Chapter 1 Introduction to Microeconomics Principles of Economics PDF

CHAPTER 1 INTRODUCTION TO MICROECONOMICS PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1–...

CHAPTER 1 INTRODUCTION TO MICROECONOMICS PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  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. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  MICROECONOMICS VS. MACROECONOMICS MICROECONOMICS MACROECONOMICS The study of individual parts The study of the economic of the economy, such as system as a whole, such as public choices, business national income, trade choices and personal cycle, unemployment rate, choices. inflation and general price level. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  POSITIVE VS. NORMATIVE 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-and- effect relationships. 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. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  SCARCITY CHOICE BASIC ECONOMIC OPPORTUNITY CONCEPTS COST PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  BASIC ECONOMIC CONCEPTS SCARCITY – One of the important concepts in economics is scarcity. – Scarcity is defined as wants always exceed limited resources to satisfy them. – Scarcity is a universal problem faced by poor as well as rich nations in order to fulfil their needs. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  BASIC ECONOMIC CONCEPTS (cont.) CHOICE – When scarcity exists, choices are to be made. OPPORTUNITY COST – Opportunity cost is defined as the second best alternative that has to be forgone for another choice which gives more satisfaction. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  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 Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  PRODUCTION POSSIBILITIES CURVE (PPC) (cont.) Assumptions: The economy is operating in full employment and full production capacity (full efficiency). The amount of resources available are fixed. The state of technology does not change throughout the production. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  PRODUCTION POSSIBILITIES CURVE (PPC) (cont.) Sewing If it allocates all its resources to sewing machine, it Machine will produce at Point A. 16 A If it allocates all its resources to butter, it will 14 produce at Point F. The country Jaya, produces two products – 12 C butter and sewing machine. 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 2 of sewing machine. F 0 1 2 3 4 5 Butter PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  PRODUCTION POSSIBILITIES CURVE (PPC) (cont.) Sewing Machine 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 ATTAINABLE 6 Point inside the PPC (Point Y) Waste E 4 of resources and 2 inefficiency F 0 1 2 3 4 5 Butter PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  FACTORS THAT INFLUENCE THE SHIFT OF PPC Sewing 1. Econo Machine mic 16 Growth When the country 14 enjoys economic growth, the PPC 12 bounds outward. 10 8 When the country is 6 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 PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  FACTORS THAT INFLUENCE THE SHIFT OF PPC (cont.) Sewing 2. Improvements Machine 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 PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  FACTORS THAT INFLUENCE THE SHIFT OF PPC (cont.) Sewing 3. Population Machine 16 14 Increase in population 12 10 8 Decrease in 6 population 4 2 0 Butter 1 2 3 4 5 PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  ECONOMIC SYSTEM MIXED ISLAMIC ECONOMY SOCIALISM CAPITALISM ECONOMY PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  CHARACTERISTICS CAPITALISM →An economic system where individuals and sellers make economic decisions using a price system MERITS AND DEMERITS PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  CHARACTERISTICS Private ownership of resources Freedom of enterprise and choice Consumers’ sovereignty Competition Government intervention Price system PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  MERITS DEMERITS Production according to Inequality of distribution consumers’ needs of wealth and income Economic freedom Inflation and high Efficient utilization of unemployment rate resources Lack of social welfare Variety of consumer Wasteful competition goods Misallocation of Enhanced trade, business resources and R&D Social cost Automatic incentives Flexibility PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  CHARACTERISTICS SOCIALISM →An economic system where all the economic decisions are made by the government or a central authority MERITS AND DEMERITS PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  CHARACTERISTICS Public ownership of resources Central planning authority Price mechanism of lesser importance Central control and ownership PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  MERITS DEMERITS Production according to Lack of incentives and basic need initiative by individuals Equal distribution of Loss of economic income and wealth freedom and consumer Better allocation of sovereignty resources Absence of competition No serious unemployment Waste of economic or inflation resources Rapid economic development Social welfare PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  CHARACTERISTICS MIXED ECONOMY →An economic system which combines both capitalism and socialism PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  CHARACTERISTICS The public and private sectors working hand in hand. The public sector is to provide the infrastructure The government will try to reduce income inequality by imposing a progressive tax system The government will also control the existence of monopolies and regulate the power of monopolists. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  CHARACTERISTICS ISLAMIC ECONOMY →An economic system which combines both capitalism and socialism and follows the principles of Syariah PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0  CHARACTERISTICS Public and private ownership of resources owned by God Price mechanism and limited government intervention Distribution of wealth Prohibition of interest Freedom of economic enterprise PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 0