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MICROECONOMI
CS
Chapter 1:IntroductionPrepared by : Cik Sajamoon a/p Boon Chooi &
Cik Masliza Mazlan
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At the end of this lessonstudent should be able to:
1.1 Define microeconomics
1.2 Compare between micro and macro
1.3 Discuss the concepts of economic
problems
1.4 Apply Production PossibilitiesCurve (PPC) to explain the concept
of economic problems
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Definition of Economics
A field of social science that studies
the behaviour of individuals in the
distribution and allocation of
limited factors of production to
maximize the production of goods
and services to fulfil mans
unlimited wants and demands.
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Differences between Microeconomics &
Macroeconomics
Microeconomics Macroeconomics
Studies individual economics unitsin detail such as a household, a firmand a government.
Studies of the economics system asa whole such as the nationalincome, the business cycle, theunemployment rate, inflation andgeneral price levels
Micro means looking closer into
small units
Studies focus on a general price
level, not on the prices of individualitems
Micro can be applied to our dailylives Problems are focused onconsumption and investment as the
main variables in the theory of
national income.
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Concepts of Economic Problems
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SCARCITY
as wantswhich are always exceeding the limi tedresourcesto satisfy society.
If there is no scarcity, there will be no economics
The needs or wants are unlimited but the world has only a
limited amount of resources of factors of production. The factors of production consists is
Labour
CapitalLand
Entrepreneur
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CHOICE
When there is scarcity, choices have to
made
Everyone cannot have what he or shewants, so they have to choose from the
available alternatives.
Cannot get all because limited resources
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OPPORTUNITY COST
..is defined as the second best alternative that
has to be forgone for another choice which gives
more satisfaction.
If you cannot obtain what you need, then you have
to choose among the alternatives. The next
alternative that you choose not to do is the cost of
the thing that you choose to do.
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PRODUCTION POSSIBILITIES
CURVES (PPC)
..show the various possible combinations
of goods and services produced within a
specified time with all its resources fully and
efficiently employed
PPC is used to explain the basic economic
concepts of scarcity, choice and opportunity
cost
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4 specific assumptions to illustrate the PPC
i. a country produces two product
ii. the economy is operating in full
employment and full production
capacityiii. the amount of resources available is fixed
iv. the state of technology does not change
throughout production
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PRODUCTION POSSIBILITIES
CURVES (PPC)
Production
PossibilitiesCar Butter
A 15 0
B 14 1
C 12 2
D 9 3
E 5 4
F 0 5
Car
butter
A
F
B
C
D
E
Z
Y
Production Possibilities Curve
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Point A to F are the best possible combination ofresources to enable full utilization and to ensure that
the country is at full employment
Any point outside the PPC (point Z):
Scarcity; at this point due to limited resourcesand technology, unable to meet production
Any point along the PPC (such as point A, B, C, D,
E and F):Choices which is attainable and efficient
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Any point inside the PPC (point Y) :
these combination of production areattainable, it is possible to produce butter and
car of this quantity but it show waste of
resource and inefficiency since the production
has not reached its maximum level . This also
leads to unemployment.
Movement from one point to another:Opportunity Cost
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depends on the opportunity cost
The PPC for an increasing opportunity cost slopes
from left to right and is convex from the origin
When the opportunity cost is constant the PPC
tends to be linear
Shape of the PPC
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Economic growth
Improvements in technology
Population
it will decrease and increase the PPC
Factors that influence the Shift of PPC
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QUESTION
Production
Combination
A B C D E
Computer 0 5 10 15 20
Radio 20 17 13 6 0
a) Based on the table
draw the production
possibility curvesfor country A
b) Calculate the
opportunity cost
i. Of producing 5
units of computer
ii. Of producing 13
units of radio
iii. Of producing 20
units of radio
c) Country A wishes to
produced 24
computer and 30 units
of radio. What is the
implication?
The following table shows the
production possibilities combination
ofCountr y A that produces two
products : computer and radio
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produced in nation samarahan
Rice (kg) Sugar (kg)
0 7,500
1,500 6,000
3,000 4,500
4,500 3,000
6,000 1,5007,500 0
Based on the above table, answer these questions:
a) Find the opportunity cost
(i) of producing 1,500 kg of rice
(ii) of producing 6,000 kg of rice(iii) when the production of rice increases from 3,000
to 7,500 kg
b) If the economy intends to produce 9,000 kg of rice and
12,000 kg of sugar, suggest 2 ways in which this can
possibly be achieved.
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Illustrate and explain the following
concepts as used in theproduction possibilities curve:
(a) Scarcity(b) Choice
(c) Opportunity cost
AT THE END OF THIS CHAPTER STUDENT
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AT THE END OF THIS CHAPTER STUDENT
SHOULD BE ABLE TO:
1.5 Describe the economic problems1.6 Discuss the characteristic of world economic systems
a. Capitalism (free market)
b. Central Planned
c. Mixed economic d. Islamic Economic
1.7 Explain the merits and demerits of world economic system
1.8 Compare the benefits of every world economic system
1.9 Compare how the world economic systems can solve basic
economic problems
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BASIC ECONOMIC PROBLEMS
1. What and How much to Produce? The economy of every nation has to
take a fundamental decision of what toproduce because of the limitedeconomic resource.
Every society must choose the type andthe quantity of goods and services thatit will produce.
A part from making choice about typesof goods to be produced, society mustalso ensure that enough goods areproduced to fulfill unlimited wants
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2. How to Produce?
This refers to the cheapest method of
production. There are alternative techniqueof producing goods and services.
A producer must manage factors ofproduction effectively to minimize the
production costs while maximizing theoutput quantity and consequentlymaximizing the profit
Production techniques are divided into
labourintensive and capitalintensivetechnique.
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3. For whom to Produce?
This refers to distribution.Distribution of economic benefits
depend on the distribution of
income, affordability and societypurchasing power
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ECONOMIC SYSTEM
Capitalism or Free MarketEconomy
Socialism or CommandEconomy
Mixed Economy Islamic Economy
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CAPITALISM
is an economic system where individuals makeall the main economic decision without any
government intervention.
Buyers, sellers will meet and enter into
transaction
The price system is the main mechanism for
any economic transaction.
also known as laissez
fair e, free marketeconomy or free enterprise
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Characteristic
Ownership of resources Privately owned by individuals or the private sector.
Decision maker Individual. Consumers sovereignty will affect theproduction of goods and services.
Price determination Price mechanism. Free operation of demand and
supply forces without any intervention
-is labeled as the Invisible Hand
Freedom to reap profits Freedom to reap profit resulting in high incentives towork
Freedom of enterprise
and choice
Individuals and producers have freedom of choice.
Also free to trade, invest, and organize to produce
within countrys legal framework
Production objective To maximize profits by prioritizing individual interest asbeing highly competitive among producers.
Government intervention There is very limited. The countrys role is to stabilize
the economic condition of the economy
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Merit Demerit
Production according to the needs
consumers
Inequality of distribution of wealth and
income
Economic freedom Inflation and high unemployment rate -
Economic do not achieve full efficiency
Efficient utilization of resources Neglected of social welfare
Greater variety of consumer goods Unnecessary variety and wastefulcompetition
Enhanced trade, business and
research & development (R&D)
Misallocation of resources
Automatic incentives Social costarising negative externality
effect such as pollution
Flexibility automatically changes
with circumstances.
Price instability determined by the
power of demand and supply in the
market
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SOCIALISM
is an economic system where all the economic
decisions are made by the government or a
central authority.
The government officially owns all resources.
It is also known as a command economy or a
planned system
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Characteristic
Ownership of resources Owned and operated by the state or the government in
the interest of society
Decision maker Government and central planning institution
Price determination Prices are fixed by the government and not determined by
demand and supply.
Freedom to reap profits No freedom
Freedom of enterprise
and choice
Determined by the government through central planning
institutions
Production objective Priorities social and community welfare
Government intervention There is very limited. The governments role is to stabilize
the economic conditions of country.
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Merit Demerit
Production according to the basic needs Lack of incentive and initiative by individuals to
work
Equitable distribution of income and
wealth
Loss of economic freedom and consumer
sovereignty
Better allocation of resources Absence of competition
Unemployment or recession and inflation
rate is minimal
Development of technology and innovation not
encouraged.
Rapid economic development Waste and inefficiency in the distribution of
economic resources
Social welfare Bureaucratic planning & administration
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MIXED ECONOMY
is an economic system which
combination both of capitalism and
socialism to solve the basic economicproblems
Both the public (government) sectors and
private sectors play a role in the economy
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Characteristic
Ownership of resources Freely owned by individuals and the private sector,
while partly owned by the government
Decision maker Individuals and the private sectors (social goods) and
the government (public goods)
Price determination Price mechanism (private goods) and the government
(controlled and public goods)
Freedom to reap profits Freedom to produce private goods, but the government
controls minimum profits rates for the production ofpublic goods
Freedom of enterprise and
choice
Individuals and private producers have freedom of
choice (for private goods) and the government makes
decisions (for public goods)
Production objective To maximize profits (for private goods) and for social
welfare (for public goods)
Government intervention There is very limited. The governments role is to
stabilize the economic conditions of country.
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Merit Demerit
Co-operation between the public and
private sectors - to satisfy the needs of
consumers and increase social welfare
Conflict of opinion between the private
sector and the government sector
-to produces public welfare such aseducation, health, infrastructure, etc
Efficient resource allocation
- The government and private sectors
compete to obtain resources and
produce goods
Uneven distribution of income
- The rich income group continue
accumulating the wealth while the lower
income still remain poorIncentive to work.
-freedom to run economic activities and
gain profits.
Guaranteed economic stability
- Implement fiscal and monetary policies
to ensure full efficiency
More option / choice of goods and
services
- The government produces public goods
while the private sectors produces
private goods
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ISLAMIC ECONOMY
is a branch of social science that studiesthe unlimited desires of individuals to
use available resources to achieve
happiness on earth and in the afterlife. It studies how individuals and society
use limited factors of productions to
fulfill their unlimited desires.
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Characteristic
Ownership of resources Allah is the sole owned; man acts as a trustee to utilize
natural resources
Decision maker Individuals and producers, based on Islamic principles
and commandments
Price determination Consumers and producers (power of the market) based
on Islamic principles and commandments
Freedom to reap profits Freedom to seek profit, provided that interest (riba) is not
involved.
Freedom of enterprise and
choice
Individuals and producers have freedom of choice,
provided there is no contravention of Islamic principles
and commandment
Production objective Priorities the accumulation of profit and social welfare
based on Islamic principles and commandments
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Merit Demerit
Priorities safety and happiness on earth and in
the afterlife
Ensure social welfare are forbidden-wealth and possessions belong to Allah, andman acts as a khalifah entrusted withresponsibility to safeguard the possessions
Individuals are encouraged to seek profit
through halal business activities
- Do not involve interest (riba)and not basedon fraud.
Distributes wealth and income fairly
-Individual : to basic necessities and to equalopportunities
--the government : to ensure each citizen is
guaranteed basic necessities according to the
principle of right to life
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ECONOMIC PROBLEMS
1. What to Produce?
Economic
System
Solution
Capitalism Determined by the power of demand or consumers spending
patterns
Socialism Determined by the ruling authority or government through a centralplanning institution. Individuals do not have the freedom to
determine the types and quantity of goods to be produced
Mixed economy Determined by price mechanism. The government produces goods
that are not produced by the private sector
Islamic economy Determined by price mechanism. Individuals are free to choose or
manufacture the types of goods to be produced, subject to Islamic
laws
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2. How much to Produce?
Economic
System
Solution
Capitalism Dependant on the price determined by the market demand
Socialism Individuals do not have the freedom to determine the types and
quantity of goods to be produced. Priority is given to the
production of basic necessities and public goods
Mixed economy The private sector produces goods based on price mechanism.
The government will supply public goods for use of all members
of the society
Islamic economy Determined by price mechanism. The government will supply
goods that are not produced by the private sector
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3. How to Produce?
Economic
System
Solution
Capitalism Firms will choose a combination factors of production to minimize costs.
The determined factors of production is based on the goal of maximizing
output while minimizing costs
Socialism Based on the governments goal of achieving maximum output to fulfill
the wants of society. The production technique will be chosen based on
social welfare
Mixed economy Firms will choose the production method that will maximize profits and
minimize costs. The government will determine production methods
based on current social benefits and social costs.
Islamic economy Firms will try to minimize production costs by using the most efficient
production technique. However, economy activities that are harmful to
society are prohibited
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4. For whom to produce?
Economic
System
Solution
Capitalism Determined based on individuals purchasing power or income. Firms
offer goods to parties that are willing to pay the price
Socialism Goods are distributed evenly and fairly. The government controls
prices or practices rationing policies to ensure that each individual is
able to enjoy goods that are produced
Mixed economy Determined by price mechanism. The income gap can be resolve
through taxation and subsidy policies
Islamic economy Goods are distributed based on purchasing power and individual
income. The government decrease the income gap through alms,
taxes, and subsidies