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Principles of Economics second edition

Oxford Fajar Sdn. Bhd. (008974-T) 2010

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INTRODUCTION TOMICROECONOMICS

CHAPTER 1

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DEFINITION OF ECONOMICS

Economics is a science which studies humanbehaviours as a relationship between ends

and scarce which have alternative uses.

OR

Economics is a study of how people use their

limited resources to try to fulfil unlimited

wants and involves alternatives or choices.

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MICROECONOMICS VS.

MACROECONOMICS

MICROECONOMICS

The study ofindividual 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.

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POSITIVE VS. NORMATIVE ANALYSIS

Apositive 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 economyshould be or what policy should be used to

achieve economic goals.

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SCARCITY

SCARCITY

OPPORTUNITY COST

OPPORTUNITY COST

CHOICE

CHOICE

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BASIC ECONOMIC CONCEPTS

1. SCARCITY One of the important concepts in economics is

scarcity.

Scarcityis defined as wants always exceedlimited resources to satisfy them.

Scarcity is a universal problem faced by pooras well as rich nations in order to fulfil theirneeds.

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BASIC ECONOMIC CONCEPTS (cont.)

2.CHOICE When scarcity exists, choices are to be

made.

3.OPPORTUNITY COST Opportunity cost is defined as the second

best alternative that has to be forgone foranother choice which gives more satisfaction.

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BASIC ECONOMIC PROBLEMS (cont.)

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

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PRODUCTION POSSIBILITIES CURVE

(PPC) Used to explain the basic economicconcepts: Scarcity, Choices and Opportunitycost.

DEFINITION:

The PPC shows the various possiblecombinations of goods and services

produced within a specified time periodwith all its resources fully and

efficiently employed.

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(PPC) (cont.)

Assumptions:

1. The economy is operating in fullemployment and full production capacity(full efficiency).

2. The amount of resources available arefixed.

3. The state of technology does not changethroughout the production.

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Sewing Machine

Butter

12

4

D

C

6

5

If it allocates all its resources to sewing machine, it will produceat Point A.

If it allocates all its resources to butter, it will produce at Point F.

A

F


(PPC) (cont.)

2

4

8

10

14

16

0 1 2 3

The country Jaya, produces two products butter and sewingmachine.

If the country Jaya is at Point C onthe PPC, it can produce thecombination of 2,000 kg butter and12,000 units of sewing machine.

Point D shows the production of3,000 kg butter and 9,000 units of

sewing machine.

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Sewing Machine

Butter

12

4

D

C

6

5

Any point along thePPC CHOICES

A

F


(PPC) (cont.)

2

4

8

10

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Point outside the PPC(Point Z) SCARCITY

B

E

Z

Y

Point inside the PPC(Point Y) Waste ofresources and inefficiency

ATTAINABLE

UNATTAINABLE

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Sewing Machine

Butter

12

4

6

5

When the country

enjoys economicgrowth, the PPC boundsoutward.

2

4

8

10

14

16

0 1 2 3

When the country is

struck by naturaldisasters, economicgrowth will decline andthe PPC will shift to theleft.

Factors that Influence the Shift of PPC

1. Economic Growth

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2. Improvements in Technology

Sewing Machine

Butter

12

4

6

5

Technology increasesthe production ofsewing machine.

2

4

8

10

14

16

0 1 2 3

Technology increasesthe production ofbutter.

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Sewing Machine

Butter

12

4

6

5

Increase in population

2

4

8

10

14

16

0 1 2 3

Decrease in population


3. Population

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Sewing Machine

Butter

12

4

6

5

2

4

8

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0 1 2 3

Increasing OpportunityCost

Shape of PPC

PPC IS CONCAVE

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Sewing Machine

Butter

12

4

6

5

2

4

8

10

14

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0 1 2 3

Shape of PPC (cont.)

PPC IS CONVEX

Decreasing OpportunityCost

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Sewing Machine

Butter

12

4

6

5

2

4

8

10

14

16

0 1 2 3

Shape of PPC (cont.)

PPC IS LINEAR

Constant OpportunityCost

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CAPITALISMAn economic system where individuals and sellers make

economic decisions using a price system

CHARACTERISTICS

MERITS AND DEMERITS

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CHARACTERISTICS

1. Private ownership of resources

2. Freedom of enterprise and choice

3. Consumers sovereignty

4. Competition

5. Government intervention

6. Price system

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MERITS DEMERITS

Production according to

consumers needs Economic freedom

Efficient utilization ofresources

Variety of consumergoods

Enhanced trade, businessand 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

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SOCIALISMAn economic system where all the economic decisions are

made by the government or a central authority

CHARACTERISTICS

MERITS AND DEMERITS

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CHARACTERISTICS

1. Public ownership of resources

2. Central planning authority

3. Price mechanism of lesser importance

4. Central control and ownership

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MERITS DEMERITS

Production according tobasic need

Equal distribution ofincome and wealth

Better allocation ofresources

No serious unemploymentor inflation

Rapid economicdevelopment

Social welfare

Lack of incentives andinitiative by individuals

Loss of economicfreedom and consumersovereignty

Absence of competition

Waste of economicresources

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CHARACTERISTICS

1. Public and private ownership of resources

2. Price mechanism and economic plans inmaking decisions

3. Government helps to control incomedisparity

4. Government intervention in the economy

5. Co-operation between the government,public and business sectors

6. Government control of monopolies

Chapter 1 eco120

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