DPB1023

MICROECONOMICS

UNIT 1

INTRODUCTION TO
MICROECONOMICS

NIK AZIDA BINTI ABD

GHANI

Learning Outcomes
Students should be able to:
1.1 Interpret microeconomic in general
Define microeconomics
Compare between study fields of economics:
micro and macro economics
1.2 Classify Economic Problems
Describe three economic problems.
Relate the concept of economic problems
a. scarcity
b. choice
c. opportunity cost

Definition of Economics
Economics is a science of studies
human behaviour as a relationship
between ends and scarce means
which have alternative uses.
Economics is a study of how people
use their limited resources to try to
fulfill unlimited wants and involves
alternatives or choices.
Economics as a study of how scarce
resources are allocated among

Definition of
Microeconomics
Economics

Microeconomi
cs

Macroeconomi
cs

Definition of
Microeconomics
Microeconomics studies individual economic
units in detail such as household, a firm and a
government.
Microeconomics the study of individual
parts of the economy such as public choices,
business choices and personal choices.
Macroeconomics the study of the economic
system as a whole such as the national
income, the trade cycle, the unemployment
rate, inflation and general price levels.

Definition of
Microeconomics

Definition of
Microeconomics

Differences between
Microeconomics and Macroeconomics
Basis

Microeconomics

Macroeconomics

Meaning

Studies economic
issues and problems at
the level of individual
firm, household etc.

Studies economic issues and

problems at the level of the
economy as a whole.

Concern

Concerned with the

determination

Concerned with
determination of aggregate
output and general price level
in the economy as a whole.

Focus

Focus on maximisation
of individuals gain.

Focus on maximisation of
social welfare.

Scope

It has narrow scope i.e.

individual person,
market etc.

It has a very wide scope i.e. a

country.

3 Economics Problems

Economic Problems
What to produce?
To decide what to produce because of the limited
economic resources.
Can be solved through the price mechanism (in a
capitalist economy) or by central planning (socialist
system).

How to produce?
Cheapest/ Quickest/ environmental friendly method of
production.
Use more human power or robotic? Automatic machines
or assembly line workers?

For whom to produce?

Distribution of economic benefits depends on the
distribution of income.

Economic Problems

3 Economics Concepts

Economic Concepts
Scarcity
Human wants are always greater than
the available resources. Scarcity refers to
wants which are always exceeding the
limited resources meant to satisfy them.
Factors of production (labour, capital,
land & entrepreneur) are scarce.

Economic Concepts
Choices
When there is scarcity, choices have to
be made decisions to choose from
available alternatives.
Consists of mental process of thinking
involved with the process of judging the
merits of multiple options and selecting
one of them.
Choice involves sacrifice.

Economic Concepts
Opportunity costs
Making choices in the face of scarcity implies
a cost.
Opportunity costs - cost of one choice in terms
of the best forgone alternative the next
alternative that you choose not to do is the
cost of thing that you choose to do.
The second best alternative that has to be
forgone for another choice which gives more
satisfaction.
The higher the opportunity cost, the less likely
to do it.

Learning Outcomes
1.3

Compare how the world of economic

systems solve the Basic Economic
Problems
Describe the economic problems: what,
how much, how to be produced and to
whom the product should be produced
Describe the characteristic of world
economic systems
a. Capitalism (free market)
b. Central planned
c. Mixed economic
d. Islamic economic

Learning Outcomes
1.3 Compare how the world of
economic systems solve the
Basic Economic Problems
Compare the benefits of every
world economic system
Compare how the world economic
systems can solve basic economic
problems

World Economic System

Economic system describes how a
countrys economy is organised.
Because of the problem of scarcity
(not having enough of something),
every country needs a system to
determine how to use its productive
resources.

World Economic System

What goods and services

to be produced?

World Economic System

World Economic System

World Economic System

Capitalism
A system of economics based on the private
ownership of capital and production inputs,
and on the production of goods and services for
profit.
The production of goods and services is based
on supply and demand in the general market,
rather than through central planning (planned
economy).
Capitalism is generally characterized by
competition between producers. Other facets,
such as the participation of government in
production and regulation, vary across models of
capitalism.

World Economic System

Capitalism
Production and price are determined by
the market rather than by governments.
Individuals have freedom to produce
goods and services they can sell in the
market.
Capitalism has been criticized for its
underlying focus on profit, and how that
focus can lead to social and economic
inequality.

World Economic System

Capitalism vs free market system
Capitalism is an economic system based on
ownership of the factors of production. Some key
features of capitalism are competition between
companies and owners, private ownership and
motivation to generate a profit. The production and
pricing of goods and services is determined by the
free market, or the supply and demand.
Afree marketsystem is an economic system
based solely on demand and supply, and there is
little or no government regulation. In a free market
system, a buyer and a seller transact freely only
when they voluntarily agree on the price of a good
or a service.

World Economic System

Capitalism vs free market system
Capitalism is focused on the creation of wealth
and ownership of capital and factors of
production
A free market system is focused on the
exchange of wealth, or goods and services. A
free market system is based solely on supply
and demand and leads to free competition in
the economy, without any intervention from
outside forces.
A private owner in a capitalist system can have
amonopolyon the market and prevent free
competition.

World Economic System

Mixed Economic System

A mixed economy means that part of the
economy is left to the free market, and part of
it is run by the government.
In reality most economies are mixed, with
varying degrees of state intervention.
Mixed economies start from the basis of
allowing private enterprise to run most
business. Then the governments intervene in
certain areas of the economy, such as
regulation, and spending money on public
services.

Benefits of Mixed
Economy

Mixedeconomiesallow many more

freedoms thancommand economies freedom to possess the means of
production; to participate in managerial
decisions; to buy, sell, fire, and hire as
needed; and for employees to organize
and protest peacefully.
Mixed economies have a high level of
state participation and spending in taxfunded libraries, schools, hospitals, roads,
utilities, legal assistance, welfare, and
social security.

Benefits of Mixed
Economy

Various restrictions are made for the

greatergood environmentalregulation, labor
regulation, antitrust and intellectual
property laws.
The ideal combination of these
freedoms and restrictions is meant to
ensure the maximumstandardof
living for the population as a whole.

Disadvantages of
Mixed Economy System
Difficult to know how much
governments should intervene, e.g.
discretionary fiscal policy may create
alternative problems such as
government borrowing.
Mixed economies are criticised by
Socialists for allowing too much market
forces, leading to inequality and an
inefficient allocation of resources.

Disadvantages of
Mixed Economy System
Mixed economies are criticised by
free market economists for allowing
too much government intervention governments make very poor
managers of the economy,
invariably being influenced by
political and short-term factors.

Economic System to solve the

basic Economics Problems

Islamic Economy System

Definition of Islamic Economy
The knowledge and application of
injunctions and rules of Shariah that
prevent injustice in the acquisition
and disposal of material resources in
order to provide satisfaction to
human beings and enable them to
perform their obligations to Allah and
the society.

Features of Islamic Economy

System
Freedom of work and enterprise with
allowability constraint
An entrepreneur can produce only permitted
things, profit should be normal after giving
wages to the labourers in accordance with
Islamic principles.
Disallow monopoly and hoarding as social
evils.

Special concept of ownership trust

ownership (man as vice-gerant, to inherit/
own wealth from Allah)

Features of Islamic Economy

System
Kinds of ownership:
a) Private individual ownership
b) Communal such as water, canal and
graveyards
c) State ownership mines, rivers and land

State ownership basic economic

institutions may be brought under state
ownership if it is required to establish
social justice or protect the interests of
the community.

Features of Islamic Economy

System
Prohibition of interest requires a
total reorganisation of the economy,
banking, investment, exchange,
business and international trade.
Zakat compulsory on the wealth of
rich Muslims distributes wealth
between the rich and the poor of the
society, influences investments, savings
and allocation of income and resources.

Features of Islamic Economy

System
Concern for poor
Distribution of inheritance Islam
distributes inheritable property
among several groups of people
(children, husband/ wife, parents,
brothers and sisters in certain
situations.

Comparison with other

Economic System
Islamic economic system implies satisfying
the economic needs of the members of
organised society in accordance with AlQuran and Sunnah.
Abolition of interest
Prohibition of gambling in all its kinds
Abolition of unlawful contracts of exchange
Imposition of zakat
Imposition of other Quranic sources of
public revenue.

Merits of Islamic Economic

System
Democratic in nature giving authority to
individuals to get rewarded for their
productive efforts.
Provision of Basic Necessities of Life like
food, clothing, shelter and education to every
citizen.
Enforcement of Islamic Law Law of syariah
peace and financial stability.
Economic Justice provide equal chances of
employment and economic development to
all people.

Merits of Islamic Economic

System
Social Justice all citizen, rich or poor
should be equal before the eyes of law.
Courts should be honest to provide justice
to people.
Utilization of Resources for the
economic welfare of the people
Economic Freedom everybody is allowed
to adopt any profession or business
within the law and it is the duty of the
state to give them protection.

Merits of Islamic Economic

System
Establishment of Baitulmal revenue
and expenditure is through
Baitulmal.
Collection of zakat and Usher in
replacement of tax system.
Fair distribution of wealth Islam is
against the concentration of wealth
in few hands.

Demerits of Islamic Economic

System
Difficult to implement the economic
system based on the moral values.
Calculation of zakat and usher
cannot be verified. Escape from the
responsibility of zakat and usher is
easy.
Collaboration with other system is
not possible and difficult to
implement in non-Muslim societies.

How economic systems can

solve basic economic problems
Economic
Problems

Capitalism Centrally
Planned

Mixed
Economy

How Much
to
Produce?
What to
Produce?

Market

State

State/Marke
t

Market

State

State/Marke
t

How to
Produce?

Market

State

Market

To Whom
to
Produce?

Market

State

State/Marke
t

Examples of economic systems

Economic Examples
Systems
Capitalism US, Japan,
Germany
Centrally
Planned
Mixed
Economy

Most
developed
economies
North Korea, Communist
China
countries
Malaysia,
Singapore