2. Introduction to Microeconomics
CHAPTER 1
Introduction to Microeconomics

3. DEFINITION OF ECONOMICS
‘Economics is a science that studies human behaviour as a relationship between ends and scarce means which have alternative uses.’ (L. Robbins)

4. DEFINITION OF ECONOMICS (CON’T)
‘Economics is a study of how people use their limited resources to try to fulfill unlimited wants and involves alternatives or choices’ (K.E. Case and R.C. Fair).

5. POSITIVE AND NORMATIVE ANALYSIS
A positive statement deals with the question of ‘what is’ and there no indication of approval or disapproval. Positive analysis focuses on facts and the cause-and-effect relationships.

6. POSITIVE AND NORMATIVE ANALYSIS (CON’T)
A normative statement deals with the question of ‘what ought to be’. Normative analysis incorporates value and judgments about what the economy should be or what policy should be used to achieve economic goals.

7. MICROECONOMICS VS MACROECONOMICS
Analyzes specific economic units in detail such as households, firms and government.
Analyzes aggregate behaviour of the entire economy such as national income, trade cycle, and international
trade .

8. BASIC ECONOMIC CONCEPTS
SCARCITY
CHOICES
OPPORTUNITY COST

9. BASIC ECONOMIC CONCEPTS (CON’T)
1. SCARCITY
One of the most important concepts in economics is scarcity.
Scarcity is defined as human wants and are always greater than available resources.
Scarcity is a universal problem faced by the poor and rich nations in order to fulfill their needs.

10. BASIC ECONOMIC CONCEPTS (CON’T)
2. CHOICES
When scarcity exists, choices are to be made.
3. OPPORTUNITY COST
Opportunity cost is defined as the second best alternative that has to be foregone for another choice which gives more satisfaction.
MICROECONOMICS

11. PRODUCTION POSSIBILITIES CURVE (PPC)
It is used to explain the basic economic concepts of scarcity, choices and opportunity cost.
DEFINITION
The PPC shows various possible combination of goods and services produced within a specified time with its resources fully and efficiently employed.

12. ASSUMPTIONS OF PRODUCTION POSSIBILITIES CURVE (PPC)
Economy is in full employment and full production capacity (full efficiency).
Resources available are fixed and limited.

13. THE ASSUMPTIONS OF PRODUCTION POSSIBILITIES CURVE (PPC) (CON’T)
The state of technology does not change throughout production.
It is assumed that the country is only producing two goods.

14. PRODUCTION POSSIBILITIES CURVE (PPC) (CON’T)
Consumer Goods (million)
Defence Goods (million)
If it allocates its resources to defence goods, it will produce at Point A
If it allocates its resources to consumer goods, it will produce at Point F A F
North Korea produces two products—defence goods and consumer goods 40 50 10 20 30 90 60
120
150
If North Korea is at point C on the PPC, it can produce the combination of 120 million defence goods and 20 million units of consumer goods
Point D shows production of 90 million defence goods and 30 million units of consumer goods D C B E

15. PRODUCTION POSSIBILITIES CURVE (PPC) (CON’T)
Defence Goods (million)
Consumer Goods (million)
Point outside the PPC (Point Z)  SCARCITY F Z D C A B E
120 40 60 50 30 90
150 10 20 Y
UNATTAINABLE
Point along the PPC  CHOICES
Movement from one point to another (point C to D)  OPPORTUNITY COST
ATTAINABLE
Point inside the PPC (Point Y)  Waste of resources and inefficiency

16. SHIFTS OF PPC DUE TO ECONOMIC GROWTH
Defence Goods (million)
Consumer Goods (million)
120 40 60 50 30 90
150
160 10 20
When the country enjoys economic growth, the PPC moves outward
When the country is struck by natural disaster, economic growth will decline and PPC shifts to the left

17. SHIFTS OF PPC DUE TO IMPROVEMENT IN TECNOLOGY
Consumer Goods (million)
Defence Goods (million) 40 50 10 20 30
120 60 90
150
160
Technology increases production of defence goods
Technology increases the production of consumer goods
MICROECONOMICS

18. SHIFTS OF PPC DUE TO POPULATION
Defence Goods (million)
Consumer Goods (million) 40 50
120 60 30 90
150
160 10 20
Increase in population
Decrease in Population

19. CONCAVE SHAPE OF PPC CURVE
Good Y
Good X 4 2 1 3 5 6 A B C D
Increasing Opportunity Cost

20. CONVEX SHAPE OF PPC CURVE (CON’T)
Good Y
Good X 1 2 3 4 5 6 A B C D
Decreasing Opportunity Cost

21. LINEAR SHAPE OF PPC CURVE (CON’T)
Good Y
Good X 4 2 1 3 5 6 A B C D
Constant Opportunity Cost
MICROECONOMICS

22. FUNDAMENTAL ECONOMIC QUESTIONS
1. WHAT TO PRODUCE ?
Depends on the what type of goods and services to produce.
2 HOW TO PRODUCE ?
Depends on the cheapest method of production.
    3. FOR WHOM TO PRODUCE ?
Depends on the distribution of income   

23. TYPES OF ECONOMIC SYSTEMS
MARKET ECONOMY
PLANNED ECONOMY
MIXED ECONOMY

24. MARKET ECONOMY MARKET ECONOMY CHARACTERISTICS MERITS AND DEMERITS
 Individuals and sellers make economic decisions using a price system.
MERITS AND DEMERITS

25. CHARACTERISTICS OF A MARKET ECONOMY
Private ownership of resources
Freedom of enterprise and choice
Consumers’ sovereignty
Competition
Government intervention
Price system

26. MERITS AND DEMERITS OF A MARKET ECONOMY
Production according to consumers’ need
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

27.  Economic decisions are made by the government or central authority.
PLANNED ECONOMY
CHARACTERISTICS
PLANNED ECONOMY
 Economic decisions are made by the government or central authority.
MERITS AND DEMERITS

28. CHARACTERISTICS OF A PLANNED ECONOMY
Public ownership of resources
Central planning authority
Price mechanism of lesser importance
Central control and ownership

29. MERITS AND DEMERITS OF A PLANNED ECONOMY
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

30. An economic system which combines both capitalism and socialism.
MIXED ECONOMY
CHARACTERISTICS
MIXED ECONOMY
An economic system which combines both capitalism and socialism.

31. CHARACTERISTICS OF MIXED ECONOMY
Public and private ownership of resources
Price mechanism and economic plans in making decision
Government helps to control income disparity
Government intervention in the economy
Co-operation between the government, public and business sectors
Government control of monopolies