DQS 156

CONCEPT OF HOUSEHOLD, FIRM AND

GOVERNMENT

NAME: ISKANDAR BIN AMIRUDDIN

MATRIX NO: 2018673058

GROUP: AP1142D
Abstract
This study shows about the basic economic concept that was related to the current
issues and in quantity surveying. Economic has 2 types which is microeconomics and
macroeconomics. The microeconomic has 3 concept, household, firm and
government. The study found there is a relationship between economics and quantity
surveying. The study also found the economic problems and can be solved by what +
how much to produce, how to produce and for whom to produce.

Acknowledgement
In preparation of this assignment, I had to give so much respect for those who help me
to complete up my assignment especially my lecturer and my friends. I would like to
thank you to Dr. Mohd Afandi Abu Bakar, lecturer of DQS 156 who guided me to finish
up my work. Also, I would like to thank Dr. Afandi for giving me the materials and
introduced to me “The Basic Economic Concept”. Now, I understood the concept more
deeply .
DEFINITION OF MICROECONOMICS

Microeconomics is the study of individual units in the economy. It focuses on the price
theory, production theory and distribution theory. For example, microeconomics is concerned
with the demand and supply of particular goods, services, and resources: cars, clothes
computers etc. The decision units in microeconomics are only household and firm.

DEFINITION OF MACROECONOMICS

Microeconomics is the study of economy as a whole or aggregate. It focuses on national

income, general employment, general price level etc. For example, microeconomics is
concerned with aggregate demand and supply. By ‘aggregate demand’ we mean the total
amount of spending in the economy, whether by consumer’s , by the overseas consumer for
our export, by the government, or by firm’s. It concluded with household, firm, the
government and the international sector.

CONCEPT OF HOUSEHOLD

All those people living under one roof are considered a household.

Households do two fundamental things vital to the economy.

1. Demand goods and services from product markets
2. Supply labor, capital, land, and entrepreneurial ability to resource markets.
Economists think of each household acting as a single decision-maker.
Householder: The key decision-maker in the household.

Evolution of a Households
Households have changed considerably in economic history. Earliest households were totally
self-sufficient. They made what they consumed and consumed what they produced to a large
extend. Specialization took place within the household.

Households are rational utility maximizers.

Economists assume that individuals, and thus households, attempt to maximize their utility.
Utility: The satisfaction received from consumption; the sense of well being. Utility is
subjective (not objective). One household may have different goals than another.
Rational: They act in their own best interest (in the interest of their own goals- maximizing
their utility), would not make choices that would make them worse off.

Households as Demanders
Personal income is allocated among three uses:
1. savings
2. consumption
3. taxes

Resource suppliers
Households use their limited resources (labor, capital, land, and entrepreneurial ability) to
maximize their own utility. They can use these resources at home, or they can sell these
resources in the resource market to earn money to spend in the product market.

CONCEPT OF FIRM

Firms: Economic units, formed by profit-seeking entrepreneurs who employ resources to

produce goods and services for sale.

Firms have evolved as providers of goods and service.

- This system still exists in some parts of the world.
- With the expansion of the economy-more demand for final goods and services-
entrepreneurs organized various stages of production under one roof.
- Work was organized in factories which
1. Promoted more efficient division of labor
2. Allowed for direct supervision of laborers
3. Reduced transportation costs
4. Facilitated use of machines.
Kinds of Firms
1. Sole Proprietorship: A firm with a single owner who has the right to all profits and who
bears unlimited liability for the firm's debts. (plumber, doctor)
- Must raise all the money to start business, is solely responsible for all debts
2. Partnerships: A firm with multiple owners who share the firm's profits and each of who
bears unlimited liability for the firm's debts.
- Two or more people agree to contribute resources in return for a share of the
profit or loss. (law, accounting, medical partnerships)
3. Corporations: A legal entity owned by stockholders whose liability is limited to the value
of their stock.
- Owners issued stocks that entitle them to profits in proportion to their
stock ownership.
- Many individuals pool money (1000s even millions)
- Easy to amass large funds, limited liability
- Stockholder has little influence over corporate policy
- Corporate income taxed twice

Household production still exists.

Name some forms of household production that still exist.
- Cooking, cleaning
- Fixing own cars
- Paint own home

CONCEPT OF GOVERNMENT

The Role of the Government

1. Establishing and Enforcing the Rules of the Game.
2. Promoting Competition
3. Regulating Natural Monopolies
4. Producing public goods.
Public good: A good that, once produced, is available for everyone to consume, regardless of
who pays and who doesn't.
5. Externality: A cost or benefit that falls on third parties and is therefore ignored by the two
parties to the market transaction.
6. Income Distribution
7. Full employment, Price stability, Economic Growth

Government is a unique Problem for Economists

1. What is the goal of government?

- Households maximize utility

- Firms maximize profits
- It might be said that government officials maximize the number of votes they will
get in the next election.

2. Voluntary exchange vs. Coercion

Market is based on voluntary exchange.
Unless there is 100% agreement--government decisions involve some degree of coercion.

ECONOMICS PROBLEM

Economics problem are divided into three which are scarcity, choice and opportunity cost.

Scarcity :

Scarcity is the most important concept in economics. If there were no scarcity, we do not
need to study economics. Scarcity occurs when a society’s wants exceed the ability of the
economy to meet those wants.

Economics solves the problem of scarcity by placing a higher price on scarce goods. The
high price discourages demand and encourages firms to develop alternatives.

For example ;
 Household are experiencing income shortage. The amount of income earned is
insufficient to meet all their wants. For example, Bernard has a RM100 of money, he wants
to buy radio and sports shoes which are worth RM100 each. Thus, lack of revenue has led
Bernard not to buy the items simultaneously.

Firms are experiencing a lack of economic resources. The economic resources owned
by the firm cannot r be used to remove all kinds of goods that are desired. For example, the
W&R company has a land. The company wants to build either a factory or a home. The lack
of economic resources has led to the fact that the company cannot build a residential and
factories silmultaneously.

Government are experienced a shortage of national income. National income earned

from tax revenue and non-tax revenue is insufficient to carry out various development
projects. For example, the government has a revenue of RM100 million. The government
wants to build either a school or a hospital that cost RM100 million each. Then, the lack of
opinion has led the government to not run the two projects silmultaneously.

Choice :
The second basic economic concept is choice. Individual, business and society must make
decision to choose. We must choose among many alternatives. Economic choices are
decisions which are made by firms, individuals, and or governments regarding which needs
and wants to satisfy, and what types of products and services should be produced and
bought. Choices arise as a result of economic problem of scarcity

For example ;

The Household aims to maximize satisfaction. Chices will be made by household

based on the priorities or interest and satisfaction of an item to themselves. For example,
Bernard has a sum of RM100 and wants to buy either radios or sport shoes of RM100 each. If
sports shoes can deliver maximum satisfaction over radio, then he will choose to buy sport
shoes. On the other hand, if the radio can provide maximum satisfaction over sports shoes, he
will choose to buy radio.
 The Firm goal is to maximize profits. Firms will opt for maximum profitability. For
example, W&R company want to build either a factory or a home. If the construction of a
residential property can generate maximum profit, then the firm will choose to build a
residential property. On the contrary, if the home’s construction can generate maximum
profit, then the firm will choose to buid the homes.

The Government goal is to maximize the welfare of society. The government will sellect the
development projects needed by the community and give them maximum welfare. For
example, the government has a revenue of RM100 million and wants to build either a school
or a hospital worth or RM100 each. If the construction of a hospital can provide maximum
welfare to the community, then the government will choose to build the hospital. On other
hand, if the construction of schools can provide maximum welfare to the community, the
work will choose to build a school.

Opportunity Cost :

Making a choice is not an easy task. Each time you choose to use resources for a purpose, it
means you must forgot some other purpose. Making a choice involves a sacrifice. In
economic that is what we mean by the term opportunity cost.

For example ;

The Household – If Bernard choose to buy radio, so the opportunity cost is sport
shoes. Then, if Bernard choose to buy sport shoes, so the opportunity cost is the radio.

The Firm – If W&R company choose to build a factory, the opportunity cost is
houses. Then, if W&R company choose to build a houses, so the opportunity cost is build the
factory.

The Government – If the government choose hospital construction project, so the

opportunity cost is school construction project. Then, if government choose school
construction project, so the opportunity cost is hospital construction project.
THE BASIC ECONOMIC PROBLEM

i) What to Produce:

Let us consider the first question: ‘which commodities are to be produced and in what
quantities? The commodities which do not command positive prices in the market would not
be produced. Therefore only those commodities with positive prices are to be produced and
in such a way that would clear the markets.

ii) How Much to Produce:

The quantity in which a commodity is to be produced is set at that level where

demand equals supply. If quality produced is more or less, then there will be dis equilibrium
in the market and price will fluctuate. Hence, to maintain stable equilibrium price it becomes
necessary to make demand and supply equal. This rule is applicable for each commodity. In
this way, first central problem is solved.

(ii) How to Produce:

In context of this it is: ‘which techniques are to be adopted’? Technology means the
correct proportion in which the different factors of production are to be employed. There are
two types of techniques. A labour-intensive technique would employ relatively more labour
and less capital. On the other hand, capital- intensive technique means more capital and less
labour.

The choice of technique depends on the prices of the factors of production. That is, if
labour is cheap and capital is expensive, a labour-intensive technique would be considered
and vice-versa. The prices of labour and capital are determined by the demand for and supply
of labour and capital respectively .In this way, the second problem will be solved.

(iii) For Whom to Produce:

The solution of this problem is very simple commodity can be consumed only by
people who have more purchasing power. Price mechanism determines the income of the
workers, i.e.; purchasing power. The purchasing power of the owner of capital is determined
in the same way. Thus, when the price of every commodity and every factor of production
are determined, the third problem will be solved.

9.0 THE ECONOMIC SYSTEM:

9.1 Capitalist System:

Is an economic system where all economic decision is made by individuals in the society
without any government intervention. Also known as free-market system, free enterprise or
laissez faire.

a. A Two-Class System
Historically, a capitalist society was characterized by the split between two classes of
individuals—the capitalist class, which owns the means for producing and distributing goods
(the owners) and the working class, who sell their labour to the capitalist class in exchange
for wages. The economy is run by the individuals (or corporations) who own and operate
companies and make decisions as to the use of resources. But there exists a “division of
labour” which allows for specialization, typically occurring through education and training,
further breaking down the two-class system into sub-classes (e.g., the middle class).
b. Profit Motive
Companies exist to make a profit. The motive for all companies is to make and sell goods
and services only for profits. Companies do not exist solely to satisfy people's needs.
Even though some goods or services may satisfy needs, they will only be available if the
people have the resources to pay for them.
c. Minimal Government Intervention
Capitalist societies believe markets should be left alone to operate without government
intervention. However, a completely government-free capitalist society exists in theory, only.
Even in the United States, the poster child for capitalism, the government regulates certain
industries, such as the Dodd-Frank Act for financial institutions. By contrast, a purely
capitalist society would allow the markets to set prices based on demand and supply for the
purpose of making profits.

d.Competition

True capitalism needs a competitive market. Without competition, monopolies exist, and
instead of the market setting the prices, the seller is the price setter, which is against the
conditions of capitalism.

e.Willingness to Change

The last characteristic of capitalism is the ability to adapt and change. Technology has been
a game changer in every society, and the willingness to allow change and adaptability of
societies to improve inefficiencies within economic structures is a true characteristic of
capitalism.

9.1.1 Characteristic of the capitalist system:

a. Private ownership of resources

b. Each consumer is motivated by his or her own self.

c. The price system is important.

d. Good and services supplied in the market.

e. Economic power is widely dispersed.

f. Competition among buyers and sellers.

9.2 Central-planned system:

The economic decisions are made by the central authority or the government. Also
known as planned economy, communist system, controlled economy and totalitarian
economy and socialism.

9.1.2 Characteristic:
a. The central authority plans the allocation of resources between current
consumption ad investment for the future
b. There is a management boy called “central authority” (responsible in making

economic decisions for the society.

c. At the microeconomics level the authority plans the output of each industry and
 firm, the techniques that will be used, and other resources required by each industry
and firm.
d. The authority plans the distribution of output between consumers

9.3 Mixed economic system:

The mixture of both the capitalist system and the central-planned economic system.
Government and the individual play their role in the economy. The government may allow
the prices of goods and inputs to fluctuate to some extent in line with changes in demand
and supply. Consumers may be free to purchase what they want.

9.3.1 Characteristic:

a. Government may control relatives’ prices of goods and inputs, by taking or

subsiding them or by directing price controls
b. Government helps to income through income taxes, welfare payments r direct
control over wages profits and rents.
c. Government control the tree of production and consumption using legislation.

d. There is a large form of cooperation between the government public, and

business sectors.
e. Government supports in providing certain goods and services that are under-
produced or not produces at all by the market system
9.4 Islamic economic system:

The combination of “Islam” and Economic can be defined as a study of science that deals
with human behaviour in utilizing and managing the resources for his ow benefit as well as
for the welfare of the society.

It also a moderate economic system and has an objective of achieving success (Al-Falah)
materially and spiritually and of achieving th true pieces of mind and the body through the
complete submission to Allah in all economic activities.

9.4.1 The economic doctrine of Islam is reflected in its concepts of Tawhid:

a. Hablumninannass

b. HablumminaAllah

9.4.2. The microeconomy foundation of an Islamic Economics are based on the

following philosophic foundation:

a. Rububiyyah (Believe Allah alone directs those who believe in Him towards
success)
b. Khilafah (Man’s role as God’s vicegerent on the earth and has been endowed with all
the spiritual and mental characteristic)
c. Tazkiyyah (Purification plus growth)

d. Ukhwah (brotherhood- Khilafah implies the fundamental and brotherhood of

mankind).

10.0 Production Possibility Curve

A production possibility curve measures the maximum output of two goods using a fixed
amount of input. The input is any combination of the four factors of production. They are
land and other natural resources, labour, capital goods, and entrepreneurship. The
manufacture of most goods requires a mix of all four.

Each point on the curve shows how much of each good will be produced when resources
shift from making more of one good and less of the other. The curve measures the trade-off
between producing one good versus another.

For example, say an economy can produce 20,000 oranges and 120,000 apples. On the
chart, that's point B. If it wants to produce more oranges, it must produce fewer apples. On
the chart, Point C shows that if it produces 45,000 oranges, it can only produce 85,000
apples.

The production possibility curve represents graphically alternative production possibilities

open to an economy. The productive resources of the community can be used to produce
various alternative goods. But since they are scarce, a choice must be made between the
alternative goods that can be produced. In other words, the economy must choose which
goods to produce and in what quantities. If it is decided to produce more of certain goods, the
production of certain other goods must be curtailed.

Another example, let us suppose that the economy can produce two commodities, cotton and
wheat. We suppose that the productive resources are being fully utilized and there is no
change in technology. The following table gives the various production possibilities.

It all available resources are employed to produce wheat, 15,000 quintals of it can be
produced. If, on the other hand, all available resources are utilized to produce cotton,
5000 quintals are produced. These are the two extremes represented by A and F and in
between them are the situations represented by B, C, D and E. At B, the economy can
produce 14,000 quintals of wheat and 1000 quintals of cotton.

At C the production possibilities are 12,000 quintals of wheat and 200u quintals of
cotton, as we move from A to F, we give up some units of wheat for some units of cotton
for instance, moving from A to B, we sacrifice 1000 quintals of wheat to produce 1000
quintals of cotton, and so on. As we move from A to F, we sacrifice increasing amounts
of cotton.

This means that, in a full-employment economy, more and more of one good can be
obtained only by reducing the production of another good. This is due to the basic fact
that the economy’s resources are limited.

The following diagram (21.2) illustrates the production possibilities set out in the above

In this diagram AF is the production possibility curve, also called or the production
possibility frontier, which shows the various combinations of the two goods which the
economy can produce with a given amount of resources. The production possibility curve is
also called transformation curve, because when we move from one position to another, we
are really transforming one good into another by shifting resources from one use to another.
CONCLUSION

Economics is concerned with the optimal distribution of scarce resources within

society. For example, economics is concerned with how individual decisions like how
firms produce goods and which goods people buy. An important element in
economics is concerned with the extent to which governments can intervene in the
economy to improve economic welfare. Economics is also concerned with wider
issues such as economic growth and unemployment – issues that affect the whole of
society.

REFERENCES

Youtube: Basic Economic Terms by Josh Tom

Vengedasalam, D. & Madhavan, K. (2010). Principles of Economics. (2nd ed).
Selangor, Malaysia: Oxford Fajar Sdn. Bhd.