Chapter 1 Introduction To Economics

Principles of Economics second edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 1: 1

CHAPTER 1
INTRODUCTION TO
MICROECONOMICS

What is Economics?
Study of how
Economics people use their
limited
RESOURCES to
fulfill unlimited
wants and involves
alternatives and
choices.
Microeconomics
Macroeconomics
study choices made by
 The study of the nation’s economy
households, firms and
as a whole.
government and how these
choices affect the markets for  Eg: economic growth, inflation,
goods and services unemployment
Demand and supply for car in

Malaysia
ECONOMIC RESOURCES
Land
Natural resources provided
by nature such as minerals,
oil, timber, air etc
Entrepreneur
Who organizes the Labour
other factors of
production and who Human effort in
make decision on Resources producing goods
production and services such as
enjoy the profit and teacher
bear losses
Capital
Stocks that can be used in
the production process
such as office buildings,
equipment and machine
The Entrepreneur

BASIC ECONOMIC CONCEPTS
SCARCITY
The condition in which resources or factors of production available are not enough
to meet all wants.
CHOICE
A comparison of alternatives: compare costs and benefits for each alternative
OPPORTUNITY COST
as the second best alternative that has to be forgone for another choice which
gives more satisfaction

PRODUCTION POSSIBILITIES CURVE
(PPC)
v Scarcity, Choices and Opportunity cost can be

explained using the PPC
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.

(PPC) (cont.)
Assumptions:
To draw PPC, we need 4 assumption:

Producing 2 goods
Fixed resources
Fixed technology
Producing at full employment

(PPC) (cont.)
Sewing Machine Alternative Sewing Butter

Machine
16 A 15 0
A
B
B 14 1
14
C 12 2
12 C
D 9 3
10 D E 5 4
8 F 0 5
6
E
4
2
F
0 1 2 3 4 5 Butter

(PPC) (cont.)
Point outside the PPC

Sewing Machine
(Point Z)  SCARCITY
16 Z
A Movement from one point to
B another (point C to D)
14 OPPORTUNITY COST
12 C
Any point along the
10 D PPC  CHOICES
Eg Point A-F
8 Y
6 Point inside the PPC
(Point Y)  Attainable E
4 BUT inefficiency
2
F
0 1 2 3 4 5 Butter

Tutorial 1
Alternative/ Combination Car (unit) Book (unit)
A 0 30
B 10 20
C 20 10
D 30 0
The following is a set of hypothetical production possibilities of an economy

1) Using a GRAPH PAPER plot the PPC for the above table.
2) What is the consequences when the economy try to produce:
i. 10 units of car and 30 units of book?
ii. 15 units of car and 5 units of book?
iii. 30 units of car and 0 unit of book?

Calculating Opportunity Cost Using
Table
Alternative/ Car (unit) Book (unit) Opportunity cost of Book
Combination
A 0 30 (10-0=10 units of car)
B 10 20 (20-10= 10 units of car)
C 20 10 (30-20= 10 units of car
D 30 0 0 unit of car
(no car should be let go because no
production of book
*** Opportunity cost of book means that how much of car should be let go when we
produce book.
Start calculating from the biggest value of car i.e at combination D because in this case
car should be let go to enable more book production

Do It Your Self (D.I.Y)
Alternative/ Car (unit) Book (unit) Opportunity cost

Combination of Car
A 0 30
B 10 20
C 20 10
D 30 0
Remember!!!
*** Opportunity cost of Car means that how much of Book
should be let go when we produce more car.

TUTORIAL QUESTION
Calculating the Opportunity Cost (Diagram)
Calculate the opportunity cost:

1. when the production of food
increase from 2kg to 4 kg
2. of producing 9 units of cloth
3. of producing 6 unit kg of
foods
Explain
1. Why point G is unattainable?
2. Even point F is attainable is it
inefficient? Why?
Shape of PPC
Sewing Machine PPC IS CONCAVE

16
14
12
Increasing Opportunity
10 Cost
4
2
Butter
0 1 2 3 4 5
Shape of PPC (cont.)
Sewing Machine
PPC IS LINEAR
16
14
12
10
Constant Opportunity
Cost
8
4
2
Butter
0 1 2 3 4 5
BASIC ECONOMIC PROBLEMS
What to produce?
• Decisions must be made about what to produce due to
limited resources
How to produce?
• technique @ method of producing a product either to
use capital intensive @ labor intensive or both
How much to produce?

• quantity of goods @ services to be produced depends on
the demand from consumers or the population and
resources available
For whom to produce?

Means who finally gets to enjoy the commodities produced

Assignment 1 (10 marks)
Using production possibility curve (PPC) explain

the basic economic concept that you learn just
now.
What should be included in your answer?
1. PPC Diagram (allocate point of scarcity,
choices and opportunity cost)
2. Definition of PPC
3. Explanation of scarcity, choices and
opportunity cost based on your diagram
by providing suitable example.

THE END
Be Prepared For Your QUIZ

and POP QUIZ as well


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Principles of Economics second edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 1: 1

Principles of Economics second edition All Rights Reserved

Demand and supply for car in

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

v Scarcity, Choices and Opportunity cost can be

Principles of Economics second edition All Rights Reserved

To draw PPC, we need 4 assumption:

Principles of Economics second edition All Rights Reserved

Sewing Machine Alternative Sewing Butter

Principles of Economics second edition All Rights Reserved

Point outside the PPC

Principles of Economics second edition All Rights Reserved

Alternative/ Combination Car (unit) Book (unit)

The following is a set of hypothetical production possibilities of an economy

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Alternative/ Car (unit) Book (unit) Opportunity cost

Principles of Economics second edition All Rights Reserved

Calculating the Opportunity Cost (Diagram)

Calculate the opportunity cost:

Sewing Machine PPC IS CONCAVE

How much to produce?

For whom to produce?

Principles of Economics second edition All Rights Reserved

Using production possibility curve (PPC) explain

Principles of Economics second edition All Rights Reserved

Be Prepared For Your QUIZ

Principles of Economics second edition All Rights Reserved

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