Chapter 1

Principles of Economics second edition All Rights Reserved
Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 1: 1

CHAPTER 1
INTRODUCTION TO
MICROECONOMICS

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.

MICROECONOMICS VS.
MACROECONOMICS
MICROECONOMICS MACROECONOMICS
The study of The study of the

individual parts of the economic system as a
economy such as whole such as
public choices, national income, trade
business choices and cycle, unemployment
personal choices. rate, inflation and
general price level.

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.

SCARCITY CHOICE
BASIC ECONOMIC
CONCEPTS
OPPORTUNITY COST

BASIC ECONOMIC CONCEPTS
1. 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.

BASIC ECONOMIC CONCEPTS (cont.)
2. CHOICE
When scarcity exists, choices are to be
made.
3. OPPORTUNITY COST
Opportunity cost is defined as the second
best alternative that has to be forgone for
another choice which gives more satisfaction.

BASIC ECONOMIC PROBLEMS (cont.)
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

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.

(PPC) (cont.)
Assumptions:
1. The economy is operating in full

employment and full production capacity
(full efficiency).
2. The amount of resources available are fixed.
3. The state of technology does not change
throughout the production.

(PPC) (cont.)
If it allocates all its resources to sewing machine, it will produce at
Sewing Machine Point A.
If it allocates all its resources to butter, it will produce at Point F.
16
A
The country Jaya, produces two products butter and sewing
14 machine.
12 C
If the country Jaya is at Point C on
the PPC, it can produce the
10 D combination of 2,000 kg butter and
12,000 units of sewing machine.
8
Point D shows the production of
6 3,000 kg butter and 9,000 units of
sewing machine.
4
2
F
0 1 2 3 4 5 Butter

(PPC) (cont.)
Point outside the PPC

Sewing Machine
(Point Z) SCARCITY
16 Z
A
Any point along the
14 B UNATTAINABLE PPC CHOICES
12 Y C Movement from one

point to another (point
10 C to D)
D OPPORTUNITY
8 COST
ATTAINABLE Movement from one
point to another (point
6 Point inside the PPC C to D)
(Point Y) Waste of E OPPORTUNITY
4 resources and inefficiency COST
2
F
0 1 2 3 4 5 Butter

Factors that Influence the Shift of PPC
1. Economic Growth
Sewing Machine
16
14
When the country
enjoys economic
12 growth, the PPC bounds
outward.
10
8
When the country is
6
struck by natural
disasters, economic
4 growth will decline and
2 the PPC will shift to the
left.
Butter
0 1 2 3 4 5
2. Improvements in Technology
Sewing Machine
16
Technology increases
the production of
14 sewing machine.
12
10
Technology increases
8
the production of
butter.
6
4
2
0 Butter
1 2 3 4 5
3. Population
Sewing Machine
16
14
Increase in population
12
10
8
Decrease in population
6
4
2
0 Butter
1 2 3 4 5
Shape of PPC
Sewing Machine PPC IS CONCAVE

16
14
12
Increasing Opportunity
10 Cost
4
2
Butter
0 1 2 3 4 5
Shape of PPC (cont.)
Sewing Machine
PPC IS CONVEX
16
14
12
10
Decreasing Opportunity
8 Cost
4
2
Butter
0 1 2 3 4 5
Shape of PPC (cont.)
Sewing Machine
PPC IS LINEAR
16
14
12
10
Constant Opportunity
Cost
8
4
2
Butter
0 1 2 3 4 5
ECONOMIC SYSTEM
TYPES OF ECONOMIC SYSTEM
CAPITALISM MIXED
SOCIALISM
ECONOMY

CHARACTERISTICS
CAPITALISM
An economic system where individuals and sellers make
economic decisions using a price system
MERITS AND DEMERITS

CHARACTERISTICS
1. Private ownership of resources
2. Freedom of enterprise and choice
3. Consumers sovereignty
4. Competition
5. Government intervention
6. Price system

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 goods Wasteful competition
Enhanced trade, business Misallocation of
and R&D resources
Automatic incentives Social cost
Flexibility

CHARACTERISTICS
SOCIALISM
An economic system where all the economic decisions are
made by the government or a central authority
MERITS AND DEMERITS

CHARACTERISTICS
1. Public ownership of resources
2. Central planning authority
3. Price mechanism of lesser importance
4. Central control and ownership

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

CHARACTERISTICS
MIXED ECONOMY
An economic system which combines both capitalism and
socialism

CHARACTERISTICS
1. Public and private ownership of resources

2. Price mechanism and economic plans in
making decisions
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


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Principles of Economics second edition All Rights Reserved

Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 1: 1

Principles of Economics second edition All Rights Reserved

Economics is a science which studies human

Principles of Economics second edition All Rights Reserved

The study of The study of the

Principles of Economics second edition All Rights Reserved

A positive analysis is to deal with the question

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

3. FOR WHOM TO PRODUCE?

Principles of Economics second edition All Rights Reserved

Used to explain the basic economic

Principles of Economics second edition All Rights Reserved

1. The economy is operating in full

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Point outside the PPC

12 Y C Movement from one

Principles of Economics second edition All Rights Reserved

Sewing Machine PPC IS CONCAVE

TYPES OF ECONOMIC SYSTEM

Principles of Economics second edition All Rights Reserved

MERITS AND DEMERITS

Principles of Economics second edition All Rights Reserved

1. Private ownership of resources

2. Freedom of enterprise and choice

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

MERITS AND DEMERITS

Principles of Economics second edition All Rights Reserved

1. Public ownership of resources

2. Central planning authority

3. Price mechanism of lesser importance

4. Central control and ownership

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

1. Public and private ownership of resources

Principles of Economics second edition All Rights Reserved

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