MICROECONOMICS PB102

NOR AZURA ISMAIL DECEMBER 2012

COURSE LEARNING OUTCOME

Upon completion of this course, students should be able to:
CLO 1
Apply effectively the knowledge of basic theories in the world of microeconomic.

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INTRODUCTION TO MICROECONOMIC
1.1 Understand microeconomic in general
1.1.1 Define microeconomics 1.1.2 Compare between study fields of economics: micro and macro economics

1.3 Learn how the world of economic systems solve the Basic Economic Problems
1.3.1 Describe the economic problems: what, how much, how to be produced and to whom the product should be produced 1.3.2 Discuss the characteristic of world economic systems
a. Capitalism (free market) b. Central Planned c. Mixed economic d. Islamic Economic

1.2 Know Economic Problems

1.2.1 Describe three economic problems. 1.2.2 Discuss the concept of economic problems
a. Scarcity b. Choice c. Opportunity cost

1.2.3 Apply Production Possibility Curve (PPC) to explain concept of economic problems
6/2/2013 a. Assumption of PPC b. Factors that influence the shift of PPC

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1.3.3 Explain the merits and demerits of world economic system 1.3.4 Compare the benefits of every world economic system 1.3.5 Compare how the world economic systems can solve basic economic problems

MICROECONOMIC IN GENERAL
Definition of microeconomics: L. Robbins:
Economics is a science that studies human behavior as a relationship between ends and scarce means which have alternative uses.

K. E. Case and R.C. Fair:

Economics is a study of how people use their limited resources to try to fulfill unlimited wants and involves alternatives or choices.

David N. Hyman:
Economics as a study of how scarce resources are allocated among alternative uses.

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MICROECONOMIC IN GENERAL
Comparison between study fields of economics: micro and macro economics
MICROECONOMICS Definition The study of individual parts of the economy such as public choices, business choices and personal choices. takes a bottoms-up approach. With this approach, aspects of the economy from the bottom up, the consumer, are studied first. This information is analysed by working up towards the whole economy. focuses on individuals and business decisions. focuses on supply and demand and the effects of prices. the study of individual choices, how these choices are decided, what motivates consumers and the effects they have on the economy. study the types of cars consumers are purchasing NOR AZURA ISMAIL MACROECONOMICS The study of the economic system as a whole such as the national income, the trade cycle, the unemployment rate, inflation and general price levels. Takes a top-down approach, starting with the top of the economy: the government. It works its way down to the consumer, trying to relate effects and patterns of the economy, in order to develop theories. focusing on country and government decisions. focuses on larger issues that control consumer spending such as unemployment, national income and rate of growth. calculates and studies gross domestic product (GDP) and the national debt.

Approach

Decisions Goods and Services

Issues Studied

Example 6/2/2013

study the car industry as a whole.

ECONOMIC PROBLEMS

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ECONOMIC PROBLEMS
Three Problems of Economic Organizations :
In every economy; economic organizations, irrespective of their type, have to face and solve three problems of economics. These three problems are as follows:
1. What to produce:
This problem is what should the economy produce in order to satisfy consumer wants as best as possible using the limited resources available.

2. How to produce:
How to combine production inputs to produce the goods decided in problem 1 as most efficiently as possible. An economy achieves productive efficiency if it produces goods using the least resources possible.

3.

For whom to produce:

Should the economy produce goods targeted towards those who have high incomes or those who have low incomes. What sort of demographic group should the goods in the economy that are produced be targeted towards?

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CONCEPT OF ECONOMIC PROBLEMS

1. Scarcity 2. Choice 3. Opportunity cost

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SCARCITY
Human wants
Unlimited wants

Resources
used to produce goods / services to satisfy human wants limited in supply scarce: i.e. their quantities are insufficient to satisfy all human wants

Types of resources
Natural resources: e.g. sunshine, rain, crude oil Human resources: labor service Man made resources: e.g. machines, equipment
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SCARCITY
Economics, then, tries to solve the problem of scarcity.
This doesnt mean to make unlimited stuff, but figuring how to distribute scarce, limited stuff in the best way to meet wants. It also wants to see how people satisfy needs and wants by the choices they make.
Why X and not Y? Why McDonalds? Why did banks buy mortgage-backed securities? Why TXU and not Gexa? Why Crocs? Seriously why Crocs?

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SCARCITY

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SCARCITY
Do they face scarcity problem?
United States Hong Kong North Korea Africa Sunshine in Thailand A free sample of candies given at a shopping centre Fresh air in a caf with many smokers Sand in the desert

Are they scarce?

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MAKING CHOICES
Due to the limited resources available, businesses must determine what to produce first to satisfy demand. All Choices in a finite world have opportunity costs. Alternative uses of finite resources Opportunity cost is the value of the next best alternative sacrificed

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MAKING CHOICES
Choice among options
Rank options according to a persons preference order
Option 1 going to cinema Option 2 going to sing karaoke Option 3 sleeping at home

What is the cost of going to the cinema?

Going to sing karaoke (highest-valued option forgone) We cannot choose option 2 and option 3 at the same time, we only forgo option 2 when we select option 1

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MAKING CHOICES
Choosing a career / job
Option 1 Option 2 being an actress ( $10 Mn. p.a.) being a nurse ( $ 0.5 Mn. p.a.)

Income forgone being an actress < income forgone being a nurse Cost being an actress < cost being a nurse Choose the job with the lowest opportunity cost

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MAKING CHOICES
Full cost
Option 1 going to a 1 hour concert and pays $200 for a ticket Option 2 working in Parkn as a salesman earning $30 per hour Option 3 working as a tutor earning $100 per hour

Full cost of attending the concert = price of ticket + income forgone (highest-valued option forgone) Full cost of attending the concert = $200 + $100 = $300

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MAKING CHOICES
Complimentary tickets
Going to Hong Kong Disneyland Ticket : Free of charge Money spent on food, transport..=$200 Income forgone = $500

Full cost of going for Disneyland (HK) =$700

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OPPORTUNITY COST
Opportunity cost is defined as the second best alternative that has to be forgone for another choice which gives more satisfaction. Opportunity cost is the highest-valued option forgone The best alternative that we give up, or forgo, when we make a choice or decision.

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OPPORTUNITY COST
Example
The opportunity cost of deciding not to work is the lost wages foregone The opportunity cost of spending money on a foreign holiday is the lost opportunity to buy a new dishwasher or the chance to enjoy two short breaks inside the United Kingdom The opportunity cost of the government spending 20 billion on interest payments on the national debt is the extra money it might have allocated to the National Health Service The opportunity cost of an economy investing its resources in new capital goods is the current production of consumer goods that is given up The opportunity cost of using arable farm land to produce wheat is that the land cannot be used in that production period to harvest potatoes
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PRODUCTION POSSIBILITY CURVE (PPC)

Production Possibility Curve (PPC) on the concept of economic problems:
Is used to explain the basic economic concepts of scarcity, choices and opportunity cost.

PPC Examples

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PRODUCTION POSSIBILITY CURVE (PPC)

Graphs that visually represent the relationship between two different goods or services
As there are limited resources available to produce any given item, an increase in the quantity produced of one item will lead to a corresponding decrease in the quantity produced of the comparison item This relationship is generally not a direct proportion as some resources are better suited to making one item over the other

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PRODUCTION POSSIBILITY CURVE (PPC)

PPC Curve graphs are therefore very useful in determining what quantities of each item would be the most efficient to produce

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PRODUCTION POSSIBILITY CURVE (PPC)

Example
In the previous example, it can be seen that as more of Item 2, lets call that Hats, is produced, less of Item 1, Wheat perhaps, is produced. However, the relationship between the two items is not constant. For example, moving from producing 0 Hats to 5 Hats yields a decrease in production of Wheat of 5 units (20 to 15). Yet when we move from producing 5 Hats to 8, we have a decrease in production of Wheat of 10 units (15 to 5)! Therefore, it can be determined that it is becoming more costly to produce Hats in terms of the loss of Wheat. This is logical when one considers the production resources used to make the different items. A farmer equipped to produce wheat will have real difficulty producing hats!
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PRODUCTION POSSIBILITY CURVE (PPC)

Factors that influence the shift of PPC:
Economic growth
The production capability of a country increases as there is an expansion of resources such as land labor, capital, ad entrepreneurship this will shift the PPC to the right.

Improvements in technology
Possible reasons for an increase in output are new innovations, applications of new and efficient techniques of production, or the development of a better way of producing goods and services.

Population
A larger population will result in an increase in production. However, if workers migrate to other countries, there will be a reduction in population.

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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

economic problems:
what, how much, how to be produced and to whom the product should be produced

Given scarce resources, how exactly do large, complex societies go about answering the basic economic questions?

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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

CAPITALISM
A.k.a. Free market economy is an economic system where individuals make all the main economic decisions without any government intervention.

Characteristics
Private ownership of resources Freedom of enterprise and choice Consumers sovereignty Competition Government intervention Price system
Price mechanism-free operation of demand and supply forces without any intervention.
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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

Merits Demerits Production according to the needs Inequality of distribution of wealth of consumers and income Economic freedom Efficient utilization of resources Variety of consumer goods Inflation and high unemployment rate Lack of social welfare Unnecessary variety and wasteful competition

Enhanced trade, business, and research and development

Automatic incentives Flexibility

Misallocation of resources
Social costs

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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

Economic decisions in capitalism
Economic problem What to produce Economic decisions An entrepreneur will only produce goods and services for which there is a demand from consumers so as to enjoy higher profit. ex: mobile phone Firms can produce any product or provide any service using more than one method which depends on the relative price of the resources involved. Ex; a designer of mobile pones has identified three methods of producing the product; by machinery, by hand or by combination of labor and machinery. The price system; the person that can afford them can obtained theISMAIL NOR AZURA goods and services. 28

How to produce

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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

SOCIALISM
A.k.a. command economy or a planned system All the economic decisions are made by the government or a central authority

Characteristic
Public ownership of resources Central planning authority Price mechanism of lesser importance Central control and ownership

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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

Merits Production according to basic needs Equal distribution of income and wealth Better allocation of resource No serious unemployment or recession/inflation Demerits Lack of incentives and initiative y individual Loss of economic freedom and consumer sovereignty/power Absence of competition Waste of economic resources

Rapid economic development

Social welfare

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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

Economic decisions in a Socialistic System
Economic problem What to produce How to produce Economic decisions Planning authorities decide what to produce. The Central Planning Authority also decides on the techniques to be used in the production of different goods and services. Decided by the Central Planning Authority is done through a set of administered fixed processes. Necessity goods are fixed at lower prices, and luxury goods at higher prices and the purpose is to reduce inequalities in the distribution of income.

For whom to produce

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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

MIXED ECONOMY
Combines both capitalism and socials to solve basic economic problems. Both the public and private sectors play a role in the economy. Most countries practice mixed economy.

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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

Characteristics
Public and private ownership of resources Price mechanism and economic plans in making economic decisions Government helps to control income disparity Government intervention in the economy Co-operation between the government public and business sectors Government control of monopolies.

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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

Economic decisions in a Mixed Economy System
Economic problem What to produce Economic decisions Decide by both the public and private sectors. The goods produce is depend on the consideration of social welfare and economic growth.

How to produce

The public and private sectors will decide on the techniques of production to be used in the production of the different goods and services
Decided by the public and private sector. The government intervenes directly through price controls and indirectly through the imposition of indirect taxes and subsidies.

For whom to produce

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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

ISLAMIC ECONOMIC SYSTEM
Muslims are to recognize that wealth, earnings, and material goods are the property of God, and that we are merely His trustees. The principles of Islam aim at establishing a just society wherein everyone will behave responsibly and honestly.

The fundamental principles of the Islamic economic system are as follows:

Muslims are not to deal in interest. It is forbidden to gain property or wealth by fraud, deceit, theft, or other falsehoods. It is particularly hateful for a guardian to take from an orphan's property. Forbidden are earnings from gambling, lotteries, and the production, sale, and distribution of alcohol. It is unlawful to hoard food and other basic necessities. A Muslim should be responsible in spending money. Muslims are encouraged to give constantly in charity.
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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

M. A. Mannan
A social science which studies the economic problems of people imbued with Islamic values.

Akram khan
As a study of how man can achieve al-falah (human wellbeing materially and spiritually) through his control, ownership and uses of these worldly resources based on the concepts of cooperation and partnership.

Amir Mohd Al-Fayssal al Saud

it is a study used by man to fulfil his as well as the societys wants according to syariah principles

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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

Economic decision: The philosophic foundations consists of four principles:
Rububiyyah
belief that Allah alone determines the sustenance and nourishment of His creation and will direct those who believe in Him toward success. the mans role as Allahs vicegerent on earth. refers to the growth and purification or cleansing of man as a necessary prerequisite before man undertakes the responsibility laid out to him. aka brotherhood has many aspects which give the Muslim society and active and positive quality and the character of equality and cooperation.

Khalifah

Tazkiyyah

Ukhwah

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ECONOMIC SYSTEMS SOLVE THE BASIC ECONOMIC PROBLEMS

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END OF CHAPTER
Q & A

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