MR.

MOHD SHAHIDAN BIN SHAARI
Lecturer of Economics School of business innovation and techno-preneurship UniMAP Bachelor’s in Economics Master’s in Economics

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 1

CHAPTER

1

INTRODUCTION TO MICROECONOMICS

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 2

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 second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 3

MICROECONOMICS VS. MACROECONOMICS

MICROECONOMICS
The study of individual parts of the economy such as public choices, business choices and personal choices.

MACROECONOMICS
The study of the economic system as a whole such as national income, trade cycle, unemployment rate, inflation and general price level.

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 4

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-andeffect 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 second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010 All Rights Reserved
Ch. 1: 5

SCARCITY

CHOICE

BASIC ECONOMIC CONCEPTS

OPPORTUNITY COST
Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010 All Rights Reserved
Ch. 1: 6

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.

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 7

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.

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 8

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

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 9

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 second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010 All Rights Reserved
Ch. 1: 10

PRODUCTION POSSIBILITIES CURVE (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.

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 11

PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)
Sewing Machine
If it allocates all its resources to sewing machine, it will produce at Point A. If it allocates all its resources to butter, it will produce at Point F.

16
14 12

A

The country Jaya, produces two products – butter and sewing machine.

C D

10
8 6

If the country Jaya is at Point C on the PPC, it can produce the combination of 2,000 kg butter and 12,000 units of sewing machine. Point D shows the production of 3,000 kg butter and 9,000 units of sewing machine.

4
2 0 1 2 3 4 5 F

Butter
All Rights Reserved
Ch. 1: 12

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)
Sewing Machine 16 14 12 10 8 6 ATTAINABLE
Point inside the PPC (Point Y)  Waste of resources and inefficiency Point outside the PPC (Point Z)  SCARCITY

A B Y UNATTAINABLE C D

Z
Any point along the PPC  CHOICES Movement from one point to another (point C to D)  OPPORTUNITY COST Movement from one point to another (point C to D)  OPPORTUNITY COST

4
2 0

E

F 1 2 3 4 5

Butter
All Rights Reserved
Ch. 1: 13

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

Factors that Influence the Shift of PPC 1. Economic Growth
Sewing Machine 16 14 12 10 8 6
When the country is struck by natural disasters, economic growth will decline and the PPC will shift to the left. When the country enjoys economic growth, the PPC bounds outward.

4
2 0
Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

1

2

3

4

5

Butter
All Rights Reserved
Ch. 1: 14

Factors that Influence the Shift of PPC 2. Improvements in Technology
Sewing Machine 16 14 12 10 8 6
Technology increases the production of butter.

Technology increases the production of sewing machine.

4
2 0
Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

1

2

3

4

5

Butter
All Rights Reserved
Ch. 1: 15

Factors that Influence the Shift of PPC 3. Population
Sewing Machine 16 14 12 10 8 6
Decrease in population Increase in population

4
2 0
Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

1

2

3

4

5

Butter
All Rights Reserved
Ch. 1: 16

Shape
Sewing Machine 16 14 12 10 8 6

of PPC
PPC IS CONCAVE

Increasing Opportunity Cost

4
2 0
Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

1

2

3

4

5

Butter
All Rights Reserved
Ch. 1: 17

Shape
Sewing Machine 16 14 12 10 8 6

of PPC (cont.)
PPC IS CONVEX

Decreasing Opportunity Cost

4
2 0
Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

1

2

3

4

5

Butter
All Rights Reserved
Ch. 1: 18

Shape

of PPC (cont.)
PPC IS LINEAR

Sewing Machine 16 14 12 10 8 6

Constant Opportunity Cost

4
2 0
Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

1

2

3

4

5

Butter
All Rights Reserved
Ch. 1: 19

ECONOMIC SYSTEM

TYPES OF ECONOMIC SYSTEM

CAPITALISM

SOCIALISM

MIXED ECONOMY

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 20

CHARACTERISTICS

CAPITALISM
 An economic system where individuals and sellers make
economic decisions using a price system

MERITS AND DEMERITS

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 21

CHARACTERISTICS

1. Private ownership of resources 2. Freedom of enterprise and choice 3. Consumers’ sovereignty 4. Competition 5. Government intervention 6. Price system
Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010 All Rights Reserved
Ch. 1: 22

MERITS
 Production according to

DEMERITS
 Inequality of distribution

consumers’ needs

of wealth and income
 Inflation and high  

 Economic freedom  Efficient utilization of 


 

resources Variety of consumer goods Enhanced trade, business and R&D Automatic incentives Flexibility


unemployment rate Lack of social welfare Wasteful competition Misallocation of resources Social cost

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 23

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 second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 24

CHARACTERISTICS

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 © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 25

MERITS
 Production according to

DEMERITS
 Lack of incentives and

basic need
 Equal distribution of

initiative by individuals
 Loss of economic

income and wealth  Better allocation of resources
 No serious unemployment

freedom and consumer sovereignty  Absence of competition
 Waste of economic

or inflation  Rapid economic development
 Social welfare

resources

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 26

CHARACTERISTICS

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

Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010

All Rights Reserved
Ch. 1: 27

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
Principles of Economics second edition © Oxford Fajar Sdn. Bhd. (008974-T) 2010 All Rights Reserved
Ch. 1: 28

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.