Introduction To Microeconomics PDF

CHAPTER 1 INTRODUCTION TO MICROECONOMICS 1– 1  INTRODUCTION  This chapter gives a brief description of economics in general. Several economic concepts and terms, such as scarcity, choice, and opportunity cost, will be introduced. Besides th...

CHAPTER 1 INTRODUCTION TO MICROECONOMICS 1– 1  INTRODUCTION  This chapter gives a brief description of economics in general. Several economic concepts and terms, such as scarcity, choice, and opportunity cost, will be introduced. Besides that, we will discuss the major problems and issues that economics attempt to address. 1– 2  DEFINITION OF ECONOMICS... The word economy comes from a Greek word for “one who manages a household.”  Economics is a study of how people use their limited resources to try to fulfil unlimited wants and involves alternatives or choices. 1– 3  FIELD OF ECONOMICS MICROECONOMICS MACROECONOMICS -The study of individual - The study of the parts of the economy, economic system as a such as public choices, whole, such as business choices and national income, trade personal choices. cycle, unemployment -also discusses how the rate, inflation and prices of good and general price level. factors of production, wages, rent, and interest rate are determined. 1– 4  ECONOMICS RESOURCES & FACTORS Land Labour -a naturally occurring resource (free gift -Skilled and unskilled labour of nature) -Contribute physically and mentally -supply of land is fixed in terms of -Only offer their services. location and geography -Labour is mobile The value of land is dependent on quality -Different from each other in term of efficiency and location and productivity Return of land is ………….. The return of labour is……. Capital Entrepreneur -consists of asset such as money, equipment, machinery and raw material used in production. -The person with the ability and skill to organise production and bear risks -Capital is mobile - Entrepreneur plans, leads, coordinates -Can be increased and decreased and control the activities of a firm -The returm for capital is…… --The return for entrepreneur is….. 1– 5 © 2011 Cengage South-Western  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 b) Capital goods -To produce other goods – machinery, factory 1– 6 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. 1– 7 3)PUBLIC GOODS  Owned by the government, paid from tax payers‟ money e.g. public road, powerhouses.  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 1– 8  BASIC ECONOMIC CONCEPTS SCARCITY CHOICE BASIC ECONOMIC CONCEPTS OPPORTUNITY COST 1– 9  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. 1– 10  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. 1– 11  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. 1– 12  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. 1– 13  BASIC ECONOMIC PROBLEMS 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 1– 14  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. 1– 15  PRODUCTION POSSIBILITIES CURVE (PPC) (cont.) Assumptions: 1. There are only two goods. 2. The economy is operating in full employment and full production capacity (full efficiency). 3. The amount of resources available are fixed. 4. The state of technology does not change throughout the production. 1– 16  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 MILK POWDER BOTTLE POSSIBILITY (‘000 KG) MACHINE (UNIT) A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5 1– 17 Milk powder („000kg) Bottle Machine 1– 18  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. 1– 19  PRODUCTION POSSIBILITIES CURVE (PPC) (cont.) Sewing Machine (‘000 units) The country Jaya, produces two products – butter and sewing machine. 16 A If it allocates all its resources to sewing machine, it will produce at Point A. 14 If it allocates all its resources to butter, it will 12 C produce at Point F. If the country Jaya is at Point C 10 D on the PPC, it can produce the combination of 2,000 kg butter 8 and 12,000 units of sewing machine. 6 Point D shows the production of 4 3,000 kg butter and 9,000 units of sewing machine. 2 F 0 1 2 3 4 5 Butter (‘000 kg) 1– 20  PRODUCTION POSSIBILITIES CURVE (PPC) (cont.) Sewing Machine (‘000 units) 16 Z A B UNATTAINABLE Point outside the PPC 14 (Point Z)  SCARCITY C 12 Y Any point along the PPC  CHOICES 10 D 8 Movement from one point ATTAINABLE to another (point C to D)  OPPORTUNITY COST 6 Point inside the PPC (Point Y)  Waste E 4 of resources and inefficiency 2 F 0 Butter (‘000 kg) 1 2 3 4 5 1– 21  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. 1– 22  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. 1– 23  FACTORS THAT INFLUENCE THE SHIFT OF PPC Sewing Machine 1. Economic Growth 16 When the country 14 enjoys economic growth, the PPC 12 bounds outward. 10 8 When the country 6 is struck by natural disasters, economic 4 growth will decline and the PPC will 2 shift to the left. Butter 0 1 2 3 4 5 1– 24  FACTORS THAT INFLUENCE THE SHIFT OF PPC (cont.) Sewing Machine 2. Improvements in Technology 16 Technology increases the 14 production of sewing machine. 12 Technology increases the 10 production of butter. 8 6 4 2 0 Butter 1 2 3 4 5 1– 25  FACTORS THAT INFLUENCE THE SHIFT OF PPC (cont.) Sewing Machine 3. Population 16 14 Increase in population 12 10 8 Decrease in 6 population 4 2 0 Butter 1 2 3 4 5 1– 26 1– 27