Chapter 1 - Introduction To Microeconomics

Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
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Ch. 1: 1
CHAPTER
INTRODUCTION TO
MICROECONOMICS

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Ch. 1: 2
DEFINITION OF ECONOMICS
Economics is a science which studies human
behaviours as a relationship between ends
and scarce which have alternative uses.
OR
Economics is a study of how people use their
limited resources to try to fulfil unlimited
wants and involves alternatives or choices.

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Ch. 1: 3
MICROECONOMICS VS.
MACROECONOMICS
MICROECONOMICS
MACROECONOMICS
The study of
individual parts of the
economy such as
public choices,
business choices and
personal choices.
The study of the

economic system as a
whole such as
national income, trade
cycle, unemployment
rate, inflation and
general price level.

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Ch. 1: 4
POSITIVE VS. NORMATIVE ANALYSIS

A positive analysis is to deal with the question
of what is and no indication of approval or

disapproval. It focuses on facts and cause-andeffect relationships.
A normative analysis is to deal with the
question of what ought to be. It incorporates
value judgements about what the economy
should be or what policy should be used to
achieve economic goals.

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Ch. 1: 5
SCARCITY
CHOICE
BASIC ECONOMIC
CONCEPTS
OPPORTUNITY COST
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Ch. 1: 6
BASIC ECONOMIC CONCEPTS

1. SCARCITY
One of the important concepts in economics is
scarcity.
Scarcity is defined as wants always exceed
limited resources to satisfy them.
Scarcity is a universal problem faced by poor
as well as rich nations in order to fulfil their
needs.

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Ch. 1: 7
BASIC ECONOMIC CONCEPTS (cont.)
2. CHOICE
When scarcity exists, choices are to be
made.
3. OPPORTUNITY COST
Opportunity cost is defined as the second
best alternative that has to be forgone for
another choice which gives more satisfaction.

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Ch. 1: 8
BASIC ECONOMIC PROBLEMS
(cont.)
1. WHAT TO PRODUCE?
Refers to the type of goods and services to be produced
2. HOW TO PRODUCE?
Refers to the cheapest method of production
3. FOR WHOM TO PRODUCE?

Refers to the distribution of income

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Ch. 1: 9
PRODUCTION POSSIBILITIES CURVE

(PPC)
Used to explain the basic economic
concepts: Scarcity, Choices and
Opportunity cost.
DEFINITION:
The PPC shows the various possible
combinations of goods and services
produced within a specified time period
with all its resources fully and
efficiently employed.
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Ch. 1: 10

(PPC) (cont.)
Assumptions:
1. The economy is operating in full
employment and full production capacity
(full efficiency).
2. The amount of resources available are fixed.

3. The state of technology does not change
throughout the production.

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Ch. 1: 11

(PPC) (cont.)
Sewing Machine
16
If it allocates all its resources to sewing machine, it will produce at

Point A.
If it allocates all its resources to butter, it will produce at Point F.
The country Jaya, produces two products butter and sewing

machine.
14
12
10
If the country Jaya is at Point C on

the PPC, it can produce the
combination of 2,000 kg butter and
12,000 units of sewing machine.
Point D shows the production of

3,000 kg butter and 9,000 units of
sewing machine.
6
4
2
0
F
1

Butter
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Ch. 1: 12

(PPC) (cont.)
Point outside the PPC
(Point Z) SCARCITY
Sewing Machine
16
A
B
14
12
UNATTAINABLE
10
8
6
4
Any point along the

PPC CHOICES
Movement from one

point to another (point
C to D)
OPPORTUNITY
COST
Movement from one
point to another (point
C to D)
OPPORTUNITY
COST
D
ATTAINABLE
Point inside the PPC
(Point Y) Waste of
resources and inefficiency
2
0
F
1
Butter
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Ch. 1: 13
Factors that Influence the Shift of PPC

1. Economic Growth
Sewing Machine
16
14
When the country

enjoys economic
growth, the PPC bounds
outward.
12
10
8
6
4
2
0
When the country is

struck by natural
disasters, economic
growth will decline and
the PPC will shift to the
left.
Butter
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Ch. 1: 14

2. Improvements in Technology
Sewing Machine
16
Technology increases
the production of
sewing machine.
14
12
10
Technology increases
the production of
butter.
8
6
4
2
0
Butter
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Ch. 1: 15

3. Population
Sewing Machine
16
14
Increase in population
12
10
8
6
Decrease in population
2
0
Butter
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Ch. 1: 16
of PPC
Shape
PPC IS CONCAVE
Sewing Machine
16
14
12
Increasing Opportunity
Cost
10
8
6
4
2
0
Butter
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Ch. 1: 17
of PPC (cont.)
Shape
Sewing Machine
PPC IS CONVEX
16
14
12
10
Decreasing Opportunity
Cost
8
6
4
2
0
Butter
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Ch. 1: 18
Shape
of PPC (cont.)
Sewing Machine
PPC IS LINEAR
16
14
12
10
Constant Opportunity
Cost
8
6
4
2
0
Butter
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Ch. 1: 19
ECONOMIC SYSTEM
TYPES OF ECONOMIC SYSTEM
CAPITALISM

SOCIALISM
MIXED
ECONOMY
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Ch. 1: 20
CHARACTERISTICS
CAPITALISM
An economic system where individuals and sellers make
economic decisions using a price system
MERITS AND DEMERITS

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Ch. 1: 21
CHARACTERISTICS
1. Private ownership of resources
2. Freedom of enterprise and choice

3. Consumers sovereignty
4. Competition
5. Government intervention
6. Price system
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Ch. 1: 22
DEMERITS
MERITS
Production according to
consumers needs
Economic freedom
Efficient utilization of
resources
Variety of consumer goods
Enhanced trade, business
and R&D
Automatic incentives
Flexibility

Inequality of distribution
of wealth and income

Inflation and high
unemployment rate
Lack of social welfare
Wasteful competition
Misallocation of
resources
Social cost
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Ch. 1: 23
CHARACTERISTICS
SOCIALISM
An economic system where all the economic decisions are
made by the government or a central authority
MERITS AND DEMERITS

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Ch. 1: 24
CHARACTERISTICS
1. Public ownership of resources
2. Central planning authority

3. Price mechanism of lesser importance
4. Central control and ownership

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Ch. 1: 25
MERITS
Production according to
basic need
DEMERITS
Lack of incentives and
initiative by individuals
Equal distribution of
Loss of economic
income and wealth

Better allocation of
resources
freedom and consumer

sovereignty
Absence of competition
No serious unemployment
Waste of economic
or inflation
Rapid economic
development
resources
Social welfare

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Ch. 1: 26
CHARACTERISTICS
MIXED ECONOMY
An economic system which combines both capitalism and
socialism

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Ch. 1: 27
CHARACTERISTICS
1. Public and private ownership of resources
2. Price mechanism and economic plans in
making decisions
3. Government helps to control income
disparity
4. Government intervention in the economy
5. Co-operation between the government,
public and business sectors

6. Government control of monopolies
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Ch. 1: 28

Chapter 1 - Introduction To Microeconomics

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Principles of Economics second edition

Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved

Principles of Economics second edition

All Rights Reserved

Principles of Economics second edition

All Rights Reserved

The study of the

Principles of Economics second edition

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POSITIVE VS. NORMATIVE ANALYSIS

of what is and no indication of approval or

achieve economic goals.

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BASIC ECONOMIC CONCEPTS

Principles of Economics second edition

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BASIC ECONOMIC CONCEPTS (cont.)

Principles of Economics second edition

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BASIC ECONOMIC PROBLEMS

3. FOR WHOM TO PRODUCE?

Principles of Economics second edition

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PRODUCTION POSSIBILITIES CURVE

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PRODUCTION POSSIBILITIES CURVE

2. The amount of resources available are fixed.

Principles of Economics second edition

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PRODUCTION POSSIBILITIES CURVE

If it allocates all its resources to sewing machine, it will produce at

The country Jaya, produces two products butter and sewing

If the country Jaya is at Point C on

Point D shows the production of

Principles of Economics second edition

PRODUCTION POSSIBILITIES CURVE

Any point along the

Movement from one

Factors that Influence the Shift of PPC

When the country

When the country is

Factors that Influence the Shift of PPC

Factors that Influence the Shift of PPC

TYPES OF ECONOMIC SYSTEM

Principles of Economics second edition

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MERITS AND DEMERITS

Principles of Economics second edition

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1. Private ownership of resources

2. Freedom of enterprise and choice

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Principles of Economics second edition

of wealth and income

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MERITS AND DEMERITS

Principles of Economics second edition

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1. Public ownership of resources

2. Central planning authority

4. Central control and ownership