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Chapter 1
Chapter objectives
To define economics and distinguish between microeconomics and
macroeconomics
To describe basic economics concepts: scarcity, choices, and opportunities cost.
To explain the basic economics problems.
To use production possibilities curve to explain economics concepts.
To explain the three types of economics system
Limited Factors
Unlimited Demand
Scarcity
Definition
Choice
Capitalism/ Free Market
Assumption
Socialism economy/
Command economy
Basic
economy
concepts
Economy
systems
Opportunity Cost
INTRODUCTION
OF ECONOMY
Calculation
Mixed economy
Curve and shift in PPC
Basic
economy
problems
Economy
statement
Normative economy
statement
Positive economy
statement
Whom
How
What
Microeconomics
Chapter 1
1.0
1.1
DEFINITION OF ECONOMIC
Economics is a field of social science that studies the behavior of individuals and society
in the distribution and allocation of limited factors of production to maximize the
production of goods and services to fulfill mans unlimited wants and demands.
Research in economy is included the microeconomics and macroeconomics issue. The
both of thats, is the research about the different part in economy.
Microeconomics is the study of small economic units namely action by the Firm and
Household. For example the study about how the prices are determined.
Macroeconomics is research about the whole of economy issue in the country included
the inflation, unemployment, economy growth and so on.
Microeconomics
Chapter 1
Exercise 1
1.
2.
3.
D.
5.
Microeconomic __________
A.
B.
C.
4.
macroeconomics.
microeconomics.
positive economics
normative economics.
Define economic
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
Microeconomics
6.
Chapter 1
i.
(4 marks)
_____________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
ii.
______________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
Microeconomics
1.2
Chapter 1
Positive economy statement is a statement which based on facts and not value
judgement. Can be tested and verified.
Example: Ethiopia is the poorest nation in the world.
ii.
Exercise 2
1.
2.
(4 marks)
_________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________.
ii.
_________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________.
Microeconomics
1.3
Chapter 1
Scarcity
The problems of economics arise because we do not have enough resources to
produce everything we want. The factors of production are limited and the
amount of output that can be produced is also limited.
It means that there are not enough available goods for everyone to freely take as
much as they want. Due to this, we have to choose the best alternative of goods
and services to be produced by the society.
ii.
Choice
Because of the resources in the world are limited, we cannot satisfy all our wants
and force us to choose. Choice involves a rational decision to be made due to
scarcity of resources in order to satisfy unlimited human wants. A choice has to
be made among several wants which involves some trade off known as
opportunity cost.
iii.
Opportunity cost
Opportunity cost is concerned with the problem of choice and the fact of scarcity,
forces us to make choices. So, that opportunity cost is defined as the value of the
best alternative foregone when a choice is made.
Example:
Dina has RM5 and she would like to buy two things: a book and a pen which cost
RM5 each (unlimited wants but limited resources). Dina has to choose either to
purchase a book or a pen which would satisfy her needs (choices). If Dina
chooses the book, then the pen is the opportunity cost because it is the second
best alternative which she has to forgone.
Microeconomics
1.4
Chapter 1
What to produces
2.
3.
The firm must decide how many quantity of the product should be
produces.
So, it must be based on total demand for the goods.
If goods are high demand, the firm must produces with the high quantity.
How to produces
4.
This problem is concerned with that goods and services will be produces.
This problem was happen because limited factors of production but
demand for the goods and services is not limited.
So, the firms will produces goods base on demand of the goods and the
goods must give the maximum utility to people.
How the goods will produces, usually the firm will make decision either
use the labor intensive or capital intensive.
The producers will choice the intensive will decreasing the production
cost.
Microeconomics
Chapter 1
Exercise
1.
Every economy in the world faces the same fundamental economic problems though the
solutions to the problems differ. In regards to this statement explain briefly what are
these basic economics problems?
(6 marks)
Microeconomics
1.5
Chapter 1
FACTORS OF PRODUCTION
Factors of production are the basic resources used in the production process in order to
produce economic goods and services. Economists have classified the factors of
production into four groups namely;
i.
Land
This is free gift of natures either on the surface or in the earth. The value based
on quality and location. Return to the land is fees. Examples are land, air, water,
forest and others.
ii.
Labour
The services contributed by people in the production process that involve both
mental and physical effort. Thats include the skill and unskillful. Return to the
labour is wages. Examples are lectures, construction workers and others.
iii.
Capital
Human made resources which are used in the production process to produce
other goods and services. Return to the capital is interest. Examples are
machinery, raw material, buildings, tools and others.
iv.
Entrepreneurship
- Its human are manages their firm to produces the goods and services.
- The entrepreneur must be risks and organize the others factors of productions.
Microeconomics
1.6
Chapter 1
10
20
Cloths (units)
Production possibilities curve (PPC) show the maximum combination on goods that can
be produced given the available factors of production and the available technology of
production.
Purpose to using the production possibilities curve is:
There are only two goods will be produce (food and cloth).
The production of technology is available and not changes.
Limited factor of production.
Economy has achieved level of full employment.
10
Microeconomics
Chapter 1
Foods (units)
a
b
14
g
c
10
d
f
e
14
20
Cloths (units)
i.
ii.
iii.
iv.
Extreme combination
Extreme combination is combination can be produced and it efficient but all
resources will use for produce only one goods.
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Microeconomics
Chapter 1
Increasing in population
Goods Y
Goods X
Technology progress.
Goods Y
Goods X
The factor can shift the PPC outward through an improvement in technology. It
allows more efficient production using existing economics resources. Based on
diagram above, if the improvement of production (technology progress)
happened only in producing goods X, the economy will produce more goods X
compare to goods Y. so, the PPC will shifted outward towards the horizontal axis.
12
Microeconomics
Chapter 1
2.
Capital Goods
0
1
2
3
4
13
Microeconomics
Chapter 1
Exercise
Use this table for questions 1 and 2.
1.
2.
Type of good
Consumer goods
36
30
24
18
12
Capital goods
15
23
26
28
29
30
The production possibilities curve for the economy depicted in the table is ____
A.
B.
C.
D.
For an economy that chooses combination C in the table, the opportunity cost of
producing six extra units of consumer goods would be ____
A.
B.
C.
D.
14
Microeconomics
Chapter 1
a.
b.
15
Microeconomics
Name :
ID No. :
Class :
Chapter 1
----------------------------------------------------------P D A 1 0 0 1
D I A
2
Quiz 1
1.
Define economics?
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.
2.
Scarcity
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.
ii.
Choice
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.
iii.
Opportunity cost
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.
3.
i.
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.
ii.
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.
iii.
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.
16
Microeconomics
Chapter 1
Exercise
The following table shows the production possibilities combination of country A that produces
two products: CDs and TVs.
Production
CD (million)
TV (million)
A
0
20
B
5
18
combinations
C
10
15
D
15
6
E
20
0
a.
Based on the table above draw the production possibilities curve for country A.
b.
c.
17
Microeconomics
1.7
Chapter 1
ECONOMIC SYSTEM
A.
Definitions
-
Features:
-
Advantaged:
-
Disadvantages:
-
18
Microeconomics
B.
Chapter 1
Definitions
- Is economy was fully controller by government.
Features:
-
Advantages:
-
Disadvantages:
-
C.
Mixed economy
Definitions
- Is a economy system that incorporates a mixture of private and government
ownership or control ( capitalism and socialist)
Features:
-
This system use market mechanism and allow government intervention in economy
activities.
Price level determine by prices mechanism but basic economys problem resolved
together between government and private.
Individual and firm free to have properties.
19
Microeconomics
Chapter 1
Advantages:
-
The government will try to reduce gap of income between rich and poor people.
( taxes and subsidies)
Government will also control the existence of monopolies.
Disadvantages:
-
D.
Islamic economy
Definitions:
- Economy which uses Allah's creation natural resources with most efficient and fair
way based on Islamic laws.
Features:
-
Al Quran and Hadith was the main source in Islamic economics activities.
Individual free to own property
individual no give priority to profit in business
fair competition permitted
free to decide in economics
Advantages:
-
20
Microeconomics
Chapter 1
EXERCISE
1.
2.
3.
(9 marks)
4.
(5 marks)
5.
(4 marks)
6.
Explain ONE (1) reason why the government intervene certain market in mixed
economic system.
(3 marks)
21
Microeconomics
Chapter 1
3.
D.
4.
Which of the following represents a point lying outside the production possibility curve?
A.
B.
C.
D.
6.
given scarce resources, how exactly do large complex societies go about deciding
what to produce, how to produce and for whom to produce.
how can the economy improve technology so as to shift the production
possibility frontier up and to the right.
given the fact that the economy is inefficient, how much and what type of
government intervention should be used to improve the efficiency of the
economy.
what is the best rate of economic growth for a society.
5.
unemployment.
High prices.
Increasing cost.
Unattainable production in the combination of two goods.
If an economy is employing all of its resources fully, it can only increase output by ___
A.
B.
C.
D.
lowering prices.
increasing the velocity of circulation of money.
improving the state of technology.
reducing unemployment.
22
Microeconomics
7.
Chapter 1
The government promises the people of more funding for AIDS research and child care,
and assures them they will not have to sacrifice any other goods or services to obtain
the additional programs:
A.
B.
C.
D.
Section B;
1.
(a)
(2 marks)
(b)
(c)
(9 marks)
[TOTAL: 15 marks]
23
Microeconomics
Chapter 1
The following table shows the production possibilities for motorcycle and laptop.
motorcycles
(thousands)
30
laptop
(thousands)
0
26
21
15
Combination
(a)
Fill in the opportunity cost (motorcycles forgone) of producing the first through the
fifth laptops.
(2 marks)
(b)
(c)
Based on the diagram (b), explain the concept of scarcity, choice and opportunity
cost.
(6 marks)
(d)
Between which points (combinations) is the opportunity cost per thousand unit of
laptops the highest?
(2 marks)
(e)
Label point Y inside the curve. Explain why this is inefficient point.
(f)
Label point Z outside the curve. Explain why this is an unattainable point.
(3 marks)
(g)
Based on the diagram, identify all efficient points and explain why these points are
efficient.
(5 marks)
24
(4 marks)
(3 marks)
Microeconomics
Chapter 1
(h)
Does this production possibilities curve reflect the law of increasing opportunity
costs?
(3 marks)
(i)
(2 marks)
[Total: 30 marks]
25