Chapter 1

Principles of Economics second edition Oxford Fajar Sdn. Bhd.
(008974-T) 2010
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Ch. 1: 1
CHAPTER
INTRODUCTION TO MICROECONOMICS
Principles of Economics second edition Oxford Fajar Sdn. Bhd. (008974-T) 2010
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Ch. 1: 2
DEFINITION OF ECONOMICS
Economics is a science which studies human behaviours 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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Ch. 1: 3
MICROECONOMICS VS. MACROECONOMICS
MICROECONOMICS
The study of individual 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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Ch. 1: 4
POSITIVE VS. NORMATIVE ANALYSIS

A positive analysis is to deal with the question
of what is and no indication of approval or disapproval. It focuses on facts and cause-andeffect relationships.
A normative analysis is to deal with the question of what ought to be. It incorporates value judgements about what the economy
should be or what policy should be used to achieve economic goals.

Principles of Economics second edition Oxford Fajar Sdn. Bhd. (008974-T) 2010 All Rights Reserved
Ch. 1: 5
SCARCITY
CHOICE
BASIC ECONOMIC CONCEPTS
OPPORTUNITY COST
Ch. 1: 6
BASIC ECONOMIC CONCEPTS

1. SCARCITY
One of the important concepts in economics is scarcity. Scarcity is defined as wants always exceed
limited resources to satisfy them.

Scarcity is a universal problem faced by poor as well as rich nations in order to fulfil their
needs.
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Ch. 1: 7
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 for another choice which gives more satisfaction.
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Ch. 1: 8
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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Ch. 1: 9
PRODUCTION POSSIBILITIES CURVE (PPC)

Used to explain the basic economic concepts: Scarcity, Choices and Opportunity cost.
DEFINITION:
The PPC shows the various possible combinations of goods and services produced within a specified time period with all its resources fully and efficiently employed.
Ch. 1: 10
PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)

Assumptions:
1. The economy is operating in full employment and full production capacity (full efficiency). 2. The amount of resources available are fixed. 3. The state of technology does not change
throughout the production.
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Ch. 1: 11

Sewing Machine
If it allocates all its resources to sewing machine, it will produce at Point A. If it allocates all its resources to butter, it will produce at Point F.
16
14 12
The country Jaya, produces two products butter and sewing machine.
C D
10
8 6
If the country Jaya is at Point C on the PPC, it can produce the combination of 2,000 kg butter and 12,000 units of sewing machine. Point D shows the production of 3,000 kg butter and 9,000 units of sewing machine.
4
2 0 1 2 3 4 5 F
Butter
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Ch. 1: 12

Sewing Machine 16 14 12 10 8 6 ATTAINABLE
Point inside the PPC (Point Y) Waste of resources and inefficiency Point outside the PPC (Point Z) SCARCITY
A B Y UNATTAINABLE C D
Z
Any point along the PPC CHOICES Movement from one point to another (point C to D) OPPORTUNITY COST Movement from one point to another (point C to D) OPPORTUNITY COST
4
2 0
F 1 2 3 4 5
Butter
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Ch. 1: 13
Factors that Influence the Shift of PPC 1. Economic Growth

Sewing Machine 16 14 12 10 8 6
When the country is struck by natural disasters, economic growth will decline and the PPC will shift to the left. When the country enjoys economic growth, the PPC bounds outward.
4
2 0
Butter
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Ch. 1: 14
Factors that Influence the Shift of PPC 2. Improvements in Technology

Technology increases the production of butter.
Technology increases the production of sewing machine.
4
2 0
Butter
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Ch. 1: 15
Factors that Influence the Shift of PPC 3. Population

Decrease in population Increase in population
4
2 0
Butter
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Ch. 1: 16
Shape
of PPC
PPC IS CONCAVE
Increasing Opportunity Cost
4
2 0
Butter
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Ch. 1: 17
Shape
of PPC (cont.)
PPC IS CONVEX
Decreasing Opportunity Cost
4
2 0
Butter
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Ch. 1: 18
Shape
of PPC (cont.)
PPC IS LINEAR
Constant Opportunity Cost
4
2 0
Butter
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Ch. 1: 19
ECONOMIC SYSTEM
TYPES OF ECONOMIC SYSTEM
CAPITALISM
SOCIALISM
MIXED ECONOMY
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Ch. 1: 20
CHARACTERISTICS
CAPITALISM
An economic system where individuals and sellers make
economic decisions using a price system
MERITS AND DEMERITS
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Ch. 1: 21
CHARACTERISTICS
1. Private ownership of resources 2. Freedom of enterprise and choice 3. Consumers sovereignty 4. Competition 5. Government intervention 6. Price system
Ch. 1: 22
MERITS
Production according to
DEMERITS
Inequality of distribution
consumers needs
of wealth and income

Inflation and high
Economic freedom Efficient utilization of
resources Variety of consumer goods Enhanced trade, business and R&D Automatic incentives Flexibility
unemployment rate Lack of social welfare Wasteful competition Misallocation of resources Social cost
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Ch. 1: 23
CHARACTERISTICS
SOCIALISM
An economic system where all the economic decisions are
made by the government or a central authority
MERITS AND DEMERITS
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Ch. 1: 24
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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Ch. 1: 25
MERITS
Production according to
DEMERITS
Lack of incentives and
basic need
Equal distribution of
initiative by individuals
Loss of economic
income and wealth Better allocation of resources

No serious unemployment
freedom and consumer sovereignty Absence of competition

Waste of economic
or inflation Rapid economic development

Social welfare
resources
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Ch. 1: 26
CHARACTERISTICS
MIXED ECONOMY
An economic system which combines both capitalism and
socialism
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Ch. 1: 27
CHARACTERISTICS
1. Public and private ownership of resources 2. Price mechanism and economic plans in
making decisions
3. Government helps to control income
disparity
4. Government intervention in the economy 5. Co-operation between the government,
public and business sectors

6. Government control of monopolies
Ch. 1: 28

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Principles of Economics second edition Oxford Fajar Sdn. Bhd.

All Rights Reserved

All Rights Reserved

All Rights Reserved

MICROECONOMICS VS. MACROECONOMICS

All Rights Reserved

POSITIVE VS. NORMATIVE ANALYSIS

should be or what policy should be used to achieve economic goals.

BASIC ECONOMIC CONCEPTS

BASIC ECONOMIC CONCEPTS

limited resources to satisfy them.

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BASIC ECONOMIC CONCEPTS (cont.)

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BASIC ECONOMIC PROBLEMS

3. FOR WHOM TO PRODUCE?

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PRODUCTION POSSIBILITIES CURVE (PPC)

PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)

throughout the production.

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PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)

PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)

Factors that Influence the Shift of PPC 1. Economic Growth

Factors that Influence the Shift of PPC 2. Improvements in Technology

Technology increases the production of sewing machine.

Factors that Influence the Shift of PPC 3. Population

Increasing Opportunity Cost

Decreasing Opportunity Cost

Constant Opportunity Cost

TYPES OF ECONOMIC SYSTEM

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MERITS AND DEMERITS

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of wealth and income

Economic freedom Efficient utilization of

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MERITS AND DEMERITS

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income and wealth Better allocation of resources

freedom and consumer sovereignty Absence of competition

or inflation Rapid economic development

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public and business sectors

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