All Rights Reserved Microeconomics © Oxford University Press Malaysia

All Rights Reserved
Microeconomics
© Oxford University Press Malaysia, 2008
1– 1

CHAPTE
R
Introduction to Mi iMi
croeconom
i
cs
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Microeconomics
© Oxford University Press Malaysia, 2008
1– 2

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DEFINITION OF ECONOMICSDEFINITION

OF

ECONOMICS
‘E i i
i
th t
‘E
conom
ics
is a
sc
ienc
e
th
a
t

studies
human behaviour
as a
lti hi bt d d
re
la
ti
ons
hi
p
b
e
t
ween en
d
s an
d

scarce means which have
alternative uses.’
(
L. Robbins
)
()
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Microeconomics
© Oxford University Press Malaysia, 2008
1– 3

DEFINITION OF ECONOMICS
(CON
‘T)
(CON T)
‘Economics is a study of how people
use their
limited resource
s
to tr
y
to
y
fulfill
unlimited wants
and involves
alternatives
or
choices

alternatives
or
choices
(K.E. Case and R.C. Fair).
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POSITIVE AND NORMATIVE
ANALYSISANALYSIS
A positive statementdeals with the
question of ‘what is’and there no
indication of approval or disapproval.
Positive anal
y
sis focuses on facts
y
and the cause-and-effect
r
e
lat
io
n
s
hi
ps
.
eato s ps
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POSITIVE AND NORMATIVE
ANALYSIS
(CON’T)
A
ti t t t
dl ithth
ANALYSIS

(CON’T)
A
norma
ti
ve s
t
a
t
emen
t
d
ea
ls w
ith
th
e
question of ‘what ought to be’.
Nti lii t lN
orma
ti
ve ana
lys
is
incorpora
t
es va
lue
and judgments about what the
economy should be or what
polic
y
should be used to
y
achieve economic goals.
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MICROECONOMICS VS
MACROECONOMICSMACROECONOMICS
MICROECONOMICS
MACROECONOMICS
Analyzes specific
economic units in detail
hh hld
Analyzes aggregate
behaviour of the entire
h
suc
h
as
h
ouse
h
o
ld
s,
firms and government.
economy suc
h
as
national income, trade
cycle and internationalcycle
,
and
international
trade .
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BASIC ECONOMIC CONCEPTSBASIC

ECONOMIC

CONCEPTS
BASIC
SCARCITY
CHOICES
BASIC
ECONOMIC CONCEPTSCONCEPTS
OPPORTUNITY COST
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BASIC ECONOMIC CONCEPTS
(CON
‘T)
1 SCARCITY
(CON T)
1
.
SCARCITY
One of the most important concepts in economics is scarcity.
Scarcit
y
is defined as human wantsand are
y
always greater than available resources. Scarcity is a universal problem faced by theScarcity
is
a
universal
problem
faced
by
the

poor and rich nations in order to fulfill their
needs.
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BASIC ECONOMIC CONCEPTS
(CON
‘T)
2
CHOICES
(CON T)
2
.
CHOICESWhen scarcity exists, choices are to be
d
ma
d
e.
3.
OPPORTUNITY COST
3.
OPPORTUNITY
COST
Opportunity cost is defined as the second
best alternativethat has to be fore
g
one for
g
another choice which gives more
satisfaction.
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1– 1010 MICROECONOMICS

PRODUCTION POSSIBILITIES
CURVE (PPC)
It is used to explain the basic economic
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.
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ASSUMPTIONS OF
PRODUCTION POSSIBILITIESPRODUCTION

POSSIBILITIES

CURVE (PPC)
1
Economy is in full employment and
1
.
Economy
is
in
full
employment
and

full production capacity (full
efficiency)efficiency)
.
2.
Resources available are fixed and limited.
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THE ASSUMPTIONS OF
PRODUCTION POSSIBILITIESPRODUCTION

POSSIBILITIES

CURVE (PPC)
(CON’T)
3
The state of technology does not
3
.
The
state
of
technology

does
not

change throughout production.
4. It is assumed that the country is
only producing two goods.
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PRODUCTION POSSIBILITIES
CURVE (PPC)
(CON
‘T)
Defence Goods (million)
CURVE

(PPC)

(CON T)
North Korea
If it allocates its resources to
produces two
products—defence
goods and
consumer goods
B
defence
goods, it will produce at
Point A
If it allocates its resources to
consumer goods it will produce at
A
150
If North Korea is at point C on the
PPC, it can produce the combination
D C
consumer goods
, it will produce at
Point F
120150
of 120 million defence
goods and
20 million units of consumer goods
Point D shows production of 90
million defence goods and 30
E
90
60
Consumer Goods (million)
million defence goods and 30 million units of consumer goods
F
40
50
0
10
20
30
30
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Microeconomics
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40
50
0
10
20
30

PRODUCTION POSSIBILITIES
CURVE (PPC)
(CON
‘T)
Point outside the PPC
CURVE

(PPC)

(CON T)
Defence Goods (million)
Point alon
g the PPC ?
Point outside the PPC (Point Z) ?SCARCITY
UNATTAINABLE
Z
C
A
B 150
g
CHOICESMovement from one point t th ( i t C t D)
D
C
120
90
YATTAINABLE
to ano
th
er
(
po
int C t
o D)
?OPPORTUNITY COST
E 60
ATTAINABLE
Point inside the PPC (Point
Y
) ?Waste of resources
Consumer Goods (million)
F
40
50
30
0
10
20
30
)
and inefficiency
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40
50
10
20
30

SHIFTS OF PPC DUE TO
ECONOMIC GROWTH
Defence Goods (million)
ECONOMIC

GROWTH
When the countr
y en
joys
150 160
yjy
economic growth, the
PPC moves outward
120
90
Wh h
60
Wh
en
the country

is struck by natural
disaster, economic
growth will decline
d PPC hift t
Consumer Goods (million)
40 50 30
0
10 20 30
an
d PPC
shift
s t
o
the left
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SHIFTS OF PPC DUE TO
IMPROVEMENT IN TECNOLOGYDefence Goods (million)IMPROVEMENT

IN

TECNOLOGY
Technology increases
production of defence
goods
150 160
Technology increases
120
90
Technology increases the production of
consumer goods
6090
Consumer Goods (million)
40
50
10
20
30
30
0
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Microeconomics
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40
50
10
20
30
0
17 MICROECONOMICS

SHIFTS OF PPC DUE TO
POPULATION
Defence Goods (million)
POPULATION
150 160
Increase in population
120
90
Increase in population
6090
Decrease in
Population
Consumer Goods (million)
40
50
30
0
10
20
30
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40
50
10
20
30

CONCAVE SHAPE OF PPC
CURVE
Good Y
CURVE
6
A
B
Increasing
Opportunity Cost
4 5
C
2 3
C
Good X
1
0
1
2
3
D
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1
2
3

CONVEX SHAPE OF PPC CURVECONVEX

SHAPE

OF

PPC

CURVE

(CON’T)
Good Y5 6A
Decreasing
Opportunity Cost
43
B
23
C
Good X
1
2
3
1
0
C
D
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1
2
3

LINEAR SHAPE OF PPC CURVELINEAR

SHAPE

OF

PPC

CURVE

(CON’T)
Good Y5 6A
Constant Opportunity
Cost
4
3B21
C
Good X
10
12 3D
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FUNDAMENTAL ECONOMIC
QUESTIONSQUESTIONS
1
WHAT TO PRODUCE ?
1
.
WHAT
TO
PRODUCE
?
Depends on the what type of goods and
servicesto produce.
2 HOW TO PRODUCE ?
Ddth
htthdfdti
D
epen
d
s on
th
e c
h
eapes
t me
th
o
d
o
f pro
d
uc
ti
on.
3
FOR WHOM TO PRODUCE ?
3
.
FOR
WHOM
TO
PRODUCE
?

Depends on the distribution of income
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ECONOMIC SYSTEMS
TYPES OF ECONOMIC
SYSTEMS
MARKET
PLANNED
MIXED
ECONOMY
PLANNED ECONOMY
MIXED
ECONOMY
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MARKET ECONOMY
CHARACTERISTICSCHARACTERISTICS
MARKET ECONOMY
?Individuals and sellers make economic
decisions using a price system.
MERITS AND DEMERITS
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CHARACTERISTICS OF A
MARKET ECONOMYMARKET

ECONOMY
1.
Private ownership of resources
2
Freedom of enterprise and choice
2
.
Freedom
of
enterprise
and
choice
3.
Consumers’ sovereigntyC
4.
C
ompetition
5.
Government intervention
6.
Price system
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MERITS AND DEMERITS OF A
MARKET ECONOMY
MERITS
DEMERITS
MARKET

ECONOMY
?
Production according to
consumers’ need
?
Economic freedom
?
Inequality of distribution
of wealth and income
?
Economic

freedom
?
Efficient utilization of
resources?
Inflation and high
unemployment rate
?
Lack of social welfare
?
Variety of consumer goods
?
Enhanced trade, business and R;D
?
Lack
of
social
welfare
?
Wasteful competition
?
Misallocation of
and
R;D
?
Automatic incentives
?
Flexibility
resources
?
Social cost
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PLANNED ECONOMY
CHARACTERISTICSCHARACTERISTICS
PLANNED ECONOMY
?
Economic decisions are made by the
?
Economic
decisions
are
made
by
the

government or central authority.
MERITS AND DEMERITS
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CHARACTERISTICS OF A PLANNED
ECONOMYECONOMY
1.
Public ownership of resourcesClli hi
2.
C
entra
l p
lann
ing aut
h
or
ity
3
Price mechanism of lesser importance
3
.
Price
mechanism
of
lesser
importance
4
Central control and ownership
4
.
Central
control
and
ownership
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MERITS AND DEMERITS OF A
PLANNED ECONOMY
MERITS
DEMERITS
PLANNED

ECONOMY
?
Production according to
basic need
?
Elditibti fi
?
Lack of incentives and
initiative by individuals
?
E
qua
l di
s
trib
u
ti
on o
f income
and wealth
?
Better allocation of resources?
Loss of economic
freedom and consumer
soverei
g
nt
y
?
No serious unemployment or
inflation
?
Rid i
gy
?
Absence of
competition
?
R
ap
id
econom
ic
development
?
Social welfare?
Waste of economic
resources
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MIXED ECONOMY
CHARACTERISTICSCHARACTERISTICSMIXED ECONOMY
?
A
n economic system which combines
both capitalism and socialism.
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CHARACTERISTICS OF
MIXED ECONOMY
1.
Public and private ownership of resources
MIXED

ECONOMY

1.
Public
and
private
ownership
of
resources
2.
Price mechanism and economic plans in making
decision
3.
Government helps to control income disparity
4
Government intervention in the economy
4
.
Government
intervention
in
the
economy
5.
Co-operation between the government, public and business sectorsbusiness
sectors
6.
Government control of monopolies
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