Introduction to Microeconomics Concepts

Microeconomics All Rights Reserved
© 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
(CON’T)

‘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 (CON’T)
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 MACROECONOMICS

Analyzes specific Analyzes aggregate
economic units in detail behaviour of the entire
such as households, economy such as
firms and government. national income, trade
cycle, and international
trade .

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BASIC ECONOMIC CONCEPTS

SCARCITY
SCARCITY CHOICES
CHOICES
BASIC
ECONOMIC
CONCEPTS

OPPORTUNITY COST
OPPORTUNITY COST

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BASIC ECONOMIC CONCEPTS
(CON’T)

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.
© Oxford University Press Malaysia, 2008 MICROECONOMICS 10 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
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
CURVE (PPC) (CON’T)

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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Defence Goods (million)
North Korea If it allocates its resources to
produces two defence goods, it will produce at
products—defence Point A
A goods and
If it allocates its resources to
150 B consumer goods
consumer goods, it will produce at
Point F
C
120 If North Korea is at point C on the
D PPC, it can produce the
90 combination of 120 million defence
goods and 20 million units of
E consumer goods
60
Point D shows production of 90
30 million defence goods and 30
F million units of consumer goods
Consumer Goods (million)
0 10 20 30 40 50
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Point outside the PPC
Z (Point Z)  SCARCITY
150 A
B UNATTAINABLE
Point along the PPC 
C
120 Y CHOICES

D
90 Movement from one point
ATTAINABLE to another (point C to D)
 OPPORTUNITY COST
60 Point inside the PPC (Point E
Y)  Waste of resources
30 and inefficiency

F
0 10 20 30 40 50
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SHIFTS OF PPC DUE TO
ECONOMIC GROWTH

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

90
When the country
is struck by natural
60 disaster, economic
growth will decline
30 and PPC shifts to
the left
0 10 20 30 40 50

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IMPROVEMENT IN TECNOLOGY
160 Technology increases
150 production of defence
goods

120

90 Technology increases
the production of
consumer goods
60

30

0 10 20 30 40 50
1–

POPULATION

160
150
Increase in population
120

90

60 Decrease in
Population
30

0 10 20 30 40 50

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CONCAVE SHAPE OF PPC
CURVE
Good Y

A
6
B
5 Increasing
Opportunity Cost
4
C
3

2

1
D
0 Good X
1 2 3
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CONVEX SHAPE OF PPC CURVE
(CON’T)
Good Y

6 A

5

Decreasing
4
Opportunity Cost
B
3

2
C
1
D
Good X
0
1 2 3

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LINEAR SHAPE OF PPC CURVE
(CON’T)
Good Y

6 A

5
B Constant Opportunity
4
Cost
3
C
2

1
D
Good X
0 1 2 3

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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 PLANNED
PLANNED MIXED
MIXED
ECONOMY
ECONOMY ECONOMY
ECONOMY 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 DEMERITS
 Production according to  Inequality of distribution
consumers’ need of wealth and income
 Economic freedom  Inflation and high
 Efficient utilization of unemployment rate
resources  Lack of social welfare
 Variety of consumer goods
 Enhanced trade, business
 Wasteful competition
and R&D  Misallocation of
 Automatic incentives resources
 Flexibility  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 DEMERITS
 Production according to  Lack of incentives and
basic need initiative by individuals
 Equal distribution of income  Loss of economic
and wealth freedom and consumer
 Better allocation of resources sovereignty
 No serious unemployment or  Absence of competition
inflation  Waste of economic
 Rapid economic resources
development
 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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Introduction to Microeconomics Concepts

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