Principle Econ chapter 1

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Ch. 1: 1

Principles of Economics second edition

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

MR. MOHD SHAHIDAN BIN SHAARI

Lecturer of Economics

School of business innovation and techno-preneurship

UniMAP

Bachelor’s in Economics

Master’s in Economics

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Ch. 1: 2



INTRODUCTION TO

MICROECONOMICS

CHAPTER 1

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Ch. 1: 3



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: 4



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.

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Ch. 1: 5



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-and-

effect 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: 6



BASIC ECONOMIC CONCEPTS

SCARCITY

OPPORTUNITY COST

CHOICE

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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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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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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: 10



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: 11




(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: 12



Sewing Machine

Butter

12

4

D

C

6

5

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.

A

F


(PPC) (cont.)

2

4

8

10

14

16

0 1 2 3

The country Jaya, produces two products – butter and sewing machine.

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.

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Sewing Machine

Butter

12

4

D

C

6

5

Any point along the PPC CHOICES

A

F

Movement from one point to another (point C to D) OPPORTUNITY COST


(PPC) (cont.)

2

4

8

10

14

16

0 1 2 3

Point outside the PPC (Point Z) SCARCITY

B

E

Z

Y

Point inside the PPC (Point Y) Waste of resources and inefficiency

ATTAINABLE

UNATTAINABLE

Movement from one point to another (point C to D) OPPORTUNITY COST

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Sewing Machine

Butter

12

4

6

5

When the country enjoys economic growth, the PPC bounds outward.

2

4

8

10

14

16

0 1 2 3

When the country is struck by natural disasters, economic growth will decline and the PPC will shift to the left.

Factors that Influence the Shift of PPC

1. Economic Growth

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Ch. 1: 15




2. Improvements in Technology

Sewing Machine

Butter

12

4

6

5

Technology increases the production of sewing machine.

2

4

8

10

14

16

0 1 2 3

Technology increases the production of butter.

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Sewing Machine

Butter

12

4

6

5

Increase in population

2

4

8

10

14

16

0 1 2 3

Decrease in population


3. Population

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Sewing Machine

Butter

12

4

6

5

2

4

8

10

14

16

0 1 2 3

Increasing Opportunity Cost

Shape of PPC

PPC IS CONCAVE

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Sewing Machine

Butter

12

4

6

5

2

4

8

10

14

16

0 1 2 3

Shape of PPC (cont.)

PPC IS CONVEX

Decreasing Opportunity Cost

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Sewing Machine

Butter

12

4

6

5

2

4

8

10

14

16

0 1 2 3

Shape of PPC (cont.)

PPC IS LINEAR

Constant Opportunity Cost

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Ch. 1: 22



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: 23



MERITS DEMERITS

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: 26



MERITS DEMERITS

Production according to basic need

Equal distribution of income and wealth

Better allocation of resources

No serious unemployment or inflation

Rapid economic development

Social welfare

Lack of incentives and initiative by individuals

Loss of economic freedom and consumer sovereignty

Absence of competition

Waste of economic resources

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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

Principle Econ chapter 1

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