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CHAPTER
1
Introduction to
Microeconomics
Microeconomics
Oxford University Press Malaysia, 2008
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)
Microeconomics
Oxford University Press Malaysia, 2008
DEFINITION OF
ECONOMICS (CONT)
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).
Microeconomics
Oxford University Press Malaysia, 2008
Microeconomics
Oxford University Press Malaysia, 2008
Microeconomics
Oxford University Press Malaysia, 2008
MICROECONOMICS VS
MACROECONOMICS
MICROECONOMICS
Analyzes specific
economic units in detail
such as households,
firms and government.
Microeconomics
Oxford University Press Malaysia, 2008
MACROECONOMICS
Analyzes aggregate
behaviour of the entire
economy such as
national income, trade
cycle, and international
trade .
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1 7
BASIC
ECONOMIC
CONCEPTS
CHOICES
CHOICES
OPPORTUNITY
OPPORTUNITY COST
COST
Microeconomics
Oxford University Press Malaysia, 2008
2. CHOICES
When scarcity exists, choices are to be
made.
3. OPPORTUNITY COST
Microeconomics
Oxford University Press Malaysia, 2008
10
1 10
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.
Microeconomics
Oxford University Press Malaysia, 2008
ASSUMPTIONS OF
PRODUCTION POSSIBILITIES
CURVE (PPC)
1. Economy is in full employment and
THE ASSUMPTIONS OF
PRODUCTION POSSIBILITIES
CURVE (PPC) (CONT)
3. The state of technology does not
change throughout production.
4. It is assumed that the country is
only producing two goods.
Microeconomics
Oxford University Press Malaysia, 2008
PRODUCTION POSSIBILITIES
CURVE (PPC) (CONT)
Defence Goods (million)
A
150
North Korea
produces two
productsdefence
goods and
consumer goods
120
90
30
F
0
10
20
Microeconomics
Oxford University Press Malaysia, 2008
30
40
60
50
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1 14
PRODUCTION POSSIBILITIES
CURVE (PPC) (CONT)
Defence Goods (million)
150
120
90
60
30
Z
B
Y
UNATTAINABLE
C
D
ATTAINABLE
Point inside the PPC (Point
Y) Waste of resources
and inefficiency
F
0
10
Microeconomics
Oxford University Press Malaysia, 2008
20
30
40
50
160
150
When the country enjoys
economic growth, the
PPC moves outward
120
90
60
30
0
10
Microeconomics
Oxford University Press Malaysia, 2008
20
30
40 50
Technology increases
production of defence
goods
150
120
90
Technology increases
the production of
consumer goods
60
30
0
10
20
Microeconomics
Oxford University Press Malaysia, 2008
30
40
50
MICROECONOMICS
17
1 17
120
90
60
Decrease in
Population
30
0
10
20
Microeconomics
Oxford University Press Malaysia, 2008
30
40
50
A
B
Increasing
Opportunity Cost
3
2
1
0
Microeconomics
Oxford University Press Malaysia, 2008
D
1
Good X
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1 19
Good Y
5
Decreasing
Opportunity Cost
4
3
2
C
1
0
D
1
Microeconomics
Oxford University Press Malaysia, 2008
Good X
3
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1 20
Good Y
5
4
Constant Opportunity
Cost
3
C
2
1
D
0
Microeconomics
Oxford University Press Malaysia, 2008
Good X
21
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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.
ECONOMIC SYSTEMS
TYPES OF ECONOMIC
SYSTEMS
MARKET
MARKET
ECONOMY
ECONOMY
Microeconomics
Oxford University Press Malaysia, 2008
PLANNED
PLANNED
ECONOMY
ECONOMY
MIXED
MIXED
ECONOMY
ECONOMY
MARKET ECONOMY
CHARACTERISTICS
MARKET ECONOMY
Individuals and sellers make economic
decisions using a price system.
CHARACTERISTICS OF A
MARKET ECONOMY
1. Private ownership of resources
2. Freedom of enterprise and choice
3. Consumers sovereignty
4. Competition
5. Government intervention
6. Price system
Microeconomics
Oxford University Press Malaysia, 2008
Production according to
consumers need
Economic freedom
Efficient utilization of
resources
Variety of consumer goods
Enhanced trade, business
and R&D
Automatic incentives
Flexibility
Microeconomics
Oxford University Press Malaysia, 2008
DEMERITS
Inequality of distribution
PLANNED ECONOMY
CHARACTERISTICS
PLANNED ECONOMY
Economic decisions are made by the
government or central authority.
CHARACTERISTICS OF A PLANNED
ECONOMY
1. Public ownership of resources
2. Central planning authority
3. Price mechanism of lesser importance
4. Central control and ownership
Microeconomics
Oxford University Press Malaysia, 2008
Production according to
basic need
Equal distribution of income
and wealth
Better allocation of resources
No serious unemployment or
inflation
Rapid economic
development
DEMERITS
Lack of incentives and
initiative by individuals
Loss of economic
freedom and consumer
sovereignty
Absence of competition
Waste of economic
resources
Social welfare
Microeconomics
Oxford University Press Malaysia, 2008
MIXED ECONOMY
CHARACTERISTICS
MIXED ECONOMY
An economic system which combines
both capitalism and socialism.
Microeconomics
Oxford University Press Malaysia, 2008
CHARACTERISTICS OF
MIXED ECONOMY
1.
2.
3.
4.
5.
6.
Microeconomics
Oxford University Press Malaysia, 2008