162)
INTRODUCTION MICROECONOMICS
(ECO TO
MICROECONOMICS
LEARNING
OUTCOMES
At the end of this lesson, the students should
be able to:
i.
ii.
iii.
iv.
v.
Define economics and distinguish between
microeconomics and macroeconomics.
Describe basic economic concepts: Scarcity,
choices and opportunity cost.
Explain the basic economic problems.
Explain graphically basic economics concept
using PPC.
Distinguish the three types of economic
HISTORY ON DEFINITION OF
ECONOMICS
i.
ii.
iii.
iv.
Economics is a science that studies human behavior as a relationship
between ends and scarce means which have alternative uses
L.Robbins (1894-1984) .
Economics is a study of how people use their limited resources to try to
fulfill their unlimited wants and involves alternative or choices K.E.
Case and R.C. Fair.
Economics is the science of how a particular society solves its
economic problems Milton Friedman (1912)
Economics is the study of mans actions in the ordinary business of
life; it examines that part of individual and social action which is most
closely connected with the attainment and with the use of the material
requisites of well-being. Thus it is on one side a study of wealth and on
the other and more important side, a part of the study of man - Alfred
Marshall (1824-1924)
DEFINITION OF ECONOMICS
Economics is a social science study which
concern on how human being allocates the limited
resources in order to fulfill the unlimited needs
and demands.
Economic can be subdivided into two branch;
macroeconomic and microeconomic.
Microeconomic analyzes the specific economic units in
details such as households, firms and government.
Macroeconomics, on the other hand, analyzes the
aggregate behavior of the entire economy.
MICROECONOMICS
VS MACROECONOMICS
e
d w e or
ul
ho e ric
Sc
u
rod car?
p
GOVERNMENT
Build more
hospitals or
schools?
doing
mpact of
I
nal
internatio
trade.
HOUSEHOLDS
What shoul
dI
buy for lunc
h?
Price of sug
ar
increase!
shirts
Price of
ould
rease, sh
dec
re or
I buy mo
less?
OPEN ECONOMICS
How does
inflation oc
curs?
What is
the
unemplo
yment
ed
rate in M
luenc te
alaysia?
t inf
Wha terest ra
the in crease?
to de
FIRMS
ECONOMIC CONCEPTS
i.
.
.
ii.
.
Three main economic concepts involves;
Scarcity (land, labour, capital and enterprise)
Occurs as human wants are always greater than the
available resources.
The most important concept in economics. If there is no
scarcity, then there will be no economics study.
Choice
When scarcity exists, choices are to be made out of the
available alternatives.
iii.
Opportunity cost (Second Best-Forgone alternative)
.
The second-best alternative that has to be forgone for
ECONOMIC CONCEPTS
This economics concept is simple :
Because the resources are scarce, therefore choices
have to be made. Once choices are made, there will
be an opportunity cost as the value of the next-best
choice (alternative) available.
What is the opportunity cost by choosing to study at
university???
THREE BASIC ECONOMIC
PROBLEMS
What to produce?
P
What kind of product/services are going to be produces.
P
P
P
Depends on the type and quantity of goods and services
needed by the countries
How to produce?
What resources are going to be used, what techniques
are going to be used to produce.
Depends on the cheapest method of production (Labor
VS Machine).
For whom to produce?
How will nation distribute income to reduce the gap
PRODUCTION POSSIBILITIES CURVE
Since with scarcity problem,PPC)
( no country in this world can produce
unlimited numbers of goods.
Therefore, an economy will produce goods depending on various
combinations of factors of production.
PPC shows the various possible combination of goods and services
produced within a specified time period with given technology and
resources.
Assumptions to illustrate PPC includes;
i.
Full-employment
.
The economy is operating in full employment and full efficiency
ii.
Fixed resources
.
The amount of available economic resources or factor of production are
fixed
PRODUCTION POSSIBILITIES CURVE
Foods (Million units)
150
A
Y(Unattainable due to
scarcity)
B
120
90
60
30
C
ABCD: Attainable and Efficient
points (Choices)
X
(Attainable but inefficient:
Lead to
wastage/unemployment)
10
20
30
D
40
50
Figure units)
1.1 : Production Possibilities Curve
Clothes (Million
PRODUCTION POSSIBILITIES CURVE
i.
.
.
ii.
.
.
iii.
Point inside the PPC (Point X)
These combinations of foods and clothes are attainable and can be
produced.
However, it shows the resources are not fully utilized and the production
has not reached its maximum level.
Points Outside the PPC (Point Y)
This point which lies outside the PPC is unattainable due to limited
resources
Shows the concept of scarcity.
Points along the PPC (Point A, B, C and D)
.
Combination are attainable and efficient.
.
Shows the second basic economic concept of choices.
iv.
.
.
.
PRODUCTION POSSIBILITIES
Movement from one point to another point
CURVE
Illustrate the third basic economic concept of opportunity cost.
E.g. movement from point A to B
Point A (100 X, 50 Y) to Point B (50 X, 75 Y) : In order for this
country to produce an additional of 25 millions units of good Y, it has
to forgone 50 millions units of good X.
Good Y
B
75
A
50
50
Good
100
X
PRODUCTION POSSIBILITIES CURVE
v.
a)
b)
Shifts of the PPC
Outward shift (Increase in output): Due to improvement in the
new technology, increase in resources and technology, economy
growth and increase in population.
Inward Shift (Decrease in output) : Due to natural disaster,
reduction in factors of production and
Corn
Corn
Corn
vi.
.
.
PRODUCTION POSSIBILITIES
CURVE
Shape of the PPC
The shape of PPC depends on the types of opportunity
cost.
Opportunity cost is calculated based on how much one
good is forgone to obtain other good.
.
Basically, there are three types of opportunity cost;
i.
Increasing opportunity cost
ii.
Constant opportunity cost
iii.
Decreasing opportunity cost.
Production Possibilities Curve:
Increasing Opportunity Costcost means
Increasing opportunity
that when a country produces
more of one good, it has to
forgone more amounts of another
goods.
Good Y
6
5
4
2
Good X
1
2
3
4
Figure 1.2 : Increasing Opportunity Cost
Figure 1.2 shows that 1 unit
increase in Good X from 1 to 2
units had to forgone 1 unit of
Good Y.
Additional unit of Good X from 2 to
3 units involves 2 units of Good Y.
This
is
called
increasing
opportunity cost as more units of
Good Y are forgone for additional
unit of Good X.
PPC is concave due
increasing opportunity cost.
to
PRODUCTION POSSIBILITIESopportunity cost
CURVE:
Constant
A
means Cost
Constant Opportunitythat when a country
Good Y
6
produces more of one good, it
has to forgone the same
amounts of another goods.
B
4
C
2
D
2
4
Figure 1.3 : Constant Opportunity Cost
6
Good X
Figure 1.3 shows that same
amount of Good Y is forgone
for each additional unit of
Good X.
PPC is linear as
opportunity
cost
constant.
the
is
Decreasing
opportunity
PRODUCTION POSSIBILITIES cost
occurs when a country produces
Good Y
m Opportunity
CURVE: Decreasingore of one good, it has to
forgone lesser amounts of another
4A
Cost goods.
B
2
C
1
D
1
2
3
Figure 1.4 : Decreasing Opportunity Cost
Good X
Figure 1.4 shows that 1 unit
increase in Good X from point A to
B involves two units of Good Y
forgone.
An additional increase of Good X
from point B to C forgone 1 units
of Good Y and number of Good Y
forgone continues to decrease.
This
is
called
decreasing
opportunity cost as lesser units of
Goods Y are forgone for additional
unit of Good X.
PRODUCTION POSSIBILITIES
CURVE
i.
Apr 2010 (Part B, Q 2)
ii.
Apr 2006 (Part B, Q2)
ECONOMIC SYSTEMS
Economic system is a way of organizing the relationship
among individuals, firms and government to make
choices on the basic economic questions.
The three basic economic problems (what to produce,
how to produce and for whom to produce) are solved
depending on the economic system chosen by the
society.
Basically, there are four types of economic system
which have been practiced, namely;
i.
Capitalist economy system
ii.
Socialist economy system
iii.
Mixed economy system
i.
CAPITALIST MARKET SYSTEM
A capitalism is an economic system where individuals
without government intervention take all the main
economic decision.
Also known as market economy, free enterprise system
and laissez-faire.
This economy is characterized as economic freedom,
where an individual can act at their own wishes without
any control from the government.
The example of countries practicing the capitalist
economic system are the United States of America (USA),
France, Canada, Japan, and Britain.
CAPITALIST MARKET SYSTEM:
CHARACTERISTICS
i.
.
.
ii.
.
.
.
Government intervention
There is no intervention by the government in the making of
economic decisions.
Government only exist as the law enforcer and set the rules
and regulation to ensure the stability of economic condition
of the country.
Private ownership of resources
Every individual in the country has a right to acquire
resources.
This enable individual to own resources as well as to
establish any enterprise at their choices.
They are free to trade, invest and organize to produce within
CAPITALIST MARKET SYSTEM:
CHARACTERISTICS
iii.
.
.
iv.
.
.
Consumers sovereignty
Consumer is the king concept is practiced in this
system.
Consumers taste and preference will affect the
production of goods and services.
Competition
Market economy also characterized as highly
competitive among the producers to obtain the highest
profit.
In order to attract more customers, producers will use
various marketing strategies to sell their products better.
CAPITALIST MARKET
SYSTEM: CHARACTERISTICS
v.
.
.
.
Price System
Price system is a system used to make economic
decisions.
In this system, price mechanism is practiced. It means
that the price is determine according to the force of
demand and supply and without any intervention.
All economic processes of consumption, production,
exchange, savings, investment and distribution will
work according to this price mechanism and is labeled
as invisible hand by Adam Smith.
CAPITALIST MARKET
SYSTEM: ADVANTAGES
i.
.
ii.
.
.
iii.
Production
consumers
according
to
the
needs
of
Producers are producing goods and services
according to the tastes of consumers, which maximize
the consumers needs and satisfaction.
Economic freedom
It means the right to earn and retain property as well
as freedom of enterprises and choices of occupation.
Thus, it will lead to the sourcing of the countrys
manpower in different units of production.
Resources are efficiently utilized
CAPITALIST MARKET
SYSTEM: ADVANTAGES
iv.
.
.
v.
.
Varieties of consumer goods
Competition takes place in various aspects such as
shape, colour, design and packaging of the products.
Thus, consumer will enjoy a wide variety of the same
product.
Enhance trade, business and R&D
Entrepreneurs or producers will always look out for
new innovations to compete with other producers to
provide high quality goods.
CAPITALIST MARKET
SYSTEM: DISADVANTAGES
i.
.
.
ii.
.
.
Inequality of distribution of wealth and income
Since with no government intervention, the system property of
private widens the gap between the rich and
the poor.
Thus, this will lead to unequal distribution of income
among the societies.
Inflation and high unemployment rate
Disparity of demand and supply of labour occurs as it
is governed by the invisible hand
Unstable business fluctuation will cause
unemployment rate during the depression.
high
CAPITALIST MARKET
SYSTEM: DISADVANTAGES
iii.
.
iv.
.
.
Lack of social welfare
In market economy, social welfare is ignored as the
business entrepreneurs do not provide any pension,
social security or accident benefits to their employees.
Unnecessary variety and wasteful competition
Too much of competition will lead to unnecessary high
cost of production.
This happen as some producers will highly advertised
their products in order to attract consumer due to stiff
competition in this market system.
CAPITALIST MARKET
SYSTEM: DISADVANTAGES
v.
.
.
vi.
.
Misallocation of resources
In this system, producers objective is to maximize
profit and therefore only produce outputs which give
higher profits.
This will lead to production of luxury goods (for rich
people) and resulting surplus as well as lack of
production for the poor people.
Social cost
Workers may face social cost (health problem) arising
from the polluted environment caused by improper
disposal of factory wastes since producers' intention is
to increase the private profit and welfare of the
i.
.
HOW CAPITALIST MARKET
SYSTEM SOLVE BASIC
What to produce?
ECONOMIC PROBLEM on the
In this economic system, production depends
goods demanded by the consumer.
.
ii.
.
.
An entrepreneur will only produce goods and services
where there is demand from consumer in order to gain
higher profit.
How to produce?
Depends on the techniques of production whether to use
labor intensive, capital intensive or combination of both
techniques.
Cheapest method of production will be adapted not only
to maximize profit but also to achieve efficiency.
ii.
SOCIALIST MARKET SYSTEM
Socialist market system is a centrally planned economy
where government or central authority makes all economic
decision.
Any private individual has no right to make their own
economic decisions.
There will be no private property rights since all resources
are owned by government.
Also known as command economy and planned economy.
There are only few countries which practice this economic
system such as Russia, Cuba, Laos, Vietnam and North
Korea.
SOCIALIST MARKET SYSTEM:
CHARACTERISTICS
i.
.
.
ii.
.
.
Public ownership of resources
All resources are owned and operated by the state or
the government in the interest of society as a whole.
This is to ensure equal opportunity for all citizens
regardless of their income.
Central planning authority
Central Planning Authority acts as government and
responsible for making economic decision for the
society.
Government will plan and allocate the resources
between current consumption and investment for the
future.
SOCIALIST MARKET SYSTEM:
CHARACTERISTICS
iii.
.
.
.
iv.
.
Less importance of price mechanism
Market forces are less important in this economic
system.
Prices are fixed by the government and not determined
by the forces of demand and supply.
Private profits are not allowed and public interest is
emphasized.
Central control and ownership
Government intervenes in all aspect of economic
activities including production, consumption and
distribution of goods and services.
SOCIALIST MARKET
SYSTEM: ADVANTAGES
i.
.
.
ii.
.
.
Production according to the basic of society
Government produced goods and services according to the
societies basic needs such as foods, clothes and building
material.
Production is not by the purchasing power of rich society
but more concern on the society as a whole.
Equal distribution of income
There will be no difference between rich and poor as
this system provides equal opportunity for all citizens
in earning income.
Wealth is also equally distributed since private
enterprise are limited.
SOCIALIST MARKET
SYSTEM: ADVANTAGES
iv.
.
v.
.
.
No serious
inflation
unemployment/recession
or
Since the economy is taken fully care by the
government, there will be no serious economic
problems as the governments main objectives is to
maintain the stability of economic.
Social welfare
Government will provide all citizens of the country full
social security such as pensions, accident benefits
and others.
With all concerns from government, labor dispute and
wastage of resources do not exist in socialist system.
SOCIALIST MARKET
SYSTEM: DISADVANTAGES
i.
.
.
ii.
.
.
Lack of incentives
individuals
and
initiatives
by
There is absence of profit motive in individuals.
Thus, this will lead to economic inefficiency since jobs
are provided by the government and individuals are
not motivated to work harder.
Loss of economic freedom of consumers
There is no choice given to consumer and they accept
whatever the public enterprise produce.
Since with the limited number of private enterprises,
there are limited variety of goods and services as well
SOCIALIST MARKET
SYSTEM: DISADVANTAGES
iii.
.
.
iv.
.
.
Absence of competition
Since there are limited private enterprise exist in this
market system, there will be less R&D activities
occurs.
Thus, quality of products will be low since there is no
competition.
Waste of economic resources
Government might produce goods and services that
are not required by the people such as military
equipments.
This will lead to overproduction of certain goods and
i.
.
HOW SOCIALIST MARKET
SYSTEM SOLVE BASIC
What to produce?
ECONOMIC PROBLEM what
In this economic system, planning authorities decides
to produce.
.
ii.
.
The Central Planning Authority will collect detailed statistics
on the resources availability and fix up with national
priorities.
How to produce?
The Central Planning Authority will also decides on what
techniques to be used in the production of goods and
services.
.
The choice is between traditional or modern techniques.
iii.
For whom to produce?
iii.
MIXED MARKET SYSTEM
Mixed market system is an economic system
which has a mix of capitalist and socialist
systems to solve basic economic problems.
A mixed economy is where both public and
private sectors play their roles in the economy.
Most of the countries in the world practiced this
type of economic systems. This includes
Malaysia, Singapore, Thailand, Germany, South
Africa and many others.
MIXED MARKET SYSTEM:
CHARACTERISTICS
i.
Public and private ownership of resources
.
Private enterprise conduct business freely.
.
ii.
.
.
.
The government encourages private sectors by
providing infrastructure and facilities.
Price mechanism and economic plan used to make
economic decisions.
Price mechanism is used on pricing of goods and
services.
However, government will intervene in setting up prices
on certain commodities.
This includes sugar, oil, rice where government
MIXED MARKET SYSTEM:
CHARACTERISTICS
iii.
.
.
.
.
.
Government intervention
Government will not intervene in the economy except
for particular industries.
Government uses the legislation for unsafe goods,
categorized as illegal products such as military items,
drugs, etc.
Government also uses direct provision such as
education, defense and health to increase standard of
living.
Besides, government also control the income disparity
through income taxes and welfare payment.
MIXED MARKET SYSTEM:
ADVANTAGES
i.
.
ii.
.
.
iii.
.
More stable economics
Since there is a lot of government intervention, the
economic will be more organized. Thus, economic condition
will be more stable.
Lower social cost
Externalities such air, noise and water pollution will be lower
due to government intervention.
Thus, social cost will be lower as government enact laws to
ensure production methods used caused least harm to the
environment.
Narrow gap between rich and poor
MIXED MARKET SYSTEM:
ADVANTAGES
iv.
.
.
Social welfare
The government will provides public goods at an
affordable price in order to enable lower income
earners to benefit the public goods as well.
Government will ensure that public and private
enterprise provide all citizens of the country full social
security such as pensions, accident benefits and
others.
i.
.
HOW MIXED MARKET
SYSTEM SOLVE BASIC
What to produce?
ECONOMIC PROBLEM by the
In this economic system, what to produce decided
public and private sectors.
.
ii.
.
The goods and services produced depends on the
consideration of social welfare as well as economic growth.
How to produce?
The private sector will choose the most efficient and costeffective techniques of production (labor intensive vs.
capital intensive) while government will enact laws to
combat inefficiencies arising from externalities.
iii.
For whom to produce?
.
The distribution of goods and services is also decided by
iv.
ISLAMIC MARKET SYSTEM
Economic activities in Islam are not seen from the
materialistic aspect only but also the spiritual aspect in this
world and the life hereafter.
The only objective of the Islamic Economic System is to
achieve Al-Falah, which means success in ones life in the
world and also the life hereafter.
The basic philosophical foundation in the Islamic Economic
System includes;
a)
Tauhid
b)
Rububiyyah
c)
Tazkiyyah
d)
Khalifah
ISLAMIC MARKET SYSTEM:
PHILOSOPHICAL
a)
.
.
i.
The concept of Tauhid
The concept of believing that in Islam there is only one
God to be worshipped which is Allah SWT.
The belief of Tauhid is divided into two, namely;
The relationship
(Habluminallah)
between
man
and
Allah
ii.
The relationship among mankind (Habluminannas)
b)
SWT
The concept of Rububiyyah
.
.
The concept of believing that Allah SWT alone is the
creator and the most powerful.
He also gives bounties and organizes mans economies
ISLAMIC MARKET SYSTEM:
PHILOSOPHICAL
c)
.
.
.
.
d.
.
.
The concept of Tazkiyyah
The concept of purification of man.
Islam believes that before one indulges in any economic
activities, he must mould pure and good soul.
For example, one can purify his wealth by giving out tithe
(Zakat) and donating (Sedekah) to the poor.
When the wealth of the rich reaches a certain stated amount,
it must be levied with zakat, which aims to help the poor.
The concept of khalifah
The concept of vicegerent that man is the servant of Allah
SWT.
ISLAMIC MARKET SYSTEM:
PHILOSOPHICAL
e)
The concept of Ukhuwwah
.
The concept of brotherhood in Islam.
.
.
.
Islam believes that all men are brothers and they must
love and respect each other and be responsible.
Those who are willing to sacrifice for their brothers
show the sign of faith.
Oppression, extortion and miserliness do not exist in
the Islamic Economic System.
i.
.
HOW ISLAMIC MARKET
SYSTEM SOLVE BASIC
What to produce?
ECONOMIC what to produce are decided
PROBLEM
In this economic system,
through the principles of Syariah as been stated in Al-Quran
and As- sunnah.
.
ii.
.
The goods and services produced must be permissible
(halal) and in accordance with the classification of goods in
Islam.
How to produce?
The producer will choose the most efficient and cost
effective methods of production. (labor vs. capital intensive)
iii.
For whom to produce?
.
In distributing the goods and services, the need of the poor
END OF CHAPTER 1
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