of how society manages its
scarce resources
• How People Make Decisions
• How People Interact
• How the economy as a whole works
Three Basic Economic Questions
• What to produce?
• How people decide what to buy, how much to work, save,
and spend
• How to produce?
• find an optimal method of producing goods and services.
• decide how much to produce, how many workers to hire
• For whom to produce?
• How society decides how to divide its resources between
national defense, consumer goods, protecting the
environment, and other needs
10 Principles of Economics
 1. People Face Trade-offs
• To get something we like we usually have to give up something we also
like.
• A student’s tradeoffs:
Studying vs. napping or Netflix-ing
• Society’s tradeoffs:
- Clean environment vs faster growth
- Efficiency vs. Equity
- Efficiency: Society getting the most out of scare resources
- Equity: Distributing economic prosperity fairly among the members of
society.
 2. The Cost of Something is What You
Give Up to Get it
• Opportunity Cost
• Potential forgone benefits from a missed opportunity.
• Making decisions requires comparing the costs and benefits of
alternative actions.
 3. Rational People Think at the Margin
• Marginal change = small incremental adjustment to an existing status
• Marginal costs vs. marginal utility
• Your decision making is usually not about Do vs. Never Do.
• It’s about doing little bit more vs. little bit less.
 4. People Respond to Incentives
• Punishment and reward.
• More Cong an, less reckless drivers.
• Korean TV Show “Conscience Refrigerator” fixed the traffic habits of
Korean people using incentives.
• Gasoline tax up -> Gasoline price up -> People drive smaller, fuel-efficient
cars or electric vehicles (in the short run) or People move closer to work
(in the long run) -> price rise in housing near the city center… etc.
 5. Trade Makes Everyone Better Off
• Which society do you want to live in?
Self-sufficiency vs Trade
• Trade allows people to specialize in what they do best.
• Production possibility frontier
 6. Markets are good.
• Markets are good, usually.
• Market in economics refers to where decentralized decisions are made
though interactions of millions of firms and households based on price
and self-interests.
• Adam Smith, the father of economics in late 1700s, “Invisible Hand”
• Individuals, households, and firms do what they do not because for
benevolence, but for their own interest.
• Microeconomics is an effort to answer the question “how does
individuals and firms acting in their own interest, w/o caring anyone else,
end up yielding the largest possible productive economy?
• Market economy <-> government economy(command economy)
7. Government Can Sometimes Improve
Market Outcomes
• But sometimes the market sucks. The market is not omnipotent.
• The invisible hand sometimes does not work.
• Market failure: a market fails to allocate resources efficiently.
• Market failure examples:
Externality: The impact of one’s actions on the well-beings of a bystander.
Market power: A single economic actor has a substantial influence on
market prices.
• Market failure is why we sometimes need government intervention.
 8. A Country’s Standard of Living
Depends on its Ability to Produce Goods
and Services
• Productivity: The amount of goods and services produced from each
hour of a worker’s time.
• Difference in standard of living between countries is attributable to
differences in countries’ productivity.
 9. Prices Rise When the Government
Prints Too Much Money
• More money in a country can lead to high inflation.
• Inflation: An increase in the overall level of prices in the economy.
• The world is suffering from inflation after COVID-19. What did the
government do during the pandemic?
 10. Society Faces a Short-Run Tradeoff
Between Inflation and Unemployment
• High employment -> more people have more money -> more demands for
goods and services -> high demand increases price -> Firms need more
workers to produce more goods to meet high demand -> high
employment…
• Phillips curve: An economic theory that inflation and unemployment
have an inverse relationship.
Economic growth -> more jobs & inflation -> less unemployment.
• This is a reasoning of policymakers to increase government spending,
reduce taxes, and print out more money when a country falls into a
slump.
• The theory had been disproven by the occurrence of stagflation in the
1970s where inflation and unemployment both were high.
 Summary
How People Make Decisions
1. People face trade-offs
2. The Cost of something is what you give up to get it
3. Rational People Think at the Margin
4. People Respond to Incentives

How People Interact

5. Trade Can Make Everyone Better Off
6. Markets are Good(usually)
7. Governments Can Sometimes Improve Market Outcomes

How the Economy as a Whole Works

8. A Country’s Standard of Living Depends on Productivity
9. Prices Rise When the Government Prints More Money
10. Society Faces Trade-off between Inflation and Unemployment
 The lens we see
the world
through,
ECONOMICS maybe with
some new
interesting
perspectives
Macroeconomics & Microeconomics
• Microeconomics is The study of how households and firms make
decisions and how they interact in markets
• supply and demand
• pricing of output
• production processes
• cost structure
• Distribution
• Macroeconomics is The study of economy-wide phenomena
• national income analysis
• gross domestic product
• unemployment
• inflation
• fiscal policy
• monetary policy
 Positive vs. Normative
• Positive analysis: descriptive
• Positive analysis is the use of theories and models to predict the impact of
a choice.
• For example:
• What will be the impact of an import quota on foreign cars?
• What will be the impact of an increase in the gasoline excise tax?
• Normative Analysis: prescriptive
• Normative analysis addresses issues from the perspective of “What ought
to be?”
• For example:
• Should we allow foreign car import?
• Should
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we increase the gasoline tax to reduce the traffic?