1. ECO 162-Introduction to Microeconomic

8/11/2019 1. ECO 162-Introduction to Microeconomic

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MICROECONOMICS

(ECO 162)

INTRODUCTION TO

MICROECONOMICS-Ms. Tai Nyuk Chin-


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LEARNING OUTCOMES

At the end of this lesson, the students should beable to:

i. Define economics and distinguish between

microeconomics and macroeconomics.ii. Describe basic economic concepts: Scarcity, choices

and opportunity cost.

iii. Explain the basic economic problems.

iv. Explain graphically basic economics concept usingPPC.

v. Distinguish the four types of economic systems.


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HISTORY ON DEFINITION OF

ECONOMICS

i. Economics is a science that studies human behavior as a relationshipbetween ends and scarce means which have alternative uses

L .Robbins (1894-1984).

ii. Economics is a study of how people use their limited resources to try to

fulfill their unlimited wants and involves alternative or choicesK.E.

Case and R.C. Fair.

iii. Economicsis the science of how a particular society solves its economic

problemsM il ton F r iedman (1912)

iv. Economics is the study of mansactions in the ordinary business of life;

it examines that part of individual and social action which is most closely

connected with the attainment and with the use of the material requisitesof well-being. Thus it is on one side a study of wealth and on the other

and more important side, a part of the study of man- Al fred Marshall

(1824-1924)


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DEFINITION OF ECONOMICS

Economics is a social science study which concern on how

human being allocates the limited resources in order to

fulfill the unlimited needs and demands.

Economic can be subdivided into two branch;

macroeconomic and microeconomic.

Microeconomic analyzes the specific economic units in

details such as households, firms and government.

Macroeconomics, on the other hand, analyzes the

aggregate behavior of the entire economy.


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HOUSEHOLDS FIRMS

GOVERNMENT OPEN ECONOMICS

Build more hospitalsor schools?


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ECONOMIC CONCEPTS

Three main economic concepts involves;i. Scarcity (land, labour, capital and enterprise)

Occurs as human wants are always greater than the

available resources.

The most important concept in economics. If there is noscarcity, then there will be no economics study.

ii. Choice

When scarcity exists, choices are to be made out of the

available alternatives.

iii. Opportunity cost (Second Best-Forgone alternative)

The second-best alternative that has to be forgone for

another choice which gives more satisfaction.


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ECONOMIC CONCEPTS

This economics concept is simple :

Because the resources are scarce, therefore choices

have to be made. Once choices are made, there will

be an opportunity cost as the value of the next-best

choice (alternative) available.

What is the opportunity cost by choosing to study at

university???


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THREE BASIC ECONOMIC PROBLEMS

What to produce? What kind of product/services are going to be produces.

Depends on the type and quantity of goods and services needed bythe countries

How to produce?

What resources are going to be used, what techniques are going tobe used to produce.

Depends on the cheapest method of production (Labor VSMachine).

For whom to produce? How will nation distribute income to reduce the gap between rich

and poor.

Depends on the distribution of income in the society.


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PRODUCTION POSSIBILITIES CURVE (PPC)

Since with scarcity problem, no country in this world can produce unlimitednumbers of goods.

Therefore, an economy will produce goods depending on variouscombinations of factors of production.

PPC shows the various possible combination of goods and servicesproduced within a specified time period with given technology and

resources. Assumptions to illustrate PPC includes;

i. Full-employment

The economy is operating in full employment and full efficiency

ii. Fixed resources

The amount of available economic resources or factor of production are fixed

iii. Technology constant

State of technology and method of production does not change

iv. Production of two goods

Assuming that the country is producing only two type of goods


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PRODUCTION POSSIBILITIES CURVE

Foods (Million units)

Clothes (Million units)

150

120

90

60

30

10 20 30 40 50

X

Y

A

B

C

D

Figure 1.1 : Production Possibilities Curve

(Unattainable due to scarcity)

ABCD: Attainable and Efficient

points (Choices)

(Attainable but inefficient: Lead

to wastage/unemployment)


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i. Point inside the PPC (Point X)

These combinations of foods and clothes are attainable and can be

produced.

However, it shows the resources are not fully utilized and the production

has not reached its maximum level.

ii. Points Outside the PPC (Point Y) This point which lies outside the PPC is unattainable due to limited

resources

Shows the concept of scarcity.

iii. Points along the PPC (Point A, B, C and D) Combination are attainable and efficient.

Shows the second basic economic concept of choices.


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iv. Movement from one point to another point Illustrate the third basic economic concept of opportunity cost.

E.g. movement from point A to B

Point A (100 X, 50 Y) to Point B (50 X, 75 Y) : In order for this

country to produce an additional of 25 millions units of good Y, it has

to forgone 50 millions units of good X.

B

A

Good Y

Good X

75

50

50 100


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v. Shifts of the PPC

a) Outward shift (Increase in output): Due to improvement in the new

technology, increase in resources and technology, economy growth and

increase in population.

b) Inward Shift (Decrease in output) : Due to natural disaster, reduction infactors of production and

Corn Corn Corn


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vi. Shape of the PPC

The shape of PPC depends on the types of opportunity cost.

Opportunity cost is calculated based on how much one good

is forgone to obtain other good. Basically, there are three types of opportunity cost;

i. Increasing opportunity cost

ii. Constant opportunity cost

iii. Decreasing opportunity cost.


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Production Possibilities Curve: Increasing

Opportunity Cost

Increasing opportunity cost meansthat when a country produces more

of one good, it has to forgone more

amounts of another goods.

Figure 1.2 shows that 1 unit increase

in Good X from 1 to 2 units had to

forgone 1 unit of Good Y.

Additional unit of Good X from 2 to 3

units involves 2 units of Good Y.

This is called increasing opportunity

cost as more units of Good Y are

forgone for additional unit of Good X. PPC is concave due to increasing

opportunity cost.

Good Y

Good X

Figure 1.2 : Increasing Opportunity Cost

1 2 3 4

2

4

5

6


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PRODUCTION POSSIBILITIES CURVE: Constant

Opportunity Cost

Constant opportunity cost means

that when a country produces

more of one good, it has to

forgone the same amounts of

another goods.

Figure 1.3 shows that sameamount of Good Y is forgone for

each additional unit of Good X.

PPC is linear as the opportunity

cost is constant.

6

2

4

2 64

Good Y

Good X

A

B

C

D

Figure 1.3 : Constant Opportunity Cost


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PRODUCTION POSSIBILITIES CURVE: Decreasing

Opportunity Cost

Decreasing opportunity cost occurswhen a country produces more of

one good, it has to forgone lesser

amounts of another goods.

Figure 1.4 shows that 1 unit increase

in Good X from point A to B involves

two units of Good Y forgone.

An additional increase of Good X

from point B to C forgone 1 units of

Good Y and number of Good Y

forgone continues to decrease.

This is called decreasing opportunitycost as lesser units of Goods Y are

forgone for additional unit of Good X.

PPC is convex due to decreasing

opportunity cost

Good Y

Good X2 31

1

2

4

Figure 1.4 : Decreasing Opportunity Cost

A

B

C

D


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i. Apr 2010 (Part B, Q 2.a)

ii. Apr 2011(Part B, Q2)

iii. Sept 2011(Part B, Q2.a)
http://localhost/var/www/apps/conversion/tmp/ECO%20162-%20Micro/Past%20Year%20Q%20_%20ECO162/6.%20ECO162_April%202010.pdfhttp://localhost/var/www/apps/conversion/tmp/ECO%20162-%20Micro/Past%20Year%20Q%20_%20ECO162/7.%20ECO162%20-%20April%202011.PDFhttp://localhost/var/www/apps/conversion/tmp/ECO%20162-%20Micro/Past%20Year%20Q%20_%20ECO162/7.%20ECO162%20-%20Sept%202011.PDFhttp://localhost/var/www/apps/conversion/tmp/ECO%20162-%20Micro/Past%20Year%20Q%20_%20ECO162/7.%20ECO162%20-%20Sept%202011.PDFhttp://localhost/var/www/apps/conversion/tmp/ECO%20162-%20Micro/Past%20Year%20Q%20_%20ECO162/7.%20ECO162%20-%20Sept%202011.PDFhttp://localhost/var/www/apps/conversion/tmp/ECO%20162-%20Micro/Past%20Year%20Q%20_%20ECO162/7.%20ECO162%20-%20Sept%202011.PDFhttp://localhost/var/www/apps/conversion/tmp/ECO%20162-%20Micro/Past%20Year%20Q%20_%20ECO162/7.%20ECO162%20-%20April%202011.PDFhttp://localhost/var/www/apps/conversion/tmp/ECO%20162-%20Micro/Past%20Year%20Q%20_%20ECO162/6.%20ECO162_April%202010.pdfhttp://localhost/var/www/apps/conversion/tmp/ECO%20162-%20Micro/Past%20Year%20Q%20_%20ECO162/6.%20ECO162_April%202010.pdf


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ECONOMIC SYSTEMS

Economic system is a way of organizing the relationshipamong individuals, firms and government to make choices on

the basic economic questions.

The three basic economic problems (what to produce, how

to produce and for whom to produce) are solved depending

on the economic system chosen by the society.

Basically, there are four types of economic system which have

been practiced, namely;

i. Capitalist economy system

ii. Socialist economy system

iii. Mixed economy system

iv. Islamic economy system


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i. CAPITALIST MARKET SYSTEM

A capitalism is an economic system where individuals without

government intervention take all the main economic decision.

Also known as market economy, free enterprise system and

laissez-faire.

This economy is characterized as economic freedom, where an

individual can act at their own wishes without any control from

the government.

The example of countries practicing the capitalist economic

system are the United States of America (USA), France, Canada,

Japan, and Britain.


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CAPITALIST MARKET SYSTEM:

CHARACTERISTICS

i. No government intervention

ii. Private ownership of resources

iii. Consumeris the kingconcept

iv. High level of competition

v. Price System Invisiblehands


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CAPITALIST MARKET SYSTEM

ADVANTAGES

i. Production according to the

needs of consumers

ii. Economic freedomiii. Resources are efficiently

utilized

iv. Varieties of consumer goods

v. Enhance trade, business andR&D

DISADVANTAGES

i. Inequality of distribution ofwealth and income.

ii. Inflation and highunemployment rate.

iii. Lack of social welfare.

iv. Unnecessary variety andwasteful competition.

v. Misallocation of resources.

vi. Social cost.


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HOW CAPITALIST MARKET SYSTEM

SOLVE BASIC ECONOMIC PROBLEMi. What to produce?

In this economic system, production depends on the goodsdemanded by the consumer.

An entrepreneur will only produce goods and services where thereis demand from consumer in order to gain higher profit.

ii. How to produce?

Depends on the techniques of production whether to use laborintensive, capital intensive or combination of both techniques.

Cheapest method of production will be adapted not only tomaximize profit but also to achieve efficiency.

iii. For whom to produce?

This problem will be solve through price system.

Goods and services are obtained by anyone who can afford.


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ii. SOCIALIST MARKET SYSTEM

Socialist market system is a centrally planned economy where

government or central authority makes all economic decision.

Any private individual has no right to make their own economic

decisions.

There will be no private property rights since all resources are

owned by government.

Also known as command economy and planned economy.

There are only few countries which practice this economic

system such as Russia, Cuba, Laos, Vietnam and North Korea.


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SOCIALIST MARKET SYSTEM:

CHARACTERISTICS

i. Public ownership of resources.

ii. Central planning authority.

iii. Less importance of price mechanism

iv. Central control and ownership


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SOCIALIST MARKET SYSTEM:

ADVANTAGES

i. Production according to

the basic of society

ii. Equal distribution of

income

v. Social welfare

DISADVANTAGES

i. Lack of incentives and

initiatives by individuals

ii. Loss of economic

freedom of consumers

iii. Absence of competition

iv. Waste of economicresources


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HOW SOCIALIST MARKET SYSTEM


In this economic system, planning authorities decides what to produce.

The Central Planning Authority will collect detailed statistics on theresources availability and fix up with national priorities.

ii. How to produce?

The Central Planning Authority will also decides on what techniques to beused in the production of goods and services.

The choice is between traditional or modern techniques.


The distribution of national product is decided by Central PlanningAuthority.

The distribution of various commodities is done through a set ofadministered fixed prices. (Necessities good are fixed at lower price whileluxurious good are fixed at higher price)

This is to ensure low inequalities in the distribution of income amongsocieties.


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iii. MIXED MARKET SYSTEM

Mixed market system is an economic system which

has a mix of capitalist and socialist systems to solve

basic economic problems.

A mixed economy is where both public and privatesectors play their roles in the economy.

Most of the countries in the world practiced this type

of economic systems. This includes Malaysia,

Singapore, Thailand, Germany, South Africa and many

others.


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MIXED MARKET SYSTEM:

CHARACTERISTICS

i. Public and private ownership of resources.

ii. Price mechanism and economic plan used to

make economic decisions.

iii. Government intervention.


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MIXED MARKET SYSTEM:

ADVANTAGES

i. More stable economics.

ii. Lower social cost.

iii. Narrow gap between

rich and poor.

iv. Social welfare.

DISADVANTAGES

Higher cost in conducting

regulation requirements.

Unsuccessful governmentregulation may paralyzed

the system.

High level of bureaucracy.


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HOW MIXED MARKET SYSTEM SOLVE

BASIC ECONOMIC PROBLEMi. What to produce?

In this economic system, what to produce decided by the public and privatesectors.

The goods and services produced depends on the consideration of socialwelfare as well as economic growth.

ii. How to produce?

The private sector will choose the most efficient and cost-effectivetechniques of production (labor intensive vs. capital intensive) whilegovernment will enact laws to combat inefficiencies arising fromexternalities.


The distribution of goods and services is also decided by the public and

private sectors. Price mechanism is not fully functional in mixed economies.

Government intervene directly through price control and indirectlyimposing indirect taxes and subsidies.


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iv. ISLAMIC MARKET SYSTEM

Economic activities in Islam are not seen from the materialisticaspect only but also the spiritual aspect in this world and the lifehereafter.

The only objective of the Islamic Economic System is to achieveAl-Falah, which means success in oneslife in the world and also

the life hereafter.

The basic philosophical foundation in the Islamic EconomicSystem includes;

a) Tauhid

b) Rububiyyahc) Tazkiyyah

d) Khalifah

e) Ukhuwwah


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HOW ISLAMIC MARKET SYSTEM


In this economic system, what to produce are decided through theprinciples of Syariah as been stated in Al-Quran and As- sunnah.

The goods and services produced must be permissible (halal) and inaccordance with the classification of goods in Islam.

ii. How to produce?

The producer will choose the most efficient and cost effective methodsof production. (labor vs. capital intensive)


In distributing the goods and services, the need of the poor shouldcome first instead of the rich.

This, however, does not mean that the needs of rich are being ignored.It just that the production of luxury goods for the rich should comelater than the need of the poor.


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ECONOMIC SYSTEMS

i. Apr 2011 Part C, Q.1b

ii. Sept 2011 Part C, Q.1b
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END OF CHAPTER 1

THANK YOU

1. ECO 162-Introduction to Microeconomic

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