INTRODUCTION TO MICROECONOMICS CHAPTER 1 INTRODUCTION TO MICROECONOMICS

DEFINITION OF ECONOMICS Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. OR Economics is a study of how people use their limited resources to try to fulfill unlimited wants and involves alternatives or choices.

MICROECONOMICS VS. MACROECONOMICS 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-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.

SCARCITY CHOICE BASIC ECONOMIC CONCEPTS OPPORTUNITY COST

BASIC ECONOMIC CONCEPTS 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 fulfill their needs.

BASIC ECONOMIC CONCEPTS (cont.) CHOICE When scarcity exists, choices are to be made. 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 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: The economy is operating in full employment and full production capacity (full efficiency). The amount of resources available are fixed. The state of technology does not change throughout the production.

PRODUCTION POSSIBILITIES CURVE (PPC) (cont.) Sewing Machine 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. 16 A 14 The country Jaya, produces two products – butter and sewing machine. C 12 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. 10 D 8 6 4 2 F 1 2 3 4 5 Butter

PRODUCTION POSSIBILITIES CURVE (PPC) (cont.) Sewing Machine Z 16 A B Point outside the PPC (Point Z)  SCARCITY UNATTAINABLE 14 C 12 Y Any point along the PPC  CHOICES 10 D 8 Movement from one point to another (point C to D)  OPPORTUNITY COST ATTAINABLE 6 Point inside the PPC (Point Y)  Waste of resources and inefficiency E 4 2 F 1 2 3 4 5 Butter

FACTORS THAT INFLUENCE THE SHIFT OF PPC Sewing Machine Economic Growth 16 When the country enjoys economic growth, the PPC bounds outward. 14 12 10 8 When the country is struck by natural disasters, economic growth will decline and the PPC will shift to the left. 6 4 2 Butter 1 2 3 4 5

FACTORS THAT INFLUENCE THE SHIFT OF PPC (cont.) Sewing Machine 2. Improvements in Technology 16 Technology increases the production of sewing machine. 14 12 Technology increases the production of butter. 10 8 6 4 2 Butter 1 2 3 4 5

FACTORS THAT INFLUENCE THE SHIFT OF PPC (cont.) Sewing Machine 3. Population 16 14 Increase in population 12 10 8 Decrease in population 6 4 2 Butter 1 2 3 4 5

SHAPE OF PPC PPC IS CONCAVE Sewing Machine 16 14 12 10 8 6 4 2 Butter Increasing Opportunity Cost 12 10 8 6 4 2 Butter 1 2 3 4 5

SHAPE OF PPC (cont.) PPC IS CONVEX Sewing Machine 16 14 12 10 8 6 4 2 Decreasing Opportunity Cost 10 8 6 4 2 Butter 1 2 3 4 5

SHAPE OF PPC (cont.) PPC IS LINEAR Sewing Machine 16 14 12 10 8 6 4 2 Constant Opportunity Cost 10 8 6 4 2 Butter 1 2 3 4 5

TYPES OF ECONOMIC SYSTEM MIXED ECONOMY ISLAMIC ECONOMY SOCIALISM CAPITALISM

TYPES OF ECONOMIC SYSTEM CHARACTERISTICS CAPITALISM An economic system where individuals and sellers make economic decisions using a price system MERITS AND DEMERITS

CHARACTERISTICS Private ownership of resources Freedom of enterprise and choice Consumers’ sovereignty High competition Government intervention Price mechanism

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

TYPES OF ECONOMIC SYSTEM CHARACTERISTICS SOCIALISM An economic system where all the economic decisions are made by the government or a central authority MERITS AND DEMERITS

CHARACTERISTICS Public ownership of resources Central planning authority Price mechanism is less important Central control and ownership

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