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Microeconomics

Oxford University Press Malaysia, 2008

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CHAPTER

1
Introduction to
Microeconomics

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DEFINITION OF
ECONOMICS
Economics is a science that
studies human behaviour as a
relationship between ends and
scarce means which have
alternative uses.
(L. Robbins)

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DEFINITION OF
ECONOMICS (CONT)
Economics is a study of how
people use their limited
resources to try to fulfill
unlimited wants and involves
alternatives or choices
(K.E. Case and R.C. Fair).

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POSITIVE AND NORMATIVE


ANALYSIS
A positive statement deals with the
question of what is and there no
indication of approval or disapproval.
Positive analysis focuses on facts
and the cause-and-effect
relationships.

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POSITIVE AND NORMATIVE


ANALYSIS (CONT)
A normative statement deals with the
question of what ought to be. Normative
analysis incorporates value and judgments
about what the economy should be or
what
policy should be used to
achieve economic goals.

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MICROECONOMICS VS
MACROECONOMICS
MICROECONOMICS
Analyzes specific
economic units in detail
such as households,
firms and government.

Microeconomics
Oxford University Press Malaysia, 2008

MACROECONOMICS
Analyzes aggregate
behaviour of the entire
economy such as
national income, trade
cycle, and international
trade .
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BASIC ECONOMIC CONCEPTS


SCARCITY
SCARCITY

BASIC
ECONOMIC
CONCEPTS

CHOICES
CHOICES

OPPORTUNITY
OPPORTUNITY COST
COST
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BASIC ECONOMIC CONCEPTS


(CONT)

2. CHOICES
When scarcity exists, choices are to be
made.

3. OPPORTUNITY COST

Opportunity cost is defined as the second


best alternative that has to be foregone for
another choice which gives more
satisfaction.

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MICROECONOMICS

10
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PRODUCTION POSSIBILITIES
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 POSSIBILITIES
CURVE (PPC)
1. Economy is in full employment and

full production capacity (full


efficiency).
2. Resources available are fixed and
limited.
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THE ASSUMPTIONS OF
PRODUCTION POSSIBILITIES
CURVE (PPC) (CONT)
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) (CONT)
Defence Goods (million)

A
150

North Korea
produces two
productsdefence
goods and
consumer goods

120
90

30
F
0

10

20

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30

40

If it allocates its resources to


consumer goods, it will produce at
Point F
If North Korea is at point C on the
PPC, it can produce the
combination of 120 million defence
goods and 20 million units of
consumer goods

60

If it allocates its resources to


defence goods, it will produce at
Point A

Point D shows production of 90


million defence goods and 30
million units of consumer goods

Consumer Goods (million)

50
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PRODUCTION POSSIBILITIES
CURVE (PPC) (CONT)
Defence Goods (million)

150
120
90
60
30

Z
B
Y

UNATTAINABLE

Point along the PPC


CHOICES

C
D

Movement from one point


to another (point C to D)
OPPORTUNITY COST

ATTAINABLE
Point inside the PPC (Point
Y) Waste of resources
and inefficiency

F
0

10

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20

30

Point outside the PPC


(Point Z) SCARCITY

40

50

Consumer Goods (million)


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SHIFTS OF PPC DUE TO


ECONOMIC GROWTH
Defence Goods (million)

160
150
When the country enjoys
economic growth, the
PPC moves outward

120
90
60
30
0

When the country


is struck by natural
disaster, economic
growth will decline
and PPC shifts to
the left

10

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20

30

40 50

Consumer Goods (million)


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SHIFTS OF PPC DUE TO


IMPROVEMENT IN TECNOLOGY
Defence Goods (million)
160

Technology increases
production of defence
goods

150
120
90

Technology increases
the production of
consumer goods

60
30
0

10

20

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30

40

50

Consumer Goods (million)


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MICROECONOMICS

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SHIFTS OF PPC DUE TO


POPULATION
Defence Goods (million)
160
150
Increase in population

120
90
60

Decrease in
Population

30
0

10

20

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30

40

50

Consumer Goods (million)


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CONCAVE SHAPE OF PPC


CURVE
Good Y
6

A
B

Increasing
Opportunity Cost

3
2
1
0
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D
1

Good X
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CONVEX SHAPE OF PPC CURVE


(CONT)

Good Y

5
Decreasing
Opportunity Cost

4
3

2
C

1
0

D
1

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Good X

3
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LINEAR SHAPE OF PPC CURVE


(CONT)

Good Y

5
4

Constant Opportunity
Cost

3
C

2
1

D
0
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Good X

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MICROECONOMICS

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FUNDAMENTAL ECONOMIC
QUESTIONS
1. WHAT TO PRODUCE ?
Depends on the what type of goods and
services to produce.
2

HOW TO PRODUCE ?
Depends on the cheapest method of production.

3. FOR WHOM TO PRODUCE ?


Depends on the distribution of income
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ECONOMIC SYSTEMS
TYPES OF ECONOMIC
SYSTEMS

MARKET
MARKET
ECONOMY
ECONOMY

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PLANNED
PLANNED
ECONOMY
ECONOMY

MIXED
MIXED
ECONOMY
ECONOMY

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MARKET ECONOMY
CHARACTERISTICS

MARKET ECONOMY
Individuals and sellers make economic
decisions using a price system.

MERITS AND DEMERITS


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CHARACTERISTICS OF A
MARKET ECONOMY
1. Private ownership of resources
2. Freedom of enterprise and choice
3. Consumers sovereignty
4. Competition
5. Government intervention
6. Price system
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MERITS AND DEMERITS OF A


MARKET ECONOMY
MERITS

Production according to

consumers need
Economic freedom
Efficient utilization of
resources
Variety of consumer goods
Enhanced trade, business
and R&D
Automatic incentives
Flexibility
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DEMERITS
Inequality of distribution

of wealth and income


Inflation and high
unemployment rate
Lack of social welfare
Wasteful competition
Misallocation of
resources
Social cost
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PLANNED ECONOMY
CHARACTERISTICS

PLANNED ECONOMY
Economic decisions are made by the
government or central authority.

MERITS AND DEMERITS


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

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MERITS AND DEMERITS OF A


PLANNED ECONOMY
MERITS

Production according to

basic need
Equal distribution of income

and wealth
Better allocation of resources
No serious unemployment or

inflation
Rapid economic

development

DEMERITS
Lack of incentives and

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

Social welfare
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MIXED ECONOMY
CHARACTERISTICS

MIXED ECONOMY
An economic system which combines
both capitalism and socialism.

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CHARACTERISTICS OF
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

5.

Co-operation between the government, public and


business sectors

6.

Government control of monopolies

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