You are on page 1of 17

FACULTY OF BUSINESS & MANAGEMENT

SEMESTER 3

BBEK1103

PRINCIPLES OF MICROECONOMICS

MATRICULATION NO IDENTITY CARD NO. TELEPHONE NO. : E-MAIL :

: :

LEARNING CENTRE

:

1.1 What to Produce? 1.1 Limited resources 1.2 How should it be produced? 1.0 Introduction Page Number 2 2 2 2 3 3 3 3 4 4 5 5 6 6 6 7 8 9 9 11 11 11 10 11 1.3.BBEK1103 PRINCIPLES OF MICROECONOMICS Table of Content 1.4 Economic systems in the world 1.2 How should it be produced? 2.2 Strengths of Centrally-planned Economic System 2.1 Traditional Economic System 1.2 Choice and Opportunities 1.3.1 The Centrally-planned Economic of North Korea 2.0 Tables of Comparison 4.4.2.2. 2.3 The weaknesses of Centrally-planned Economic system.2.1.2.1 What to produce? 2.2.0 Conclusion Reference 12 13 15 1 .1 How They Solve the Fundamental Problems of Economic 2.1.3.3For whom should it be produced? 2.3 Fundamental problems of Economy 1.2.1.4.3 Centrally-planned Economic System 1.1.1.2 Strengths of Free Market System 2.3 The weaknesses of Free Market System 3.4.1 How They Solve the Fundamental Problems of Economic 2.2 Free Market or Price System 1.2 The Free Market System of United State of America 2.4.3 For whom should it be produced? 1.4 Mixed Economy System 2.0 Comparison of two Economic systems 2.

we will have loss of benefit that we would have been gained from 2 magazines. 1. it is better for us to know some of the concepts in economic. one as limited in physical quantity such as land and the other one is limited as in use such as labor and machinery. According to http://economicsonline.co. All economic decisions involve making choices therefore leads to creating sacrifices. For example. so let say a new shirt will cost us RM10 and magazines are RM5 each.0 Introduction – What is economic? Economic concerned with the efficient use of a scarce resources to achieve maximum satisfaction of human wants. we have to make choices between alternatives we have.1 Limited resources Resources are said to be limited in two ways. Before we go to the type of economic systems in the world. there are three fundamental problems that we have to answer in order for us to make choices. The three fundamental problems are as shown below.2 Choice and opportunity Given that resources are limited. 2 . Therefore. 1. if we have RM10 to spend for. if we buy the new shirt.BBEK1103 PRINCIPLES OF MICROECONOMICS 1.uk. 1.3 Fundamental problems of Economy According to Clayton (2008). some concepts that we need to know are as below. we can summarize that economics is the study of how to satisfy unlimited human wants with limited or scarce resource.

For this purpose. a mechanism should 3 . the society needs to determine what types of goods and services to be produced with limited resources to maximize their satisfaction. goods and services have to be distributed. This is the „rule of thumb‟ of every economic system. Consumer goods will be disseminated to consumers while capital goods to firms.3.BBEK1103 PRINCIPLES OF MICROECONOMICS Figure 1 : Fundamental Problems in making choices 1. 1.3.3.3 For whom should it be produced? After being produced.2 How should it be produced? Goods and services must be produced at its optimum level with a minimum input without sacrificing the quality of the goods and products produced. Therefore.1 What to Produce? The available resources can only produce limited quantity of goods and services. 1.

the features of free market system are as below. The three basic questions above are used in the economic systems that used in every country. The process of production and distribution system is developed for custom or tradition according to what the community wants and always does.4. iv.” According to Economywatch.BBEK1103 PRINCIPLES OF MICROECONOMICS be available. The barter system is still used in daily trade in order to cater the need of life. 1. This economy system is influenced by human habits. customs and religious belief. namely as follows.2 Free Market or Price System According to Dictionary. 1. i. Nature is the source of life and prosperity. The features of traditional economic system according to Daily Tape.4 Economic systems in the world The economic systems are classified into four groups. a free market system or price system is “a system where prices and wages are determined by unrestricted competition between businesses. iii.com. Government does not interfere in the business activities. There is no sharing of work in the community.com. without government regulation or fear of monopolies. Everyone has their own part of work to be done.4. 4 . ii.1 Traditional Economic System Traditional Economic system is an economic where people do their things traditionally. Traditional economies are said to be the primitive on undeveloped economic systems where tools and techniques are seen as outdated. 1. they depends on products of nature to meet the needs. This happens because of the people in this economic system live simple where most of the time. i.

5 .4 Mixed Economy System This type of economic system is commonly used in most of the countries all over the world nowadays. 1. market and also in income distribution. The features of Centrally-planned Economic according to Drahokoupil (2010). Government controls the rice of goods and services. how much they want and for whom they want to produce. i. All resources are wholly owned by the government. According to Bradley (2010). Profit is not the main concern 1. ii. Consumers are free to choose. a centrally planned economy pursues to control what is produced and how resources are distributed and used.4. Government intervenes in regulation and prices. ii.3 Centrally-planned Economic System Dictionary. the market forces are not allowed to. The features of mixed economic according to Shaik (2010) are as below. Mixed economic are said to overcomes the disadvantages of both free market and centrally-planned economic. Prices are decided by the Price mechanism. iii.” Therefore. Consumers and producers have no control of what to produce.4. this type of economic allows both government and private sector have their roles in directing the economy. iv. iii. Producers are free to produce what they want.com explained that Centrally-planned economy is “an economic system in which economic decisions are made by the state or government rather that by the interaction between consumers and businesses. Public and private sector are both exist. i.BBEK1103 PRINCIPLES OF MICROECONOMICS ii.

1. the problems of „what. I would like to compare North Korea and United State of America. They choose and the choice is the principle of an economic activity. communication. Government act as regulator rather that a business entity. 2. utilities etc. They decide how much should be produces and which goods and services are to be produced. iv.0 Comparison of two Economic systems Above are the four types of economic system used around the world. The government or the central planning authority decides all the important activities. With Gross Domestic Product (GDP) per capita of less than $2.1 The Centrally-planned Economic of North Korea Like most of the countries which used centrally-planned economic system. The problem of how to produce is solved by choosing the method of production to be adopted in the factories owned by the government.1 How They Solve the Fundamental Problems of Economic This phenomenon of economic status is closely related to how North Korea manages the fundamental problems of economic. how and for whom to produce‟ are decided by the commission. 6 . which is one of the largest economies in Asia. The government has the „Planning Authority‟ to solve the fundamental problems of economic. the role of market allocation in North Korea is very limited. The problem of whom to produce solved by deciding the compensation for various skills and compensation for other factors production. Government and public sector are providing more to social objectives such as public transport. In order to understand more on centrally-planned economic system and free market system. The process can be summarized in Figure 2 below. As discussed earlier.000. 2.BBEK1103 PRINCIPLES OF MICROECONOMICS iii. 2. North Korea remains as one of the world‟s poorest and least developed countries compared to its neighbor South Korea.

centrally-planned economic is the emphasizing of social service where there will be equality in provision of health care.BBEK1103 PRINCIPLES OF MICROECONOMICS Figure 2: How Centrally-planned / Command Economic manages the economy. education opportunities and food. there should be no poverty in North Korea and everyone should be equal in wealth. 7 .1. if there is any need to be shifted into a different area. create great industrial power and attain to the imperative social goals. Massive projects can be executed easily. Centrally-planned economic system is able to override self interest in individual level and overcome the welfare of general population in order to achieve a superior agreed-upon goal to the bigger society. the government focuses more on equality. there is no difficulty to change it quickly. If done correctly. As government is the sole owner of the companies.2 Strengths of Centrally-planned Economic System According to Moynihan & Titley (2000) there are four main strengths of the centrally-planned system. The final major strength is that the Centrally-planned economic is very stable. All private property is eliminated and the government will distribute the goods equally. 2. It is great on mobilizing economic resources quickly and effectively even though it has to do in the large scale. First. The third strength is the government capability of doing rapid change if facing major problems. Second strength is.

1. The rewards for individual initiative are very rare as each person is expected to perform a job according to the economic decisions made by the central planning authority. Furthermore. they go for rationing instead. Therefore. Finally. workers are influenced on what jobs they must do and sometimes the workers are discouraged to move. it cannot be used in gathering information about consumers‟ needs and thus cannot be used to measure or control the demands. They focus more on following orders and discouraged from making any independent decisions. this economic system is not good in promoting innovation. Thus. Thirdly. Because they cannot get the updated information of what goods and services need to produce. Secondly.3 The weaknesses of Centrally-planned Economic system. 8 . Moniyhan & Titley (2000) mentioned that the rapid mobilization means centrally-planned economy cut down other social needs. decisions only made after consulting a number of people and needs a lot amount of paperwork. the prices are set by them. For example. therefore. This can happen because the central planning authority does not consider the law of „demand and supply‟. The government has a difficult time coping with it because the absolute size of the bureaucracy discourages any small adjustment. Fourth.BBEK1103 PRINCIPLES OF MICROECONOMICS 2. the centrally-planned economic system requires a very large decision making organization. these procedures make the decision making slower and increase the production costs. the centrally-planned economic system is not flexible when it has to deal with minor day-to-day problems. They don‟t even given the incentive to work hard and as a result. It requires a lot of administrators to operate the system. the resources in the country will be wasted due to the misallocation. many people work just hard enough to fill the production quotas set by the central planning authority.

S) is the freedom given to private sector in making majority economic decisions towards the direction and scale of what should U. U.S has 29. we can say that every consumers 9 .S produce (Heritage. in free economic system.org on Economic freedom of United States). As we have discussed the features of Free Market system in subtopic 1.1 How They Solve the Fundamental Problems of Economic Figure 3: How Free Market system manages the economy. individual and private sectors act in their own to answer the fundamental problems of economy. the central feature of the United States of America (U. According to Anderson (2006). 40% of world billionaires and 139 largest companies out of 500 companies in the world (As in Forbes.2. Nowadays.6 million of small business. Therefore. From the figure 3 above. 2.BBEK1103 PRINCIPLES OF MICROECONOMICS 2.2. we can say that the market has the power to make decision. 30% of world millionaires.4. this is boosted by reasonably low levels of government intervention.2 The Free Market System of United State of America As we know. 2011).

1. The consumer would prioritize on goods and services that give the utmost satisfaction and the market will produce according to the consumers‟ preference.2 How to produce? This is solved by the producers who seek for profits. 2.1 What to produce? In free market system.2. When everything went back to normal. Any individual that has purchasing power and willing to buy would have the opportunities to buy the goods and services offered. producers would use the most efficient production techniques with the minimum of production cost.1. 2. For example in the 70s when the U.2.2.S has oil (gasoline) shortage.1. the one advantage of free market system is it always can adjust to change. Shaik (2010) explained on how free market system solves the fundamental problems of economic as below.2 Strengths of Free Market System According to Clayton (2008). the consumers reduced their demand for large automobiles and increase in smaller yet more efficient in fuel consumption vehicles. free market system has great degree of individual freedom.3 For whom to produce? It is depends on purchasing power. 2. Secondly. consumers opt for large cars again and so the producers of automobiles began making big cars again. what to produce would be depends on the needs and wants of the consumer.BBEK1103 PRINCIPLES OF MICROECONOMICS and producers are capable to solve the fundamental problems of economic. Producers may produce whatever they think sellable and decide to produce their products in most efficient manner while 10 . They will look into the needs of the consumers before producing the goods and services needed. 2. In order to maximize profit. Their main objective is to maximize profit.2.

the decision making are decentralized unlike the Centrally-planned economic system.2. in free market system. whether they should make further investment on their own education and training. they are free to make their own choice of where and when they want to work. Government only intervenes in certain important concerns for example on national defense and protection of the environment. One is that free economic system does not provide for basic needs for of everyone. For example. according to Clayton (2008). Thirdly. Lastly. national defense and comprehensive health care. Lastly according to Clayton (2008). government has very low degree of interference in the market. free market system also does not provide adequate of services that individuals value most for example a system of justice. Secondly. employees would concern about termination of jobs and in the other hand the employers are worried about business being taken over by another company that provide better and hence lost their customers.3 The weaknesses of Free Market System There are some weaknesses or disadvantages pointed out by Clayton (2008). 2. there would be high volume of uncertainty that workers and businesses face if there is change done. As individuals. Anyone who is not capable to care for themselves would have difficulties in surviving. This is why the government has to intervene in providing these services where individuals pay back with taxes.BBEK1103 PRINCIPLES OF MICROECONOMICS consumers in the other hand spends on goods and services they most preferred. therefore everyone has a voice in the economy runs and directs the scarce resources into the uses that consumers favor. 11 .

Lack effective incentives to get people to work. discouraged. New and different ideas are Free Market System Economic Rewards only productive resources.0 Table of comparisons Advantages Centrally Planned Economic Capable of dramatic change in a short time. which consumes resources. Must guard against market failures. Workers and business face uncertainty as a result of competition and change.BBEK1103 PRINCIPLES OF MICROECONOMICS 3. does not provide for people that not capable to take care themselves to work. 12 . Table 1: Advantages and disadvantages of Centrally-planned Economy and Free Market System Economy. Requires large bureaucracy. no room for individuality. Lack of government interference. Free Market System Economic Able to adjust to change gradually. universal education. Disadvantages Centrally Planned Economic Does not meet wants and needs of consumers. or health care. Does not produce enough public goods such as defense. Little flexibility to deal with minor dayto-day changes. public health. Decentralized decision making Incredible variety of goods and services High degree of consumer satisfaction. Provide equality to everyone. and others public services available at little or no cost. Many basic educations. Individual freedom for everyone.

motivation. the free market economic system is better and more convincing than the centrally-planned economic system.0 Conclusions In my opinion. Table 2: How Centrally-planned Economy and Free Market System Economy solved the fundamental problems of economic. innovation. The outputs of some industries are inputs in others. How to Produce? On labor incentive in order to Based on profits and techniques fulfill social welfare. For whom to produce? Equally to everyone Anyone who have the purchasing power. according to the by the supply and demand. 4. This is because the Centrally-planned economy seems to be outdated and not suitable for prevailing society as they consider much about freedom. the collapse of it central-planning economy system is caused by the main two problems. between the two. are depends on the cost of production. the other sectors would be 13 . The coordination problem was chain related to each production. government decisions in order to maximize the social welfare. therefore if there is any problem in any sectors. Taking former Soviet Union for example. satisfaction etc.BBEK1103 PRINCIPLES OF MICROECONOMICS Fundamental of economic Problems Centrally Planned Economic Free Market System Economic What and how much to Decided by central planning Decided by the price determined produce? authority. Unfortunately do not consider poor people. one is the coordination problem and the other one is the incentive problem.

public necessities. Furthermore. while profit and losses indicate success and failure and incentives is given to increase or decrease production in the free market system. even their economic system is said the closest to the free market system. (2947 words) 14 . as government owned the system. This has brought the collapse of the former Soviet Union where they become 15 separate nations on November 1991. Thus. In my opinion. The incentive problem in the other hand. What worse.BBEK1103 PRINCIPLES OF MICROECONOMICS infected. the workers are lack of motivation to be more innovative. there would be some intervention from them in order to make sure that the economy of the country will always stable and profitable to all. as long as there is government. there is no initiative to improve the product quality or techniques of production and therefore. there is still some intervention from the government in the case of the national defense. There was no price mechanism to provide incentives to eliminate the obstacles. the central planning have no incentive to respond to product insufficiencies or oversupplies. United States for example. the centrally planned system also lacked of entrepreneurship. they cannot make profits to provide for any innovation. actually there is no pure free market system practiced in the worlds nowadays. As for the free market system. as in free market system. environment and health issues.

"North Koreans See Few Gains Below Top Tier". ( 2006).Cahaya Pantai Publisher. New Jersey: Wiley. The New York Times. Economic: A Complete Course. McGraw-Hill/Irwin. Brian Titley.BBEK1103 PRINCIPLES OF MICROECONOMICS References Anderson. retrieved on 7th February 2013 at http://members. McGraw-Hill. 15. The Micro Economy Today. Oxford University Press Myant Martin. Kuala Lumpur Schiller. & Brown..forbes. Kefahaman ekonomi : untuk yang memimpin dan dipimpin.forbes. "Mixed economy . Introduction to Business. Transition Economies: Political Economy in Russia. Clow.com/billionaires/ Mustapa Mohamed (1993). 15 .2000. Kenneth W.An economy that uses both market signals and government directives to allocate goods and resources. p. 2010. "Tax Misery & Reform Index". At http://www. New York: Glencoe/Mac-Graw Hill.nytimes.html Brown. Eastern Europe. 2012. Retrieved Februaryr 5th." This follows immediately from a discussion on command economies and market mechanism. Forbes.2008. Economics – Principles and Practices. and Central Asia. 2011 retrieved online on 7th February 2013 at http://www. 2012).com/2012/10/15/world/asia/north-koreans-say-life-has-not-improved. March 14. Jack. Betty J. Hoboken. Dan Moynihan. Bradley. Clayton G E. John E.com/global/2006/0522/032.. Forbes. (1995). Jan Drahokoupil (2010).html Andrew Jabobs (October 14.

org.dineshbakshi. Retrieved February 2nd.cfm?ID=Unitedstates http://www.com/browse/planned economy In Dailytape.co.d. 2013. Retrieved on 7th February 2013 at http://ssrn. retrieved on 7th February 2013 at http://www.uk/Competitive_markets/Economic_systems.).org/research/features/index/country.com .2010. Retrieved February 1st. 2013.com/2011/08/22/traditional-economic-system-the-features-advantages-anddisadvantages/ In Economywatch.html 16 .com/abstract=1530392 (n. Salman Ahmed.economicsonline. Heritage.com/world_economy/world-economic-indicators/mixedeconomy.com Unabridged . A Comparative Study of the Major Economic Systems in the Aftermath of the Great Recession. 2013 from http://dailytape.heritage. from http://www.economywatch.html http://www.BBEK1103 PRINCIPLES OF MICROECONOMICS Shaikh. at: http://dictionary.php?lesson=EM322 mixed economy http://www.reference. Dictionary.com/as-a-level-economics/basic-economic-ideas/117-revisionnotes/1350-market-economic-system Index of Economic Freedom – United States.org/lessons/index.econedlink. Retrieved February 2nd.