1. Principles of Microeconomics

2. 2
INTRODUCTION TO ECONOMICSINTRODUCTION TO ECONOMICS
CHAPTER 1

3. . . . The word economy comes from a Greek
word for “one who manages a household.”
• The study of how scarce, or limited, resources
are used to satisfy unlimited wants and needs.
• The study of how people make decision in a
world of scarcity.
Economy. . .

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ECONOMICS RESOURCES & FACTORS
© 2011 Cengage South-Western

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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

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• Capital goods
-To produce other goods – machinery, factory
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, light house.
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,highway

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SUMMARY
ECONOMICS
GOODS
FREE GOODS PUBLIC GOODS
SUPPLY Private sector Nature Government
PRICE/COST √ X X
OPPORTUNITY
COST
√ X √
EXAMPLE

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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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PRODUCTION POSSIBILITIES CURVE (PPC)
• PPC is used to explain scarcity, choice and opportunity cost.
• PPC shows the various possible combinations of goods
produces within a specific time with given resources and
technology.
• Assumption of PPC:
1) There are only two goods.
2) Factors of production cannot be further increased.
3)Level of technology is fixed and stagnant.
4)The economy has achieved maximum efficiency (full
employment)

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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
POSSIBILITY
MILK POWDER
(‘000 KG)
BOTTLE
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
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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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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