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
economy, such as a whole, such as
__________________ _________________
__________________ _________________
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 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.
BASIC ECONOMIC
CONCEPTS
 BASIC ECONOMIC CONCEPTS

 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.)

 CHOICE
– When scarcity exists, choices are to be made.

 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

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.
 PRODUCTION POSSIBILITIES
CURVE (PPC) (cont.)
Assumptions:

1.

2.

3.
 PRODUCTION POSSIBILITIES
CURVE (PPC) (cont.)
Sewing Machine
If it allocates all its resources to sewing machine, it
will produce at Point A.
16
A If it allocates all its resources to butter, it will
produce at Point F.
14
The country Jaya, produces two products –
12 C butter and sewing machine.

If the country Jaya is at Point C

10 D on the PPC, it can produce the
combination of 2,000 kg butter
8 and 12,000 units of sewing
machine.
6
Point D shows the production of
4 3,000 kg butter and 9,000 units
of sewing machine.
2
F
0 1 2 3 4 5 Butter
 PRODUCTION POSSIBILITIES
CURVE (PPC) (cont.)
Sewing Machine

16 Z
A
B UNATTAINABLE Point outside the PPC
14 (Point Z)  SCARCITY
C
12 Y
Any point along the PPC
 CHOICES
10 D
8 Movement from one point
ATTAINABLE to another (point C to D)
 OPPORTUNITY COST
6 Point inside the PPC
(Point Y)  Waste E
4 of resources and
inefficiency
2
F
0 1 2 3 4 5 Butter
 FACTORS THAT INFLUENCE
THE SHIFT OF PPC
Sewing Machine
1. Economic
Growth 16
When the country
14 enjoys economic
growth, the PPC
12 bounds outward.

10

8
When the country
6 is struck by natural
disasters, economic
4 growth will decline
and the PPC will
2 shift to the left.
Butter
0 1 2 3 4 5
 FACTORS THAT INFLUENCE
THE SHIFT OF PPC (cont.)
Sewing Machine
2. Improvements
in Technology 16
Technology increases the
14 production of sewing machine.

12
Technology increases the
10 production of butter.

4
2

0 Butter
1 2 3 4 5
 FACTORS THAT INFLUENCE
THE SHIFT OF PPC (cont.)
Sewing Machine
3. Population
16

14
Increase in
population
12

10

8
Decrease in
6
population
4
2

0 Butter
1 2 3 4 5
 SHAPE OF PPC

Sewing Machine

16 PPC IS CONCAVE

14
Increasing Opportunity Cost
12

10

4
2

Butter
0 1 2 3 4 5
 SHAPE OF PPC (cont.)

Sewing Machine

16
PPC IS CONVEX
14

12
Decreasing Opportunity Cost
10

4
2

Butter
0 1 2 3 4 5
 SHAPE OF PPC (cont.)

Sewing Machine

16
PPC IS LINEAR
14

12 Constant Opportunity Cost

10

4
2
Butter
0 1 2 3 4 5
 ECONOMIC SYSTEM

TYPES OF ECONOMIC SYSTEM

MIXED
ECONOMY CAPITALISM
SOCIALISM
 CHARACTERISTICS

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

MERITS AND DEMERITS

 CHARACTERISTICS

 Private ownership of resources

 Freedom of enterprice choices
 consumer sovereignty
 Competition
 Government intervention
 Pricing system
 MERITS DEMERITS
 Production the need consumer  Inequality desire
 Economic freedom  inflation

 Efficient utilization of  Lack of social welfare

resources  Wasteful competition
 Variety of consumer goods  erosion of human values

 Product the demand on consumer

 Social cost
 envcourage trade and quality product
 Flexibility
Produce depending on the customer needs
 CHARACTERISTICS

SOCIALISM
An economic system where all the economic decisions
are made by the government or a central authority

MERITS AND DEMERITS

 CHARACTERISTICS

 Public ownership of resources

 centre planning authority
 Price mechanism of lesser importance
 Centre control ownership
fully government control
 MERITS DEMERITS
 Production basic needs  Lack of incentives and
 Equal distribution of initiative by individuals
income and wealth  Loss economy freedom
 Better allocation of  less competition r&d also
resources  Waste of economic
Greater Welfare due to Less Inequality of Income:
 resources
 Absence of Business Fluctuations mixed economy is an economy which
both the public private sector play a
 Social welfare role in the economy

characteristic
public and private ownership resources
encourage by the government