Chap 1 -Intro to Microeconomics-new

8/22/2019 Chap 1 -Intro to Microeconomics-new

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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

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Chap 1 -Intro to Microeconomics-new