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?

©2005 Pearson Education, Inc. Chapter 1 2

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

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Branch of Economics
Microeconomics

Macroeconomics

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 Microeconomics

The branch of economics that

studies decision-making by a
single individual, household, firm,
industry, or level of government

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Macroeconomics

The branch of economics that

studies decision-making for the
economy as a whole

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 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)

©2005 Pearson Education, Inc. Chapter 1 7

 1. Definition of Microeconomics

The study of how scarce or limited

resources are used to satisfy
unlimited material wants and
needs
(Welch and Welch)

©2005 Pearson Education, Inc. Chapter 1 8

 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:

©2005 Pearson Education, Inc. Chapter 1 10

 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 The production
Produced possibilities frontier
shows the
C combinations of
3,000 F
output—in this case,
Production
cars and computers—
A Possibilities
2,200 that the economy can
B Frontier
2,000 possibly produce. The
economy can produce
any combination on or
D inside the frontier.
1,000
Points outside the
E frontier are not
feasible given the
0 300 600 700 1,000Quantity of economy’s 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
A technological
4,000 advance in the
computer industry
enables the economy
3,000 to produce more
G computers for any
2,300 given number of cars.
2,200
A As a result, the
production
possibilities frontier
shifts outward. If the
economy moves from
point A to point G, then
the production of both
0 600 650 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?

©2005 Pearson Education, Inc. Chapter 1

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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

©2005 Pearson Education, Inc. Chapter 1 26

 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

©2005 Pearson Education, Inc. Chapter 1 27

 Market Definition

 Importance of market definition

In order to set price, make budgeting
decisions, etc., companies must know
 Theircompetitors
 Product-characteristic and geographic
boundaries of the market
Important for public policy decisions
 Shouldgovernment allow a merger between
companies in same market?

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 ECONOMIC SYSTEM

TYPES OF ECONOMIC
SYSTEM

CAPITALISM MIXED
SOCIALISM
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 DEMERITS
 Production according to  Inequality of distribution
consumers’ needs of wealth and income
 Economic freedom  Inflation and high
 Efficient utilization of unemployment rate
resources  Lack of social welfare
 Variety of consumer  Wasteful competition
goods  Misallocation of
 Enhanced trade, business resources
and R&D  Social cost
 Automatic incentives
 Flexibility
 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 DEMERITS
 Production according to  Lack of incentives and
basic need initiative by individuals
 Equal distribution of  Loss of economic
income and wealth freedom and consumer
 Better allocation of sovereignty
resources  Absence of competition
 No serious unemployment  Waste of economic
or inflation resources
 Rapid economic
development
 Social welfare
 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