Principles of Microeconomics

2

INTRODUCTION TO ECONOMICS CHAPTER 1

. . . The word economy comes from a Greek word for “one who manages a household.”

• The study of how scarce, or limited, resources are used to satisfy unlimited wants and needs.

• The study of how people make decision in a world of scarcity.

Economy. . .

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ECONOMICS RESOURCES & FACTORS

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Types of goods1)ECONOMICS GOODSSupply is limitedInvolves price and opportunity costDivided into two: a)Consumer goods gives satisfaction to

customers -Long lasting- Radio, car - Not long lasting(perishable) – Food, fruits

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• Capital goods -To produce other goods – machinery, factory2) FREE GOODSFrom nature and can be obtained without costUnlimited supply so there is no price and the

opportunity cost is zero.Essential to human e.g air and water.There is some cost involved because of

pollution.

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3)PUBLIC GOODSOwned by the government, paid from tax payers’

money e.g. public road, light house.Everyone can use them and we cannot exempt

anyone from using them.

4)PRIVATE GOODSOwned by individual or companies.Others get to use them if they pay or allowed by the

owner e.g:House, car,highway

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SUMMARYECONOMICS

GOODSFREE GOODS PUBLIC GOODS

SUPPLY Private sector Nature Government

PRICE/COST √ X X

OPPORTUNITY COST

√ X √

EXAMPLE

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WHAT IS SCARCITY?• The limited/scarce products and services that

can be produced to satisfy the unlimited needs/desires of humans.

• This problem comes about due to the limited economic resources.

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WHAT IS CHOICE?

• The problem of scarcity leads to choice.• Humans should make a choice between products

and services that are needed and also decided on current or future consumption.

• The consumer will make the efficient/effective choice in order to maximize their satisfaction.

• The producer will make choices or decisions to produce products and services using the limited resources in order to maximize their profits.

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WHAT IS OPPORTUNITY COST?

• Choice will lead to opportunity cost.• Second best product or services that we let go in

order to obtain the best product or services.• E.g: We assume the government has RM2

million to build either a hospital or a school. If the government use the money to build a school, the opportunity cost would be the hospital.

• It exist due to the scarcity of resources.

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• Decisions require comparing costs and benefits of alternatives.• Whether to go to college or to work?• Whether to study or go out on a date?• Whether to go to class or sleep in?

• The opportunity cost of an item is what you give up to obtain that item.

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PRODUCTION POSSIBILITIES CURVE (PPC)• PPC is used to explain scarcity, choice and opportunity cost.• PPC shows the various possible combinations of goods

produces within a specific time with given resources and technology.

• Assumption of PPC:1) There are only two goods.2) Factors of production cannot be further increased.3)Level of technology is fixed and stagnant.4)The economy has achieved maximum efficiency (full employment)

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Example:

A country produces milk powder and bottle making machines. Milk powder is a consumer good whereas the bottle making machine is capital good.

PRODUCTION POSSIBILITY

MILK POWDER (‘000 KG)

BOTTLE MACHINE

(UNIT)A 15 0

B 14 1

C 12 2

D 9 3

E 5 4

F 0 5

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Milk powder

Bottle Machine

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EXPLAINATION OF PPC

ON THE PPC• Points A to F are the best possible combinations of

resources to enable full utilization and to ensure the country is at full employment.

• If all the resources are used to produce milk powder only , 15,000 kg of milk bottle will be produced.

• If all resources are used to produce bottle machine only, 5 bottle machines will be produced.

• Points A to F shows choice.

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INSIDE THE PPC

• Any point inside the PPC is attainable (Point Y)• Attainable means it is possible to produce both the

goods.• Points inside PPC show wastage of resources because

the production has not reached its maximum capacity.

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OUTSIDE PPC

• Any point outside the PPC is unattainable (point Z)• Unattainable means it is not possible to produce both

the goods.• points outside PPC show scarcity where the country

is unable to meet production due to limited resources and technology.

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