Topic 1

INTRODUCTION: MARKETS
AND PRICES

Introduction
1. What is Microeconomics?
2. What are the key themes of
microeconomics?
3. What is a Market?
4. What is the difference between real and
nominal prices
5. Why study microeconomics?

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What is economics?
The study of how society chooses to
allocate its scarce resources to the
production of goods and services in
order to satisfy unlimited wants

Branch of Economics
Microeconomics
Macroeconomics

Microeconomics
The branch of economics that
studies decision-making by a
single individual, household, firm,
industry, or level of government

Macroeconomics
The branch of economics that
studies decision-making for the
economy as a whole

1. Definition of Microeconomics
Basically economic is deals with
how scarce resources are
allocated to maximize the
unlimited wants that we wants to
fulfill.
(Hashim Ali)

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1. Definition of Microeconomics
The study of how scarce or limited
resources are used to satisfy
unlimited material wants and
needs
(Welch and Welch)

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2. Themes of Microeconomics
Microeconomics deals with limits
Limited budgets
Limited time
Limited ability to produce

How do we make the most of limits?

Make trade- off

How do we allocate scarce resources?

Analyze the price or cost
Preferences or availability of resources
Maximizing profit or satisfaction.
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Themes of Microeconomics
Workers, firms and consumers must
make trade-offs
Do I work or go on vacation?
Do I purchase a new car or save my money?
Do we hire more workers or buy new
machinery?

How are these trade-offs best made?

Refer to the following cases:

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The Economist as a Scientist

Production possibilities frontier

A graph
Combinations of output that the economy
can possibly produce
Given the available
Factors

of production
Production technology

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The production possibilities frontier

Quantity of
Computers
Produced
C

3,000

2,200
2,000

1,000

300

600 700

The production
possibilities frontier
shows the
combinations of
outputin this case,
Production
cars and computers
Possibilities
that the economy can
Frontier
possibly produce. The
economy can produce
any combination on or
inside the frontier.
Points outside the
E
frontier are not
feasible given the
1,000Quantity of economys resources.
Cars Produced

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The production possibilities frontier

Efficient levels of production

The economy is getting all it can
From

the scarce resources available

Points on the production possibilities frontier

Trade-off:
The

only way to produce more of one good

Is to produce less of the other good

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The production possibilities

frontier
Inefficient levels of production
Points inside production possibilities frontier

Opportunity cost of producing one good

Give up producing the other good
Slope of the production possibilities frontier

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The production possibilities

frontier
Bowed out production possibilities
frontier
Opportunity cost of a car highest
Economy

- producing many cars and fewer

computers

Opportunity cost of a car lower

Economy

- producing fewer cars and many

computers

Resource specialization

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The production possibilities frontier

Technological advance
Outward shift of the production possibilities frontier
Economic growth
Produce more of both goods

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A shift in the production possibilities frontier

Quantity of
Computers
Produced
4,000
3,000
G

2,300
2,200

600 650

A technological
advance in the
computer industry
enables the economy
to produce more
computers for any
given number of cars.
As a result, the
production
possibilities frontier
shifts outward. If the
economy moves from
point A to point G, then
the production of both
1,000 Quantity of cars and computers
increases.
Cars Produced
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Economics View
Positive approach
Normative approach

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Positive & Normative Analysis

Positive Analysis statements that
describe the relationship of cause and
effect
Questions that deal with explanation and
prediction
What

will be the impact of an import quota on

foreign cars?
What will be the impact of an increase in the
gasoline excise tax?

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Positive & Normative Analysis

Normative Analysis analysis examining
questions of what ought to be
Often supplemented by value judgments
Should

the government impose a larger

gasoline tax?
Should the government decrease the tariffs on
imported cars?

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3. What is a Market?
Markets
Collection of buyers and sellers, through their
actual or potential interaction, determine the
prices of products
Buyers:

consumers purchase goods,

companies purchase labor and inputs
Sellers: consumers sell labor, resource owners
sell inputs, firms sell goods

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What is a Market?
Market Definition
Determination of the buyers, sellers, and
range of products that should be included in
a particular market

Arbitrage
The practice of buying a product at a low
price in one location and selling it for more in
another location

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What is a Market?
Defining the Market
Many of the most interesting questions in
economics concern the functioning of
markets
Why

are there a lot of firms in some markets

and not in others?
Are consumers better off with many firms?
Should the government intervene in markets?

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Types of Markets
Perfectly competitive markets
Because of the large number of buyers and
sellers, no individual buyer or seller can
influence the price.
Example:

Most agricultural markets

Fierce competition among firms can create a

competitive market

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Types of Markets
Noncompetitive Markets
Markets where individual producers can
influence the price.
Cartel

groups of producers who act

collectively
Example: OPEC dominates with world oil
market

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Market Price
Transactions between buyers and sellers
are exchanges of goods for a certain
price
Market price price prevailing in a
competitive market.
Some

markets have one price: price of gold

Some markets have more than one price: price
of Tide versus Wisk

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Market Definition
Market Definition
Which buyers and sellers should be included
in a given market
This depends on the extent of the market
boundaries, geographical and by range of
products, to be included in it
Market

for housing in Muadzam or Putrajaya.

Market for all cameras or digital cameras

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Market Definition
Importance of market definition
In order to set price, make budgeting
decisions, etc., companies must know
Their

competitors
Product-characteristic and geographic
boundaries of the market

Important for public policy decisions

Should

government allow a merger between

companies in same market?

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ECONOMIC SYSTEM

CAPITALISM
CAPITALISM

SOCIALISM
SOCIALISM

MIXED
MIXED
ECONOMY
ECONOMY

CHARACTERISTICS

CAPITALISM
An economic system where individuals and sellers make economic
decisions using a price system

MERITS AND DEMERITS

CHARACTERISTICS
1. Private ownership of resources
2. Freedom of enterprise and choice
3. Consumers sovereignty
4. Competition
5. Government intervention
6. Price system

MERITS
Production according to
consumers needs
Economic freedom
Efficient utilization of
resources
Variety of consumer
goods
Enhanced trade, business
and R&D
Automatic incentives
Flexibility

DEMERITS
Inequality of distribution
of wealth and income
Inflation and high
unemployment rate
Lack of social welfare
Wasteful competition
Misallocation of
resources
Social cost

CHARACTERISTICS

SOCIALISM
An economic system where all the economic decisions are made by
the government or a central authority

MERITS AND DEMERITS

CHARACTERISTICS
1. Public ownership of resources
2. Central planning authority
3. Price mechanism of lesser importance
4. Central control and ownership

MERITS
Production according to
basic need
Equal distribution of
income and wealth
Better allocation of
resources
No serious unemployment
or inflation
Rapid economic
development
Social welfare

DEMERITS
Lack of incentives and
initiative by individuals
Loss of economic
freedom and consumer
sovereignty
Absence of competition
Waste of economic
resources

CHARACTERISTICS

MIXED ECONOMY
An economic system which combines both capitalism and
socialism

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

THE END