Chapter 1 Eco120

Principles of Economics second edition Oxford Fajar Sdn. Bhd.
(008974-T) 2010
All Rights Reserved Ch. 1: 1
CHAPTER
INTRODUCTION TO MICROECONOMICS
Principles of Economics second edition Oxford Fajar Sdn. Bhd. (008974-T) 2010
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.
MICROECONOMICS VS. MACROECONOMICS
MICROECONOMICS
The study of individual parts of the economy such as public choices, business choices and personal choices.
MACROECONOMICS
The study of the economic system as a whole such as national income, trade cycle, unemployment rate, inflation and general price level.
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.
Principles of Economics second edition Oxford Fajar Sdn. Bhd. (008974-T) 2010 All Rights Reserved Ch. 1: 5
SCARCITY SCARCITY
CHOICE CHOICE
BASIC ECONOMIC BASIC ECONOMIC CONCEPTS CONCEPTS
OPPORTUNITY COST OPPORTUNITY COST

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.
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.
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
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.
PRODUCTION POSSIBILITIES CURVE (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.


Sewing Machine 16 14 12 10 8 6 4 2 0 1 2 3 4 5 F Butter
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.
C D
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.

Sewing Machine 16 14 12 10 8 6 4 2 0
Point outside the PPC (Point Z) SCARCITY
A B Y UNATTAINABLE C D ATTAINABLE
Point inside the PPC (Point Y) Waste of resources and inefficiency
Z
Any point along the PPC CHOICES
F 1 2 3 4 5 Butter
Factors that Influence the Shift of PPC 1. Economic Growth

Sewing Machine 16 14 12 10 8 6 4 2 0
When the country enjoys economic growth, the PPC bounds outward.
When the country is struck by natural disasters, economic growth will decline and the PPC will shift to the left.
Butter
Factors that Influence the Shift of PPC 2. Improvements in Technology

Sewing Machine 16 14 12 10 8 6 4 2 0
Technology increases the production of sewing machine.
Technology increases the production of butter.
Butter
Factors that Influence the Shift of PPC 3. Population

Sewing Machine 16 14 12 10 8 6 4 2 0
Increase in population
Decrease in population
Butter
Shape
Sewing Machine 16 14 12 10 8 6 4 2 0
of PPC
PPC IS CONCAVE
Increasing Opportunity Cost
Butter
Shape
Sewing Machine 16 14 12 10 8 6 4 2 0
of PPC (cont.)
PPC IS CONVEX
Decreasing Opportunity Cost
Butter
Shape
of PPC (cont.)
PPC IS LINEAR
Sewing Machine 16 14 12 10 8 6 4 2 0
Constant Opportunity Cost
Butter
ECONOMIC SYSTEM
CAPITALISM
SOCIALISM
MIXED ECONOMY
CHARACTERISTICS
CAPITALISM
An economic system where individuals and sellers make economic decisions using a price system
MERITS AND DEMERITS
CHARACTERISTICS
1. Private ownership of resources 2. Freedom of enterprise and choice 3. Consumers sovereignty 4. Competition 5. Government intervention 6. Price system
MERITS
Production according to
DEMERITS
Inequality of distribution
consumers needs
of wealth and income unemployment rate
Economic freedom Efficient utilization of
Inflation and high
resources goods
Variety of consumer Enhanced trade, business
Lack of social welfare Wasteful competition Misallocation of
and R&D
resources
Automatic incentives Flexibility
Social cost
CHARACTERISTICS
SOCIALISM
An economic system where all the economic decisions are made by the government or a central authority
MERITS AND DEMERITS
CHARACTERISTICS
1. Public ownership of resources 2. Central planning authority 3. Price mechanism of lesser importance 4. Central control and ownership
MERITS
Production according to
DEMERITS
Lack of incentives and
basic need
Equal distribution of
initiative by individuals
Loss of economic
income and wealth

Better allocation of
freedom and consumer sovereignty

Absence of competition Waste of economic
resources
No serious unemployment
or inflation
Rapid economic
resources
development
Social welfare
CHARACTERISTICS
MIXED ECONOMY
An economic system which combines both capitalism and socialism
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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Principles of Economics second edition Oxford Fajar Sdn. Bhd.

All Rights Reserved Ch. 1: 1

All Rights Reserved Ch. 1: 2

All Rights Reserved Ch. 1: 3

MICROECONOMICS VS. MACROECONOMICS

All Rights Reserved Ch. 1: 4

POSITIVE VS. NORMATIVE ANALYSIS

BASIC ECONOMIC BASIC ECONOMIC CONCEPTS CONCEPTS

OPPORTUNITY COST OPPORTUNITY COST

BASIC ECONOMIC CONCEPTS

limited resources to satisfy them.

Scarcity is a universal problem faced by poor

as well as rich nations in order to fulfil their needs.

All Rights Reserved Ch. 1: 7

BASIC ECONOMIC CONCEPTS (cont.)

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BASIC ECONOMIC PROBLEMS

3. FOR WHOM TO PRODUCE?

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PRODUCTION POSSIBILITIES CURVE (PPC)

PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)

employment and full production capacity (full efficiency).

throughout the production.

PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)

PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)

Point outside the PPC (Point Z) SCARCITY

Factors that Influence the Shift of PPC 1. Economic Growth

Factors that Influence the Shift of PPC 2. Improvements in Technology

Technology increases the production of sewing machine.

Technology increases the production of butter.

Factors that Influence the Shift of PPC 3. Population

Increasing Opportunity Cost

Decreasing Opportunity Cost

Constant Opportunity Cost

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MERITS AND DEMERITS

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of wealth and income unemployment rate

Economic freedom Efficient utilization of

Inflation and high

Variety of consumer Enhanced trade, business

Lack of social welfare Wasteful competition Misallocation of

Automatic incentives Flexibility

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MERITS AND DEMERITS

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income and wealth

freedom and consumer sovereignty

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An economic system which combines both capitalism and socialism

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public and business sectors

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