Principle Econ chapter 1

MR. MOHD SHAHIDAN BIN SHAARI Lecturer of Economics School of business innovation and techno-preneurship UniMAP Bachelor’s in Economics Master’s in Economics

Principles of Economics

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CHAPTER

1

INTRODUCTION TO MICROECONOMICS


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DEFINITION OF ECONOMICS Economics is a science which studies human behaviours as a relationship between ends and scarce which have alternative uses.

OR 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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MICROECONOMICS VS. MACROECONOMICS

MICROECONOMICS

MACROECONOMICS

The study of individual parts of parts of the economy such as public choices, business choices and personal choices.

The study of the economic system as a such as whole such whole national income, trade cycle, unemployment rate, inflation and general price level.


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POSITIVE VS. NORMA NORMATIVE TIVE ANALYSIS ANALYSIS A positive analysis is to deal with the question of “what is” and no indication of approval or disapproval. It focuses on facts and cause-andeffect relationships.

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A normative analysis is to deal with the question of “what ought to be”. It incorporates value judgements about what the economy should be or what policy should be used to achieve economic goals.

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SCARCITY

CHOICE

BASIC ECONOMIC CONCEPTS

OPPORTUNITY COST


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BASIC ECONOMIC CONCEPTS 1. SCARCITY 

One of the important concepts in economics is scarcity.

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Scarcity is defined as wants always exceed limited resources to satisfy them.

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Scarcity is a universal problem faced by poor as well as rich nations in order or der to fulfil their needs.


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BASIC ECONOMIC CONCEPTS (cont.)

2. CHOICE  When scarcity exists, choices are to be made. 3. OPPORTUNITY COST the second  Opportunity cost is defined as the second best alternative that alternative that has to be forgone for another choice which gives more satisfaction.


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BASIC ECONOMIC PROBLEMS

(cont.)

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. Principles of Economics

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PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)

Assumptions: 1. The economy is operating in full employment and full production capacity (full efficiency). 2. The amount of resources available are fixed. 3. The state of technology does not change throughout the production.


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PRODUCTION POSSIBILITIES CURVE (PPC) (cont.) Sewing Machine 16

If it allocates all its resources resources to sewing machine, machine, it will produce produce at Point A. If it allocates all its resources to butter, it will produce at Point F.

A The country Jaya, produces two products – butter and sewing machine.

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If the country Jaya is at Point C on the PPC, it can produce the combination of 2,000 kg butter and 12,000 units of sewing machine.

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Point D shows the production of 3,000 kg butter and 9,000 units of sewing machine.

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Butter All Rights Reserved

PRODUCTION POSSIBILITIES CURVE (PPC) (cont.) Point outside the PPC (Point Z)  SCARCITY

Sewing Machine 16 14 12

Z A B

UNATTAINABLE

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Any point along the PPC  CHOICES Movement from one point to another (point C to D)  OPPORTUNITY COST Movement from one point to another (point C to D)  OPPORTUNITY COST

D ATTAINABLE Point inside the PPC (Point Y)  Waste of resources and inefficiency

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Factors that Influence the Shift of PPC 1. Economic Growth Sewing Machine 16 14

When the country enjoys economic growth, the PPC bounds outward.

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When the country is struck by natural disasters, economic growth will decline and the PPC will shift to the left.

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Factors that Influence the Shift of PPC 2. Improvements in Technology Sewing Machine 16 Technology increases the production of sewing machine.

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Technology increases the production of butter.

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Factors that Influence the Shift of PPC 3. Population Sewing Machine 16 14

Increase in population

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Decrease in population

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of PPC

Shape

PPC IS CONCAVE

Sewing Machine 16 14 12

Increasing Opportunity Cost

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of PPC (cont.)

Shape Sewing Machine

PPC IS CONVEX

16 14 12 10 Decreasing Opportunity Cost


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Shape

of PPC (cont.)

Sewing Machine

PPC IS LINEAR

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Constant Opportunity Cost


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ECONOMIC SYSTEM

TYPES OF ECONOMIC SYSTEM

CAPITALISM


SOCIALISM

MIXED ECONOMY

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CHARACTERISTICS

CAPITALISM 

An economic system where individuals and sellers make economic decisions using a price system

MERITS AND DEMERITS


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CHARACTERISTICS

1. Private ownership of resources 2. Freedom of enterprise and choice 3. Consumers’ sovereignty 4. Competition 5. Government intervention 6. Price system Principles of Economics

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DEMERITS

MERITS 

Production according to

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Inequality of distribution of wealth and income

consumers’ needs 

Economic freedom

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Efficient utilization of resources

Inflation and high unemployment rate

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Lack of social welfare

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Variety of consumer goods

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Wasteful competition

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Enhanced trade, business and R&D

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Misallocation of resources

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Social cost

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Automatic incentives Flexibility


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CHARACTERISTICS

SOCIALISM 

An economic system where all the economic decisions are made by the government or a central authority

MERITS AND DEMERITS


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CHARACTERISTICS

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

DEMERITS

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Production according to basic need

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Lack of incentives and initiative by individuals

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Equal distribution of income and wealth

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Better allocation of resources

Loss of economic freedom and consumer sovereignty

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Absence of competition

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No serious unemployment or inflation

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Rapid economic development

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Social welfare


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Waste of economic resources

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CHARACTERISTICS

MIXED ECONOMY 


An economic system which combines both capitalism capital ism and socialism

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CHARACTERISTICS 1. Public and private ownership of resources 2. Price mechanism and economic plans in

making decisions 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 Principles of Economics

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Principle Econ chapter 1

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