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All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 1– 1.

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Presentation on theme: "All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 1– 1."— Presentation transcript:

1 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 1

2 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 2 Introduction to Microeconomics 1 CHAPTER

3 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 3 DEFINITION OF ECONOMICS ‘Economics is a science that studies human behaviour as a relationship between ends and scarce means which have alternative uses.’ (L. Robbins)

4 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 4 ‘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). DEFINITION OF ECONOMICS (CON’T)

5 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 5 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. POSITIVE AND NORMATIVE ANALYSIS

6 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 6 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. POSITIVE AND NORMATIVE ANALYSIS (CON’T)

7 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 7 MICROECONOMICS VS MACROECONOMICS Analyzes specific economic units in detail such as households, firms and government. MICROECONOMICS Analyzes aggregate behaviour of the entire economy such as national income, trade cycle, and international trade. MACROECONOMICS

8 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 8 BASIC ECONOMIC CONCEPTS BASIC ECONOMIC CONCEPTS SCARCITY CHOICES OPPORTUNITY COST

9 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 9 1. SCARCITY One 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. BASIC ECONOMIC CONCEPTS (CON’T)

10 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – CHOICES When scarcity exists, choices are to be made. 3. OPPORTUNITY COST Opportunity cost is defined as the second best alternative that has to be foregone for another choice which gives more satisfaction. 10MICROECONOMICS BASIC ECONOMIC CONCEPTS (CON’T)

11 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 11 It is used to explain the basic economic concepts of scarcity, choices and opportunity cost. DEFINITION The PPC shows various possible combination of goods and services produced within a specified time with its resources fully and efficiently employed. PRODUCTION POSSIBILITIES CURVE (PPC)

12 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 12  Economy is in full employment and full production capacity (full efficiency).  Resources available are fixed and limited. ASSUMPTIONS OF PRODUCTION POSSIBILITIES CURVE (PPC)

13 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 13 THE ASSUMPTIONS OF PRODUCTION POSSIBILITIES CURVE (PPC) (CON’T) 3.The state of technology does not change throughout production. 4.It is assumed that the country is only producing two goods.

14 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 14 Consumer Goods (million) Defence Goods (million) PRODUCTION POSSIBILITIES CURVE (PPC) (CON’T) North Korea produces two products—defence goods and consumer goods If 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 goods Point D shows production of 90 million defence goods and 30 million units of consumer goods D C B E If it allocates its resources to defence goods, it will produce at Point A If it allocates its resources to consumer goods, it will produce at Point F A F

15 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 15 Point along the PPC  CHOICES Point outside the PPC (Point Z)  SCARCITY UNATTAINABLE PRODUCTION POSSIBILITIES CURVE (PPC) (CON’T) Movement from one point to another (point C to D)  OPPORTUNITY COST Defence Goods (million) Consumer Goods (million) F Z D C A B E Y ATTAINABLE Point inside the PPC (Point Y)  Waste of resources and inefficiency

16 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 16 Defence Goods (million) Consumer Goods (million) When the country enjoys economic growth, the PPC moves outward SHIFTS OF PPC DUE TO ECONOMIC GROWTH When the country is struck by natural disaster, economic growth will decline and PPC shifts to the left

17 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 17 Consumer Goods (million) Defence Goods (million) Technology increases production of defence goods Technology increases the production of consumer goods MICROECONOMICS SHIFTS OF PPC DUE TO IMPROVEMENT IN TECNOLOGY

18 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 18 Defence Goods (million) Consumer Goods (million) Decrease in Population Increase in population SHIFTS OF PPC DUE TO POPULATION

19 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 19 Good Y Good X Increasing Opportunity Cost A B C D CONCAVE SHAPE OF PPC CURVE

20 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 20 Good Y Good X Decreasing Opportunity Cost A B C D CONVEX SHAPE OF PPC CURVE (CON’T)

21 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 21 21MICROECONOMICS Good Y Good X Constant Opportunity Cost A B C D LINEAR SHAPE OF PPC CURVE (CON’T)

22 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 22 FUNDAMENTAL ECONOMIC QUESTIONS 1.WHAT TO PRODUCE ? Depends on the what type of goods and services to produce. 2HOW TO PRODUCE ? Depends on the cheapest method of production. 3. FOR WHOM TO PRODUCE ? Depends on the distribution of income

23 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 23 MARKET ECONOMY PLANNED ECONOMY MIXED ECONOMY ECONOMIC SYSTEMS TYPES OF ECONOMIC SYSTEMS

24 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 24 MARKET ECONOMY  Individuals and sellers make economic decisions using a price system. CHARACTERISTICS MERITS AND DEMERITS MARKET ECONOMY

25 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – Private ownership of resources 2. Freedom of enterprise and choice 3. Consumers’ sovereignty 4. Competition 5. Government intervention 6. Price system CHARACTERISTICS OF A MARKET ECONOMY

26 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 26 MERITS DEMERITS  Production according to consumers’ need  Economic freedom  Efficient utilization of resources  Variety of consumer goods  Enhanced trade, business and R&D  Automatic incentives  Flexibility  Inequality of distribution of wealth and income  Inflation and high unemployment rate  Lack of social welfare  Wasteful competition  Misallocation of resources  Social cost MERITS AND DEMERITS OF A MARKET ECONOMY

27 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 27 PLANNED ECONOMY  Economic decisions are made by the government or central authority. CHARACTERISTICS PLANNED ECONOMY MERITS AND DEMERITS

28 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – Public ownership of resources 2. Central planning authority 3. Price mechanism of lesser importance 4. Central control and ownership CHARACTERISTICS OF A PLANNED ECONOMY

29 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 29 MERITS DEMERITS  Production according to basic need  Equal distribution of income and wealth  Better allocation of resources  No serious unemployment or inflation  Rapid economic development  Social welfare  Lack of incentives and initiative by individuals  Loss of economic freedom and consumer sovereignty  Absence of competition  Waste of economic resources MERITS AND DEMERITS OF A PLANNED ECONOMY

30 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 30 MIXED ECONOMY  An economic system which combines both capitalism and socialism. CHARACTERISTICS MIXED ECONOMY

31 All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – Public and private ownership of resources 2. Price mechanism and economic plans in making decision 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 CHARACTERISTICS OF MIXED ECONOMY


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