MICROECONOMI CS Chapter 1: Introduction

Prepared by : Cik Sajamoon a/p Boon Chooi & Cik Masliza Mazlan

At the end of this lesson student should be able to:

1.1 Define microeconomics 1.2 Compare between micro and macro 1.3 Discuss the concepts of economic problems 1.4 Apply Production Possibilities Curve (PPC) to explain the concept of economic problems

Definition of Economics
A field of social science that studies the behaviour of individuals in the distribution and allocation of limited factors of production to maximize the production of goods and services to fulfil mans unlimited wants and demands.

Differences between Microeconomics & Macroeconomics

Microeconomics Macroeconomics

Studies individual economics units Studies of the economics system as in detail such as a household, a firm a whole such as the national and a government. income, the business cycle, the unemployment rate, inflation and general price levels Micro means looking closer into small units
Micro can be applied to our daily lives

Studies focus on a general price level, not on the prices of individual items
Problems are focused on consumption and investment as the main variables in the theory of national income.

Concepts of Economic Problems

SCARCITY
as wants which are always exceeding the limited resources to satisfy society. If there is no scarcity, there will be no economics The needs or wants are unlimited but the world has only a limited amount of resources of factors of production. The factors of production consists is Labour Capital Land Entrepreneur

CHOICE
When there is scarcity, choices have to made Everyone cannot have what he or she wants, so they have to choose from the available alternatives. Cannot get all because limited resources

OPPORTUNITY COST
..is defined as the second best alternative that has to be forgone for another choice which gives more satisfaction. If you cannot obtain what you need, then you have to choose among the alternatives. The next alternative that you choose not to do is the cost of the thing that you choose to do.

PRODUCTION POSSIBILITIES CURVES (PPC)

..show the various possible combinations of goods and services produced within a specified time with all its resources fully and efficiently employed PPC is used to explain the basic economic concepts of scarcity, choice and opportunity cost

4 specific assumptions to illustrate the PPC

i. a country produces two product ii. the economy is operating in full employment and full production capacity iii. the amount of resources available is fixed iv. the state of technology does not change throughout production

PRODUCTION POSSIBILITIES CURVES (PPC)

Production Possibilities

Car

Butter

Car

A B C D E F

15 14 12 9 5 0

0 1 2

B C D Y E

3 4

butter Production Possibilities Curve

 Point A to F are the best possible combination of resources to enable full utilization and to ensure that the country is at full employment Any point outside the PPC (point Z): Scarcity; at this point due to limited resources and technology, unable to meet production Any point along the PPC (such as point A, B, C, D, E and F): Choices which is attainable and efficient

 Any point inside the PPC (point Y) : these combination of production are attainable, it is possible to produce butter and car of this quantity but it show waste of resource and inefficiency since the production has not reached its maximum level . This also leads to unemployment. Movement from one point to another: Opportunity Cost

Shape of the PPC

depends on the opportunity cost The PPC for an increasing opportunity cost slopes from left to right and is convex from the origin

When the opportunity cost is constant the PPC tends to be linear

Factors that influence the Shift of PPC

Economic growth Improvements in technology Population it will decrease and increase the PPC

QUESTION
Production

Combination

a) Based on the table draw the production possibility curves for country A

A
Computer

B
5

C
10

D
15

E
20

b) Calculate the opportunity cost

i. Of producing 5 units of computer

Radio

20

17

13

ii. Of producing 13 units of radio

iii. Of producing 20 units of radio

The following table shows the production possibilities combination of Country A that produces two products : computer and radio

c) Country A wishes to produced 24 computer and 30 units of radio. What is the implication?

The table below shows the maximum combination of rice And sugar
produced in nation samarahan
Rice (kg) 0 1,500 3,000 Sugar (kg) 7,500 6,000 4,500

4,500
6,000 7,500

3,000
1,500 0

Based on the above table, answer these questions: a) Find the opportunity cost (i) of producing 1,500 kg of rice (ii) of producing 6,000 kg of rice (iii) when the production of rice increases from 3,000 to 7,500 kg b) If the economy intends to produce 9,000 kg of rice and 12,000 kg of sugar, suggest 2 ways in which this can possibly be achieved.

Illustrate and explain the following concepts as used in the production possibilities curve: (a) Scarcity (b) Choice (c) Opportunity cost

AT THE END OF THIS CHAPTER STUDENT

SHOULD BE ABLE TO:
1.5 1.6 Describe the economic problems Discuss the characteristic of world economic systems a. Capitalism (free market) b. Central Planned c. Mixed economic d. Islamic Economic Explain the merits and demerits of world economic system Compare the benefits of every world economic system Compare how the world economic systems can solve basic economic problems

1.7 1.8 1.9

BASIC ECONOMIC PROBLEMS

1. What and How much to Produce? The economy of every nation has to take a fundamental decision of what to produce because of the limited economic resource. Every society must choose the type and the quantity of goods and services that it will produce. A part from making choice about types of goods to be produced, society must also ensure that enough goods are produced to fulfill unlimited wants

2. How to Produce? This refers to the cheapest method of production. There are alternative technique of producing goods and services. A producer must manage factors of production effectively to minimize the production costs while maximizing the output quantity and consequently maximizing the profit Production techniques are divided into labour intensive and capital intensive technique.

3. For whom to Produce? This refers to distribution. Distribution of economic benefits depend on the distribution of income, affordability and society purchasing power

ECONOMIC SYSTEM Capitalism or Free Market Economy Socialism or Command Economy Mixed Economy Islamic Economy

CAPITALISM
is an economic system where individuals make all the main economic decision without any government intervention. Buyers, sellers will meet and enter into transaction The price system is the main mechanism for any economic transaction. also known as laissez faire, free market economy or free enterprise

Characteristic
Ownership of resources Decision maker Privately owned by individuals or the private sector. Individual. Consumers sovereignty will affect the production of goods and services.

Price determination

Price mechanism. Free operation of demand and supply forces without any intervention -is labeled as the Invisible Hand
Freedom to reap profit resulting in high incentives to work

Freedom to reap profits

Freedom of enterprise and choice

Production objective

Individuals and producers have freedom of choice. Also free to trade, invest, and organize to produce within countrys legal framework
To maximize profits by prioritizing individual interest as being highly competitive among producers.

Government intervention

There is very limited. The countrys role is to stabilize the economic condition of the economy

Merit
Production according to the needs consumers Economic freedom

Demerit
Inequality of distribution of wealth and income Inflation and high unemployment rate Economic do not achieve full efficiency Neglected of social welfare Unnecessary variety and wasteful competition Misallocation of resources Social cost arising negative externality effect such as pollution Price instability determined by the power of demand and supply in the market

Efficient utilization of resources Greater variety of consumer goods

Enhanced trade, business and research & development (R&D) Automatic incentives Flexibility automatically changes with circumstances.

SOCIALISM
is an economic system where all the economic decisions are made by the government or a central authority. The government officially owns all resources. It is also known as a command economy or a planned system

Characteristic
Ownership of resources Owned and operated by the state or the government in the interest of society

Decision maker

Government and central planning institution

Price determination

Prices are fixed by the government and not determined by demand and supply. No freedom

Freedom to reap profits

Freedom of enterprise and choice

Determined by the government through central planning institutions

Production objective Government intervention

Priorities social and community welfare There is very limited. The governments role is to stabilize the economic conditions of country.

Merit
Production according to the basic needs

Demerit
Lack of incentive and initiative by individuals to work

Equitable distribution of income and wealth

Better allocation of resources Unemployment or recession and inflation rate is minimal Rapid economic development

Loss of economic freedom and consumer sovereignty

Absence of competition Development of technology and innovation not encouraged. Waste and inefficiency in the distribution of economic resources

Social welfare

Bureaucratic planning & administration

MIXED ECONOMY
is an economic system which combination both of capitalism and socialism to solve the basic economic problems Both the public (government) sectors and private sectors play a role in the economy

Characteristic
Ownership of resources Freely owned by individuals and the private sector, while partly owned by the government Individuals and the private sectors (social goods) and the government (public goods) Price mechanism (private goods) and the government (controlled and public goods) Freedom to produce private goods, but the government controls minimum profits rates for the production of public goods Individuals and private producers have freedom of choice (for private goods) and the government makes decisions (for public goods)

Decision maker Price determination Freedom to reap profits

Freedom of enterprise and choice

Production objective
Government intervention

To maximize profits (for private goods) and for social welfare (for public goods)
There is very limited. The governments role is to stabilize the economic conditions of country.

Merit
Co-operation between the public and private sectors - to satisfy the needs of consumers and increase social welfare

Demerit
Conflict of opinion between the private sector and the government sector -to produces public welfare such as education, health, infrastructure, etc Uneven distribution of income - The rich income group continue accumulating the wealth while the lower income still remain poor

Efficient resource allocation - The government and private sectors compete to obtain resources and produce goods Incentive to work. -freedom to run economic activities and gain profits. Guaranteed economic stability - Implement fiscal and monetary policies to ensure full efficiency More option / choice of goods and services - The government produces public goods while the private sectors produces private goods

ISLAMIC ECONOMY is a branch of social science that studies the unlimited desires of individuals to use available resources to achieve happiness on earth and in the afterlife. It studies how individuals and society use limited factors of productions to fulfill their unlimited desires.

Characteristic
Ownership of resources Allah is the sole owned; man acts as a trustee to utilize natural resources
Individuals and producers, based on Islamic principles and commandments Consumers and producers (power of the market) based on Islamic principles and commandments Freedom to seek profit, provided that interest (riba) is not involved. Individuals and producers have freedom of choice, provided there is no contravention of Islamic principles and commandment Priorities the accumulation of profit and social welfare based on Islamic principles and commandments

Decision maker

Price determination

Freedom to reap profits

Freedom of enterprise and choice

Production objective

Merit
Priorities safety and happiness on earth and in the afterlife Ensure social welfare are forbidden -wealth and possessions belong to Allah, and man acts as a khalifah entrusted with responsibility to safeguard the possessions

Demerit

Individuals are encouraged to seek profit through halal business activities - Do not involve interest (riba) and not based on fraud.

Distributes wealth and income fairly -Individual : to basic necessities and to equal opportunities --the government : to ensure each citizen is guaranteed basic necessities according to the principle of right to life

ECONOMIC SYSTEM SOLVE BASIC

ECONOMIC PROBLEMS
1. What to Produce?
Economic System
Capitalism Socialism

Solution
Determined by the power of demand or consumers spending patterns Determined by the ruling authority or government through a central planning institution. Individuals do not have the freedom to determine the types and quantity of goods to be produced

Mixed economy

Determined by price mechanism. The government produces goods that are not produced by the private sector

Islamic economy

Determined by price mechanism. Individuals are free to choose or manufacture the types of goods to be produced, subject to Islamic laws

2. How much to Produce?

Economic System Capitalism Solution

Dependant on the price determined by the market demand

Socialism

Individuals do not have the freedom to determine the types and quantity of goods to be produced. Priority is given to the production of basic necessities and public goods

Mixed economy

The private sector produces goods based on price mechanism. The government will supply public goods for use of all members of the society

Islamic economy

Determined by price mechanism. The government will supply goods that are not produced by the private sector

3. How to Produce?
Economic System Capitalism Solution Firms will choose a combination factors of production to minimize costs. The determined factors of production is based on the goal of maximizing output while minimizing costs Based on the governments goal of achieving maximum output to fulfill the wants of society. The production technique will be chosen based on social welfare

Socialism

Mixed economy

Firms will choose the production method that will maximize profits and minimize costs. The government will determine production methods based on current social benefits and social costs.

Islamic economy

Firms will try to minimize production costs by using the most efficient production technique. However, economy activities that are harmful to society are prohibited

4. For whom to produce?

Economic System Capitalism Solution

Determined based on individuals purchasing power or income. Firms offer goods to parties that are willing to pay the price

Socialism

Goods are distributed evenly and fairly. The government controls prices or practices rationing policies to ensure that each individual is able to enjoy goods that are produced

Mixed economy

Determined by price mechanism. The income gap can be resolve through taxation and subsidy policies Goods are distributed based on purchasing power and individual income. The government decrease the income gap through alms, taxes, and subsidies

Islamic economy