2Introduction to Microeconomics CHAPTER1Introduction to Microeconomics
3DEFINITION OF ECONOMICS ‘Economics is a science that studies human behaviour as a relationship between ends and scarce means which have alternative uses.’ (L. Robbins)
4DEFINITION OF ECONOMICS (CON’T) ‘Economics is a study of how people use their limited resources to try to fulfill unlimited wants and involves alternatives or choices’ (K.E. Case and R.C. Fair).
5POSITIVE AND NORMATIVE ANALYSIS A positive statement deals with the question of ‘what is’ and there no indication of approval or disapproval. Positive analysis focuses on facts and the cause-and-effect relationships.
6POSITIVE AND NORMATIVE ANALYSIS (CON’T) A normative statement deals with the question of ‘what ought to be’. Normative analysis incorporates value and judgments about what the economy should be or what policy should be used to achieve economic goals.
7MICROECONOMICS VS MACROECONOMICS Analyzes specific economic units in detail such as households, firms and government.Analyzes aggregate behaviour of the entire economy such as national income, trade cycle, and internationaltrade .
9BASIC ECONOMIC CONCEPTS (CON’T) 1. SCARCITYOne of the most important concepts in economics is scarcity.Scarcity is defined as human wants and are always greater than available resources.Scarcity is a universal problem faced by the poor and rich nations in order to fulfill their needs.
10BASIC ECONOMIC CONCEPTS (CON’T) 2. CHOICESWhen scarcity exists, choices are to be made.3. OPPORTUNITY COSTOpportunity cost is defined as the second best alternative that has to be foregone for another choice which gives more satisfaction.MICROECONOMICS
11PRODUCTION POSSIBILITIES CURVE (PPC) It is used to explain the basic economic concepts of scarcity, choices and opportunity cost.DEFINITIONThe PPC shows various possible combination of goods and services produced within a specified time with its resources fully and efficiently employed.
12ASSUMPTIONS OF PRODUCTION POSSIBILITIES CURVE (PPC) Economy is in full employment and full production capacity (full efficiency).Resources available are fixed and limited.
13THE ASSUMPTIONS OF PRODUCTION POSSIBILITIES CURVE (PPC) (CON’T) The state of technology does not change throughout production.It is assumed that the country is only producing two goods.
14PRODUCTION POSSIBILITIES CURVE (PPC) (CON’T) Consumer Goods (million)Defence Goods (million)If it allocates its resources to defence goods, it will produce at Point AIf it allocates its resources to consumer goods, it will produce at Point FAFNorth Korea produces two products—defence goods and consumer goods40501020309060120150If North Korea is at point C on the PPC, it can produce the combination of 120 million defence goods and 20 million units of consumer goodsPoint D shows production of 90 million defence goods and 30 million units of consumer goodsDCBE
15PRODUCTION POSSIBILITIES CURVE (PPC) (CON’T) Defence Goods (million)Consumer Goods (million)Point outside the PPC (Point Z) SCARCITYFZDCABE12040605030901501020YUNATTAINABLEPoint along the PPC CHOICESMovement from one point to another (point C to D) OPPORTUNITY COSTATTAINABLEPoint inside the PPC (Point Y) Waste of resources and inefficiency
16SHIFTS OF PPC DUE TO ECONOMIC GROWTH Defence Goods (million)Consumer Goods (million)12040605030901501601020When the country enjoys economic growth, the PPC moves outwardWhen the country is struck by natural disaster, economic growth will decline and PPC shifts to the left
17SHIFTS OF PPC DUE TO IMPROVEMENT IN TECNOLOGY Consumer Goods (million)Defence Goods (million)40501020301206090150160Technology increases production of defence goodsTechnology increases the production of consumer goodsMICROECONOMICS
18SHIFTS OF PPC DUE TO POPULATION Defence Goods (million)Consumer Goods (million)40501206030901501601020Increase in populationDecrease in Population
19CONCAVE SHAPE OF PPC CURVE Good YGood X421356ABCDIncreasing Opportunity Cost
20CONVEX SHAPE OF PPC CURVE (CON’T) Good YGood X123456ABCDDecreasing Opportunity Cost
21LINEAR SHAPE OF PPC CURVE (CON’T) Good YGood X421356ABCDConstant Opportunity CostMICROECONOMICS
22FUNDAMENTAL ECONOMIC QUESTIONS 1. WHAT TO PRODUCE ?Depends on the what type of goods and services to produce.2 HOW TO PRODUCE ?Depends on the cheapest method of production. 3. FOR WHOM TO PRODUCE ?Depends on the distribution of income
23TYPES OF ECONOMIC SYSTEMS MARKET ECONOMYPLANNED ECONOMYMIXED ECONOMY
24MARKET ECONOMY MARKET ECONOMY CHARACTERISTICS MERITS AND DEMERITS Individuals and sellers make economic decisions using a price system.MERITS AND DEMERITS
25CHARACTERISTICS OF A MARKET ECONOMY Private ownership of resourcesFreedom of enterprise and choiceConsumers’ sovereigntyCompetitionGovernment interventionPrice system
26MERITS AND DEMERITS OF A MARKET ECONOMY Production according to consumers’ needEconomic freedomEfficient utilization of resourcesVariety of consumer goodsEnhanced trade, business and R&DAutomatic incentivesFlexibilityInequality of distribution of wealth and incomeInflation and high unemployment rateLack of social welfareWasteful competitionMisallocation of resourcesSocial cost
27 Economic decisions are made by the government or central authority. PLANNED ECONOMYCHARACTERISTICSPLANNED ECONOMY Economic decisions are made by the government or central authority.MERITS AND DEMERITS
28CHARACTERISTICS OF A PLANNED ECONOMY Public ownership of resourcesCentral planning authorityPrice mechanism of lesser importanceCentral control and ownership
29MERITS AND DEMERITS OF A PLANNED ECONOMY Production according to basic needEqual distribution of income and wealthBetter allocation of resourcesNo serious unemployment or inflationRapid economic developmentSocial welfareLack of incentives and initiative by individualsLoss of economic freedom and consumer sovereigntyAbsence of competitionWaste of economic resources
30An economic system which combines both capitalism and socialism. MIXED ECONOMYCHARACTERISTICSMIXED ECONOMYAn economic system which combines both capitalism and socialism.
31CHARACTERISTICS OF MIXED ECONOMY Public and private ownership of resourcesPrice mechanism and economic plans in making decisionGovernment helps to control income disparityGovernment intervention in the economyCo-operation between the government, public and business sectorsGovernment control of monopolies