MICROECONOMICS

(DPB1023)
Chapter 1
INTRODUCTION TO
MICROECONOMICS
 LEARNING OUTCOMES
At the end of this lesson, the
students should be able to:
i. Describe microeconomics in general.
ii. Describe economic problems.
iii. Describe world economic systems.
iv. Distinguish the benefits of every world
economic system.
v. Describe how the world economic
systems solve basic economic problems.
 DEFINITION OF ECONOMICS
Economics is a social science study which
concern on how human being allocates the
limited resources in order to fulfill the
unlimited needs and demands.
Economic can be subdivided into two branch;
macroeconomic and microeconomic.
Microeconomic analyzes the specific/individual
economic units in details such as households,
firms and government.
Macroeconomics, on the other hand, analyzes
the aggregate behavior of the entire economy.
SCOPES OF ECONOMICS
MICROECONOMICS
VS MACROECONOMICS
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Build more s
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GOVERNMENT schools? I buy OPEN ECONOMICS
s h o u ld
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Impac m
doing How does
r n at io nal
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What is occurs?
unemp the
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W h at h e
Malays
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HOUSEHOLDS inte rease? FIRMS
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 THREE BASIC ECONOMIC PROBLEMS

What goods and services should an

economy produce? should the emphasis be on
agriculture, manufacturing or services?
How should goods and services be
produced? labour intensive, land intensive,
capital intensive? Efficiency?
To whom should the goods and services be
produced? distribution? ?
THREE BASIC ECONOMIC PROBLEMS
 CONCEPTS OF ECONOMIC PROBLEMS

Three main economic concepts involves;

i. Scarcity (land, labour, capital and enterprise)
. Limited resources but unlimited wants.
. Occurs as human wants are always greater than the
available resources.
. The most important concept in economics. If there is no
scarcity, then there will be no economics study.
 Resources
From producer point of view:

Land : all gift of nature; land, forest, mineral, oil

deposit and water

Labor : all human physical and mental efforts

but excluding entrepreneurial ability

Capital : all manufactured aids; tools,

equipments, machinery; money is not capital

Entrepreneurial Ability: special ability to

gather and transform all other resources into
product/service
 CONCEPTS OF ECONOMIC PROBLEMS
Three main economic concepts involves;
ii. Choice
. When scarcity exists, choices are to be made out of the available
alternatives.
iii. Opportunity cost (Second Best-Forgone alternative)
. The second-best alternative that has to be forgone for another
choice which gives more satisfaction.

. Ex: Umie has RM5 and she would like to buy a book n a pen
which cost RM5 each (scarcity). Umie has to choose either to
purchase a book @ a pen which would satisfy her needs (choices).
If Umie chooses the book, the pen is the opportunity cost because
it is the second best alternative which she has to forgo.
 CONCEPTS OF ECONOMIC PROBLEMS

This economics concept is simple :

Because the resources are scarce, therefore choices
have to be made. Once choices are made, there will
be an opportunity cost as the value of the next-best
choice (alternative) available.
What is the opportunity cost by choosing to study at
university???
 ECONOMIC SYSTEMS
Economic system is a way of organizing the
relationship among individuals, firms and
government to make choices on the basic economic
questions.
The three basic economic problems (what to
produce, how to produce and for whom to
produce) are solved depending on the economic
system chosen by the society.
Basically, there are four types of economic system
which have been practiced, namely;
i. Capitalist economy system
ii. Socialist economy system
iii. Mixed economy system
iv. Islamic economy system
 i. CAPITALIST MARKET
SYSTEM
A capitalism is an economic system where
individuals without government intervention take
all the main economic decision.
Also known as market economy, free enterprise
system, price mechanism, and laissez-faire.
This economy is characterized as economic
freedom, where an individual can act at their own
wishes without any control from the government.
The example of countries practicing the capitalist
economic system are the United States of America
(USA), France, Canada, Japan, and Britain.
 CAPITALIST MARKET SYSTEM:
CHARACTERISTICS
i. Government intervention
. There is no intervention by the government in the
making of economic decisions.
. Government only exist as the law enforcer and set
the rules and regulation to ensure the stability of
economic condition of the country.
ii. Private ownership of resources
. Every individual in the country has a right to acquire
resources.
. This enable individual to own resources as well as to
establish any enterprise at their choices.
. They are free to trade, invest and organize to
produce within the countrys legal framework.
 CAPITALIST MARKET SYSTEM:
CHARACTERISTICS
iii. Consumers sovereignty
. Consumer is the king concept is practiced in
this system.
. Consumers taste and preference will affect the
production of goods and services.
iv. Competition
. Market economy also characterized as highly
competitive among the producers to obtain the
highest profit.
. In order to attract more customers, producers
will use various marketing strategies to sell their
products better.
CAPITALIST MARKET SYSTEM:
CHARACTERISTICS
v. Price System
. Price system is a system used to make economic
decisions.
. In this system, price mechanism is practiced. It
means that the price is determine according to
the force of demand and supply and without any
intervention.
. All economic processes of consumption,
production, exchange, savings, investment and
distribution will work according to this price
mechanism and is labeled as invisible hand by
Adam Smith.
CAPITALIST MARKET SYSTEM:
ADVANTAGES
i. Production according to the needs of
consumers
. Producers are producing goods and services according to
the tastes of consumers, which maximize the consumers
needs and satisfaction.
ii. Economic freedom
. It means the right to earn and retain property as well as
freedom of enterprises and choices of occupation.
. Thus, it will lead to the sourcing of the countrys
manpower in different units of production.
iii. Resources are efficiently utilized
. Competition creates efficiency in producing quality goods
at lower cost since techniques are more efficient.
CAPITALIST MARKET SYSTEM:
ADVANTAGES
iv. Varieties of consumer goods
. Competition takes place in various aspects such
as shape, colour, design and packaging of the
products.
. Thus, consumer will enjoy a wide variety of the
same product.
v. Enhance trade, business and R&D
. Entrepreneurs or producers will always look out
for new innovations to compete with other
producers to provide high quality goods.
CAPITALIST MARKET SYSTEM:
DISADVANTAGES
i. Inequality of distribution of wealth and
income
. Since with no government intervention, the system
of private property widens the gap between the rich
and the poor.
. Thus, this will lead to unequal distribution of income
among the societies.
ii. Infation and high unemployment rate
. Disparity of demand and supply of labour occurs as
it is governed by the invisible hand
. Unstable business fluctuation will cause high
unemployment rate during the depression.
CAPITALIST MARKET SYSTEM:
DISADVANTAGES
iii. Lack of social welfare
. In market economy, social welfare is ignored as the
business entrepreneurs do not provide any pension,
social security or accident benefits to their
employees.
iv. Unnecessary variety and wasteful
competition
. Too much of competition will lead to unnecessary
high cost of production.
. This happen as some producers will highly advertised
their products in order to attract consumer due to
stiff competition in this market system.
CAPITALIST MARKET SYSTEM:
DISADVANTAGES
v. Misallocation of resources
. In this system, producers objective is to maximize
profit and therefore only produce outputs which give
higher profits.
. This will lead to production of luxury goods (for rich
people) and resulting surplus as well as lack of
production for the poor people.
vi. Social cost
. Workers may face social cost (health problem) arising
from the polluted environment caused by improper
disposal of factory wastes since producers' intention is
to increase the private profit and welfare of the
workers is often neglected.
HOW CAPITALIST MARKET SYSTEM
SOLVE BASIC ECONOMIC PROBLEM
i. What to produce?
. In this economic system, production depends on the goods
demanded by the consumer.
. An entrepreneur will only produce goods and services where
there is demand from consumer in order to gain higher profit.
ii. How to produce?
. Depends on the techniques of production whether to use labor
intensive, capital intensive or combination of both techniques.
. Cheapest method of production will be adapted not only to
maximize profit but also to achieve efficiency.
iii. For whom to produce?
. This problem will be solve through price system.
. Goods and services are obtained by anyone who can afford.
ii. SOCIALIST MARKET SYSTEM
Socialist market system is a centrally planned
economy where government or central authority
makes all economic decision.
Any private individual has no right to make their
own economic decisions.
There will be no private property rights since all
resources are owned by government.
Also known as command economy and planned
economy.
There are only few countries which practice this
economic system such as China, Russia, Cuba,
Laos, Vietnam and North Korea.
 SOCIALIST MARKET SYSTEM:
CHARACTERISTICS
i. Public ownership of resources
. All resources are owned and operated by the state
or the government in the interest of society as a
whole.
. This is to ensure equal opportunity for all citizens
regardless of their income.
ii. Central planning authority
. Central Planning Authority acts as government and
responsible for making economic decision for the
society.
. Government will plan and allocate the resources
between current consumption and investment for
the future.
 SOCIALIST MARKET SYSTEM:
CHARACTERISTICS
iii. Less importance of price mechanism
. Market forces are less important in this economic
system.
. Prices are fixed by the government and not
determined by the forces of demand and supply.
. Private profits are not allowed and public interest
is emphasized.
iv. Central control and ownership
. Government intervenes in all aspect of economic
activities including production, consumption and
distribution of goods and services.
SOCIALIST MARKET SYSTEM:
ADVANTAGES
i. Production according to the basic of society
. Government produced goods and services according to
the societies basic needs such as foods, clothes and
building material.
. Production is not by the purchasing power of rich society
but more concern on the society as a whole.
ii. Equal distribution of income
. There will be no difference between rich and poor as
this system provides equal opportunity for all citizens
in earning income.
. Wealth is also equally distributed since private
enterprise are limited.
SOCIALIST MARKET SYSTEM:
ADVANTAGES
iv. No serious unemployment/recession or
infation
. Since the economy is taken fully care by the
government, there will be no serious economic
problems as the governments main objectives is to
maintain the stability of economic.
v. Social welfare
. Government will provide all citizens of the country full
social security such as pensions, accident benefits
and others.
. With all concerns from government, labor dispute and
wastage of resources do not exist in socialist system.
SOCIALIST MARKET SYSTEM:
DISADVANTAGES
i. Lack of incentives and initiatives by
individuals
. There is absence of profit motive in individuals.
. Thus, this will lead to economic inefficiency since
jobs are provided by the government and individuals
are not motivated to work harder.
ii. Loss of economic freedom of consumers
. There is no choice given to consumer and they
accept whatever the public enterprise produce.
. Since with the limited number of private enterprises,
there are limited variety of goods and services as
well as restricted available choices.
SOCIALIST MARKET SYSTEM:
DISADVANTAGES
iii. Absence of competition
. Since there are limited private enterprise exist in
this market system, there will be less R&D activities
occurs.
. Thus, quality of products will be low since there is
no competition.
iv. Waste of economic resources
. Government might produce goods and services that
are not required by the people such as military
equipments.
. This will lead to overproduction of certain goods and
underproduction of certain other goods.
HOW SOCIALIST MARKET SYSTEM
SOLVE BASIC ECONOMIC PROBLEM
i. What to produce?
. In this economic system, planning authorities decides what to produce.
. The Central Planning Authority will collect detailed statistics on the
resources availability and fix up with national priorities.
ii. How to produce?
. The Central Planning Authority will also decides on what techniques to be
used in the production of goods and services.
. The choice is between traditional or modern techniques.
iii. For whom to produce?
. The distribution of national product is decided by Central Planning
Authority.
. The distribution of various commodities is done through a set of
administered fixed prices. (Necessities good are fixed at lower price while
luxurious good are fixed at higher price)
. This is to ensure low inequalities in the distribution of income among
societies.
 iii. MIXED MARKET SYSTEM

Mixed market system is an economic system

which has a mix of capitalist and socialist
systems to solve basic economic problems.
A mixed economy is where both public and
private sectors are complementary play their
roles in the economy.
Most of the countries in the world practiced
this type of economic systems. This includes
Malaysia, Singapore, Thailand, Germany,
South Africa and many others.
 MIXED MARKET SYSTEM:
CHARACTERISTICS
i. Public and private ownership of resources
. Private enterprise conduct business freely.
. The government encourages private sectors by
providing infrastructure and facilities.
ii. Price mechanism and economic plan used to
make economic decisions.
. Price mechanism is used on pricing of goods and
services.
. However, government will intervene in setting up
prices on certain commodities.
. This includes sugar, oil, rice where government
declared as controlled items .
 MIXED MARKET SYSTEM:
CHARACTERISTICS
iii. Government intervention
. Government will not intervene in the economy except for
particular industries.
. Government uses the legislation for unsafe goods,
categorized as illegal products such as military items,
drugs, etc.
. Government also uses direct provision such as
education, defense and health to increase standard of
living.
. Besides, government also control the income disparity
through income taxes and welfare payment.
. Government will also control the existence of
monopolies in order to avoid customers being exploited
by monopolist.
MIXED MARKET SYSTEM:
ADVANTAGES
i. More stable economics
. Since there is a lot of government intervention, the economic will
be more organized. Thus, economic condition will be more stable.
ii. Lower social cost
. Externalities such air, noise and water pollution will be lower due to
government intervention.
. Thus, social cost will be lower as government enact laws to ensure
production methods used caused least harm to the environment.
iii. Narrow gap between rich and poor
. Government intervention through imposing progressive tax will
help to narrow down the gap between the rich and the poor.
. Higher income earners are taxed more than lower income earners.
MIXED MARKET SYSTEM:
ADVANTAGES
iv. Social welfare
. The government will provides public goods at
an affordable price in order to enable lower
income earners to benefit the public goods as
well.
. Government will ensure that public and private
enterprise provide all citizens of the country full
social security such as pensions, accident
benefits and others.
HOW MIXED MARKET SYSTEM
SOLVE BASIC ECONOMIC PROBLEM
i. What to produce?
. In this economic system, what to produce decided by the public and
private sectors.
. The goods and services produced depends on the consideration of social
welfare as well as economic growth.
ii. How to produce?
. The private sector will choose the most efficient and cost-effective
techniques of production (labor intensive vs. capital intensive) while
government will enact laws to combat inefficiencies arising from
externalities.
iii. For whom to produce?
. The distribution of goods and services is also decided by the public and
private sectors.
. Price mechanism is not fully functional in mixed economies.
. Government intervene directly through price control and indirectly
imposing indirect taxes and subsidies.
 iv. ISLAMIC MARKET SYSTEM
Economic activities in Islam are not seen from the
materialistic aspect only but also the spiritual aspect
in this world and the life hereafter.
The only objective of the Islamic Economic System is
to achieve Al-Falah, which means success in ones
life in the world and also the life hereafter.
The basic philosophical foundation in the Islamic
Economic System includes;
a) Tauhid
b) Rububiyyah
c) Tazkiyyah
d) Khalifah
e) ukhuwwah
 ISLAMIC MARKET SYSTEM:
PHILOSOPHICAL
a) The concept of Tauhid
. The concept of believing that in Islam there is only
one God to be worshipped which is Allah SWT.
. The belief of Tauhid is divided into two, namely;
i. The relationship between man and Allah SWT
(Habluminallah)
ii. The relationship among mankind (Habluminannas)
b) The concept of Rububiyyah
. The concept of believing that Allah SWT alone is the
creator and the most powerful.
. He also gives bounties and organizes mans
economies activities for genuine interest to achieve
Al-Falah in this world and the life hereafter.
 ISLAMIC MARKET SYSTEM:
PHILOSOPHICAL
c) The concept of Tazkiyyah
. The concept of purification of humans soul, wealth.
. Islam believes that before one indulges in any economic
activities, he must mould pure and good soul.
. For example, one can purify his wealth by giving out tithe
(Zakat) and donating (Sedekah) to the poor.
. When the wealth of the rich reaches a certain stated amount,
it must be levied with zakat, which aims to help the poor.
d. The concept of khalifah
. The concept of vicegerent that man is the servant of Allah
SWT.
. In Islam, men are created as trustees and they are
responsible to prosper the land and always to be in servitude
to Allah SWT set by the Islamic Law (syariah)
 ISLAMIC MARKET SYSTEM:
PHILOSOPHICAL
e) The concept of Ukhuwwah
. The concept of brotherhood in Islam.
. Islam believes that all men are brothers and
they must love and respect each other and be
responsible.
. Those who are willing to sacrifice for their
brothers show the sign of faith.
. Oppression, extortion and miserliness do not
exist in the Islamic Economic System.
HOW ISLAMIC MARKET SYSTEM
SOLVE BASIC ECONOMIC PROBLEM
i. What to produce?
. In this economic system, what to produce are decided through the
principles of Syariah as been stated in Al-Quran and As- sunnah.
. The goods and services produced must be permissible (halal) and
in accordance with the classification of goods in Islam.
ii. How to produce?
. The producer will choose the most efficient and cost effective
methods of production. (labor vs. capital intensive)
iii. For whom to produce?
. In distributing the goods and services, the need of the poor should
come first instead of the rich.
. This, however, does not mean that the needs of rich are being
ignored. It just that the production of luxury goods for the rich
should come later than the need of the poor.
END OF CHAPTER 1

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