CHAPTER 1

INTRODUCTION TO
MICROECONOMICS

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 INTRODUCTION

 This chapter gives a brief description of

economics in general. Several economic
concepts and terms, such as scarcity, choice,
and opportunity cost, will be introduced.
Besides that, we will discuss the major
problems and issues that economics attempt to
address.

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 DEFINITION OF ECONOMICS

. . . The word economy comes from a Greek word

for “one who manages a household.”

 Economics is a study of how people use their

limited resources to try to fulfil unlimited
wants and involves alternatives or choices.

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 FIELD OF ECONOMICS

MICROECONOMICS MACROECONOMICS

-The study of individual - The study of the

parts of the economy, economic system as a
such as public choices, whole, such as
business choices and national income, trade
personal choices. cycle, unemployment
-also discusses how the rate, inflation and
prices of good and general price level.
factors of production,
wages, rent, and interest
rate are determined.

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 ECONOMICS RESOURCES & FACTORS

Land Labour
-a naturally occurring resource (free gift -Skilled and unskilled labour
of nature) -Contribute physically and mentally
-supply of land is fixed in terms of -Only offer their services.
location and geography -Labour is mobile
The value of land is dependent on quality -Different from each other in term of efficiency
and location and productivity
Return of land is ………….. The return of labour is…….

Capital
Entrepreneur
-consists of asset such as money, equipment,
machinery and raw material used in production. -The person with the ability and skill to
organise production and bear risks
-Capital is mobile
- Entrepreneur plans, leads, coordinates
-Can be increased and decreased and control the activities of a firm
-The returm for capital is…… --The return for entrepreneur is…..

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© 2011 Cengage South-Western
 Types of goods

1)ECONOMICS GOODS
 Supply is limited
 Involves price and opportunity cost
 Divided into two:
a)Consumer goods gives satisfaction to
customers
-Long lasting- Radio, car
- Not long lasting(perishable) – Food, fruits
b) Capital goods
-To produce other goods – machinery, factory
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2) FREE GOODS
 From nature and can be obtained without cost
 Unlimited supply so there is no price and the
opportunity cost is zero.
 Essential to human e.g air and water.
 There is some cost involved because of
pollution.

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3)PUBLIC GOODS
 Owned by the government, paid from tax
payers‟ money e.g. public road, powerhouses.
 Everyone can use them and we cannot exempt
anyone from using them.

4)PRIVATE GOODS
 Owned by individual or companies.
 Others get to use them if they pay or allowed by
the owner e.g:House, car
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 BASIC ECONOMIC
CONCEPTS

SCARCITY CHOICE

BASIC ECONOMIC
CONCEPTS

OPPORTUNITY COST

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 WHAT IS SCARCITY?

 The limited/scarce products and services that

can be produced to satisfy the unlimited
needs/desires of humans.
 This problem comes about due to the limited
economic resources.

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 WHAT IS CHOICE?
 The problem of scarcity leads to choice.
 Humans should make a choice between
products and services that are needed and
also decided on current or future consumption.
 The consumer will make the efficient/effective
choice in order to maximize their satisfaction.
 The producer will make choices or decisions to
produce products and services using the limited
resources in order to maximize their profits.

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 WHAT IS OPPORTUNITY COST?

 Choice will lead to opportunity cost.

 Second best product or services that we let go
in order to obtain the best product or services.
 E.g: We assume the government has RM2
million to build either a hospital or a school. If
the government use the money to build a
school, the opportunity cost would be the
hospital.
 It exist due to the scarcity of resources.

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 Decisions require comparing costs and benefits
of alternatives.
– Whether to go to college or to work?
– Whether to study or go out on a date?
– Whether to go to class or sleep in?

 The opportunity cost of an item is what you give

up to obtain that item.

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 BASIC ECONOMIC PROBLEMS

1. WHAT TO PRODUCE?
 Refers to the type of goods and services to be produced

2. HOW TO PRODUCE?
 Refers to the cheapest method of production

3. FOR WHOM TO PRODUCE?

 Refers to the distribution of income

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 PRODUCTION POSSIBILITIES
CURVE (PPC)

 Used to explain the basic economic concepts:

Scarcity, Choices and Opportunity cost.

DEFINITION:
The PPC shows the various possible
combinations of goods and services
produced within a specified time period
with all its resources fully and
efficiently employed.

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 PRODUCTION POSSIBILITIES
CURVE (PPC) (cont.)
Assumptions:

1. There are only two goods.

2. The economy is operating in full employment
and full production capacity (full efficiency).
3. The amount of resources available are fixed.
4. The state of technology does not change
throughout the production.

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 Example:
A country produces milk powder and bottle making
machines. Milk powder is a consumer good whereas the
bottle making machine is capital good.

PRODUCTION MILK POWDER BOTTLE

POSSIBILITY (‘000 KG) MACHINE (UNIT)

A 15 0
B 14 1
C 12 2
D 9 3
E 5 4
F 0 5

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Milk powder
(„000kg)

Bottle Machine
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 EXPLAINATION OF PPC

ON THE PPC
 Points A to F are the best possible combinations
of resources to enable full utilization and to
ensure the country is at full employment.
 If all the resources are used to produce milk
powder only , 15,000 kg of milk bottle will be
produced.
 If all resources are used to produce bottle
machine only, 5 bottle machines will be produced.
 Points A to F shows choice.
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 PRODUCTION POSSIBILITIES
CURVE (PPC) (cont.)
Sewing Machine
(‘000 units) The country Jaya, produces two products –
butter and sewing machine.
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A If it allocates all its resources to sewing machine, it
will produce at Point A.
14
If it allocates all its resources to butter, it will
12 C produce at Point F.

If the country Jaya is at Point C

10 D on the PPC, it can produce the
combination of 2,000 kg butter
8 and 12,000 units of sewing
machine.
6
Point D shows the production of
4 3,000 kg butter and 9,000 units
of sewing machine.
2
F
0 1 2 3 4 5 Butter (‘000 kg)

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 PRODUCTION POSSIBILITIES
CURVE (PPC) (cont.)
Sewing Machine
(‘000 units)

16 Z
A
B UNATTAINABLE Point outside the PPC
14 (Point Z)  SCARCITY
C
12 Y
Any point along the PPC
 CHOICES
10 D
8 Movement from one point
ATTAINABLE to another (point C to D)
 OPPORTUNITY COST
6 Point inside the PPC
(Point Y)  Waste E
4 of resources and
inefficiency
2
F
0 Butter (‘000 kg)
1 2 3 4 5

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 INSIDE THE PPC

 Any point inside the PPC is attainable (Point Y)

 Attainable means it is possible to produce both
the goods.
 Points inside PPC show wastage of resources
because the production has not reached its
maximum capacity.

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 OUTSIDE PPC

 Any point outside the PPC is unattainable (point

Z)
 Unattainable means it is not possible to produce
both the goods.
 points outside PPC show scarcity where the
country is unable to meet production due to
limited resources and technology.

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 FACTORS THAT INFLUENCE
THE SHIFT OF PPC
Sewing Machine
1. Economic
Growth 16
When the country
14 enjoys economic
growth, the PPC
12 bounds outward.

10

8
When the country
6 is struck by natural
disasters, economic
4 growth will decline
and the PPC will
2 shift to the left.
Butter
0 1 2 3 4 5

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 FACTORS THAT INFLUENCE
THE SHIFT OF PPC (cont.)
Sewing Machine
2. Improvements
in Technology 16
Technology increases the
14 production of sewing machine.

12
Technology increases the
10 production of butter.

4
2

0 Butter
1 2 3 4 5

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 FACTORS THAT INFLUENCE
THE SHIFT OF PPC (cont.)
Sewing Machine
3. Population
16

14
Increase in
population
12

10

8
Decrease in
6
population
4
2

0 Butter
1 2 3 4 5

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