Microeconomics P1:

-Overview of microeconomics
-The study of economics
-Factors of production
-Central economic problem
-Example of scarcity choices and opportunity cost
-Production Possibility Frontier (PPF)
-Constant Opportunity Cost
-3 types of economic systems
->Command economy
->Market economy
-Circular flow model
->Mixed economy
-Example of government intervention in a mixed economy (Circular flow
model)
-Invisible hand mechanism

Overview of microeconomics
-Economics is the study of people and choices
-In microeconomics, we will look at the benefits and cost of the choices (We will
assume rationale people would choose choice whereby benefits outweighs cost)
-The idea of scarcity
->People have unlimited wants, but limited resources.
- Microeconomics analyses choices that individuals in households, individual
businesses, and governments make, and how those choices interact in markets
-In economics, Money is useless unless you have goods and services to exchange
for.

The study of economics

Demand supply:
 -Remember: We have unlimited needs and wants (E.g. More time, money, goods)
but limited resources
->These limited resources also known as factors of production

-These limited resources (Scarcity) leads to people to make a choice, and every
choice would have an opportunity cost.
->Because of limited resource, we need to allocate these resources to achieve the
most benefits that outweighs the costs.

Factors of production (Limited resources)

-When you have limited resources, you have limited factors of production.

Land -The natural resources available for production.

-Everything that grows on land or is found under it.
->Example: oil, fish, crops

Land includes all the natural physical resources:

-E.g. fertile farm land (Able to grow crops)

-Some nations are richly endowed with natural resources and then specialise in their
extraction and production
->E.g. the high productivity of the vast expanse of farm land in the United States and
the oil sands in Alberta, Canada.
->Other countries such as Japan are heavily reliant on importing these resources.
Labour -The human factor input into the production process
->E.g. the supply of workers available and their productivity
->An increase in the size of the labour force is vital to businesses or countries
Entrepreneurship -Entrepreneurs organise (Make use) the other factors of production (Land, Capital,
Labour) to produce goods and services, as well as the risk-taking factor of production
(Take risks).
->In communist, most businesses are owned by government,
->In a sense government ‘entrepreneurship’
 ->In free economy, entrepreneurship can be individual

Capital Goods/Things used in the supply of other products

-> Capital goods are used to produce other consumer goods and services in the
future
->Think of capital as the machinery, tools and buildings humans use to produce
goods and services.

-All man-made goods which are used for further production of goods are included in
capital. Thus, it is man-made material source of production.
->It is the produced means of production. Examples are machines, tools, buildings,
roads, bridges, raw material (E.g. Wood, oranges), trucks, factories, etc

Physical Capital includes:

-Includes machinery, equipment, new technology, factories and other buildings,
distribution facilities
-It consists of manmade goods that assist in producing consumer goods and
services.

Human (Knowledge) capital includes:

The skills, knowledge, and experience possessed by an individual
->Labour ->Quantity of workers, Human capital ->Quality of workers

Central economic problem

-Because of scarcity (Limited resources/factors of
production) we make a choice/decision.
-And this choice/decision is influenced by:
->Benefits
-Advantages of choosing A compared to B
-What you take in
->Costs (Explicit opportunity cost)
-What you give out
->Opportunity cost
-What you trade off, give up, the best alterative
forgone
-Two types of opportunity cost, Explicit and implicit
->Explicit/cost
-This is an opportunity cost that involves a money payment and usually a
market transaction.
->Implicit
-This is an opportunity cost that DOES NOT involve a money payment or
market transaction.

Example of explicit and implicit (Read for understanding):

Explicit Implicit
Opportunity cost that involves a money payment and usually Opportunity cost that DOES NOT involve a
a market transaction. money payment or market transaction.
-The money payment is generally made to compensate the -The person incurring the opportunity cost
person who has incurred the actual opportunity cost and
foregoes the satisfaction. This payment, in effect, transfers
the burden of the opportunity cost from the original person to
the one making payment.
E.g Tom takes a job working four hours each day at the CD
Music Emporium. While at work, Tom foregoes satisfaction
from playing video games and hanging out with friends.
-He is the person directly incurring the opportunity cost from
this job.
-However, because Tim is paid an hourly wage, this cost is
transferred to the CD Music Emporium. The CD Music
Emporium is thus incurring an explicit cost.
and foregone satisfaction is not
compensated and the cost is not transferred
to anyone else.
E.g. Amy works four hours a day at Waldo's
Taco World, which happens to be owned by
his father James. While at work, Amy also
foregoes satisfaction from playing video
games and hanging out with friends.
-However, Amy does not receive a money
payment to compensate for his foregone
alternatives. 

Opportunity cost:
E.g. Coffee or tea. You decide to choose coffee, forgo tea (Next best alternative
forgone)

Basic questions in economics:

What to produce & in what quantities? Demands
How to produce? Producer/Supplying
For whom to produce? Consumers

Example of scarcity choices and opportunity cost

-Individual  Make choice by Satisfaction (Utility)
-Govt  Make choice by Social benefits
-Business  Make choice by Profit

Companies: Scarcity:
-Make choices to Money. Hence want to maximize their profits
maximize their profits
Choice:
U.S. companies decided to move their production to Asia

Opportunity costs:
May need to down size their U.S. operation, forgoing the US skilled workforce.

Governments: Scarcity:
Make choices to Money. Want to use it wisely to maximize social benefits
maximize social
benefits (education Choice (If they made this choice):
spending) and -Spend on campaigns to encourage people to stop smoking to reduce social
minimize social costs cost
(pollution), based on
limited funds (Money) Opportunity costs:
from tax -Reduce the funds available for education.
-The opportunity cost is the funding forgone for education
Individuals: Scarcity:
Money. Want to use it to wise to maximise satisfaction levels (Utility)
make choices to
maximize their Choice:
satisfaction levels (or When an individual spends his bonus for the down payment of a car, he may
utility) need to forgo his Europe holiday. (Opportunity cost)

Production Possibility Frontier/curve (PPF)

-It presents the potential prospects for the production of a pair of products (2
products)
->PPF/PPC shows the different combinations of two goods that can be produced
with full utilisation of resources
-PPF shows Concepts of Scarcity, Choice and Opportunity Cost
->Scarcity (Such that it is unrealistic to produce outside the curve):
-There are always limited resources in producing consumer products
-When the point is outside the PPF is unattainable as there is not enough
resources to attain the production of goods, given current factors of
production
-However, any point that is within the PPF (Curve) would mean that the
products that will be made is attainable, and any point that is on the curve,
would mean that the resources (Factors of production) are fully utilised to
make the specific two goods (As we assumed in PPF that only 2 goods are
produced by the economy, assumptions of PPF).

->Choice:
-We can only choose either one of the two goods, whereby if we decide to
increase the goods to be produced on Coffee beans by allocating more
resources, we are not able increase the production of cars as well

->Opportunity cost:
-The trade off, best forgone alternative when a choice is made. When we
choose to make more of goods A, that means we need to forgo some of
goods B.
Assumptions made about PPF:
-Resources are used to produce one or both of only two goods (Need to assume
only 2 goods produced by the economy)
-Quantities of the resources do not change
-Technology and production techniques do not change (Constant state of
technology)
-Resources (Inputs) are used optimally/efficiently
-Law of Increasing opportunity cost (Increasing cost in terms of unit forgone)

This curve that shows the maximum combinations of

goods and services that can be produced by an economy
in a given time period, given all resources are fully
utilized.

Point Y: All production is devoted to producing garments,

no cars are produced.
Point X: No garments are being produced, only cars are
produced.
At point Z, resources are being shared between the
production of both goods.

The opportunity cost of producing more garments is the

number of cars that are NOT produced or forgone.

A, B, C:
Represent the most efficient utilisation of resources for the economy

D:
-Point outside PPF (Shows scarcity)
->Unattainable (Unrealistic, out of the range) as there is not enough resources to
attain the production of goods, given current factors of production
->If there was a change in technology while the level of land, labour and capital
remained the same, the time required to make garments and cars would be reduced.
->This is the same when land allocated increases or more labour or more capital.

E:
-A movement from a point inside the PPF (e.g., Point E) to a point on the PPF (e.g.,
Point A) could be due to better utilization of resources as the economy recovers from
a recession. (Maybe during recession, low demand of goods, hence resources
needed to make the goods are not optimally utilised)
-Any points within the curve shows that country’s resources are not being fully
(Optimally)
-Inefficient use of resources

Production Possibility Frontier/curve (PPF) outward shift:

-Outward shift of the PPF = Economic growth (More garments, cars able to be
produced) Reasons for outward shift:
-Increase in the QUANTITY of resources such as labour, land and
capital
-Increase in the QUALITY of resources such as through training and
education
-Increase in the level of TECHNOLOGY, results in better methods of
production

Examples:
-Increase in the size of labour force
-Increase in the amount of land available
-Increase in the amount of capital
-Increase in the skills of labour force (Human capital)

Point A to Point B:
-To produce 1 more garment, 3 cars need to be given up (Opportunity cost).

Point B to Point C:
-To produce 1 more garment, 8 cars need to be given up.
-Opportunity cost is bigger for movement from B to C compared to
movement from A to B.
->This is because not all resources used to produce garments and cars are
equally suited at producing both goods.
->PPF is a concave curve
->Resource needed to produce Good A is not equally, perfectly suited to
produce Good B
As we move towards point C, where fewer carsExample:
are being produced, it is
unlikely the workers who usually produce cars will be as productive as
workers who usually produce garments, and vice versa
->Not all resources used to produce garments and cars are equally suited
at producing both goods (Law of increasing opportunity cost)
->In order to produce more unit of garment, number of cars that have to be
forgone increases!!
https://www.youtube.com/watch?
v=FwPiWz1a1Tw&index=3&list=PLD5BC727C84E254E5
More examples:

*Note that if
unemployment
in economy, it
would be at
point X. There
are still workers,
but it is not
utilised.
(Resources not
fully utilised)

-When the PPF shifts outwards, we know there is growth in an

economy (Economic growth is an increase in the capacity of
an economy to produce goods and services).
-Alternatively, when the PPF shifts inwards it indicates that the
economy is shrinking (Decrease in the ability of an economy to
produce goods and services, as Consumption generally
decreases)
->A shrinking economy could be a result of a decrease in
supplies or a deficiency in technology, unemployment, etc…

The law of increasing opportunity cost:

-Opportunity cost goes higher and higher when you give up one
type of good, as different goods require different types and
allocation of resources.
- As production increases, the opportunity cost does as well.

Constant Opportunity Cost

 -The economy forgoes the same amount of one good (e.g. muffins) when producing
more of the other (e.g. cupcakes).
->This is because the resources used to produce 1 muffin and 1 cupcake is similar
->Not realistic for entire economy because different resources are better suited for
the production of different products.

Economic systems:
-Market economy/ Pure free Market
-Planned economy/ Command economy
-Mixed economy

Because of scarcity, each economic system must decide on how to answer the 3
economic questions:
-What to produce and how much to produce?
-How to produce?
-For whom to produce?
->These 3 questions are answered differently depending on the type of economic
system a country adopts

What is the market/pure free, planned/command, mixed economy?

Command economy Pure market economy Mixed economy

-Decisions/choices Works on the belief that it is more
made by the planning efficient for individuals to make
authorities (usually market decisions/choices
government agencies) -Buyers and sellers communicate
and not by their intentions through prices
individuals/businesses -Individuals and businesses own
resources, goods and services and
-No market activity use them as they choose
allowed ->No government intervention,
Some resources are owned by
individuals, some by the government
-Decisions are made by both the market
and the government
-Government intervenes where market
(Pure free) fails
-Four areas of intervention: Business
sector, household sector, goods markets
(goods and services purchased by
->Economic decision- instead, buyers and sellers make all consumers) and factor markets
making process is the economic decisions that is guided  (Where factors of production are bought
centralized by the Invisible Hand mechanism and sold, such as the labour market, the
physical capital market, market for raw
->Consumer choices determine how
materials)
industries and financial markets
-Mixed economies start from the basis of
operate
allowing private enterprise to run most
businesses.
-Carousell
-Then the governments intervene in
certain areas of the economy, such as
-Individuals own the factors of
providing public services (health,
production and individually decide
education, waste management) and the
how to use them in order to exchange
regulation or private business (e.g. legal
for goods/services that they want.
right to private property, and abuse of
-The collective decisions of these
monopoly power)
individuals are reflected in constantly
changing prices and the interaction of
E.g. Property
supply and demand for each
->Govt ->HDB
good/service that determines what
->Private ->Individuals, not by
how much will be produced.
government.
->E.g. Collective decisions of people
to buy a specific product or not,
E.g land
affects the demand and supply, would
->Some govt, some individual
influences the prices of the goods

Economic What to produce? How to produce? For whom to produce?

system
Command A central planning authority (or A central planning authority decides A central planning authority
economy government) decides what on the combination of resources decides who receives the
goods and services to (FOP) that will be used on producing goods and services that are
produce. goods and services produced.
Market Firms produce goods and Individual firms decide on the Goods and services are
economy services that consumers are combination of resources to be used distributed to individuals
willing and able to buy for in producing goods and services, that and households who are
prices that will yield profits for would maximize the profit of each firm. willing and able to buy
the firms. them.
Mixed The government steps in to The government intervenes in the -Goods and services are
economy produce goods and services production of goods and services distributed to individuals
(Most (e.g. public goods such as when the private market is not and households who are
countries) roads, national defence) in producing at socially optimal levels willing and able to buy
areas where there is market ->Market failure them.
failure (Quantity of a product -However, government
demanded by consumers does intervention will affect the
not equate to the quantity price and output levels in
supplied by suppliers, low/high the market.
supply demand)
-A public good is a product that
one individual can consume
without reducing its availability
to another individual, and from
which no one is excluded. 
Public good is:
-Non-rivalry: This means that when a good is consumed, it doesn’t reduce the
amount available for others.
-> E.g. benefiting from a street light doesn’t
reduce the light available for others but
eating an apple would.

-Non-excludability: This occurs when it is

not possible to provide a good without it
being possible for others to enjoy. E.g. if
you erect a dam to stop flooding – you
protect everyone in the area (whether they
contributed to flooding defences or not.) (Everyone can benefit from the good)

Market economy
-Circular flow model
->Show the
interdependent
relationships
between
households,
producers
(businesses), and
government. 
Goods markets:
Goods and services purchased by consumers (Households)

Factor markets:
Factor of productions are sold to firms
-Factors of production and goods and services flow in one direction (red arrows).
-Money flows in the opposite direction (Green arrows).

Green arrow:
Represents the flow of money in an economy. In the goods and services market,
consumers/households spend money on goods and services, which is received by
producers/businesses. In the factor market, businesses pay consumers/households
for their work done in helping to produce goods and services as well as to factor
markets (E.g. land).
An example would be someone working at a café would get money as income, and
the same person will spend money on a hamburger, which would be considered
expenditure

Red arrow:
-In the factor market, consumers/households act as workers and offer factors of
production to produce goods.
-In the goods market, producers offer goods and services produced back to
consumers/households.

Mixed economy:
-Example of government intervention in a mixed economy (Circular flow model)
->Through many policies and laws

Invisible hand mechanism (Free market):

What it is:
The invisible hand refers to the self-regulating nature of the marketplace in
determining how resources are allocated based on individuals acting in their own
self-interest.

Why it matters:
It argues that government intervention in the marketplace is unnecessary.
->Instead, changes in demand for goods automatically result in price adjustments
without the need for regulation.
->Supply and demand
(As demand for item increases, prices rise. When producer responds to price by
producing larger supply, this increases competition and drives price down.

Advantages of pure market economy and command economy:

Advantage of pure market economy Advantage of command economy
(Disadvantage of command economy) (Disadvantage of pure market economy)
-More choices for consumers -Essential services provided free of
->Firms will produce whatever collective charge
decisions of these individuals are
prepared to buy. -No unemployment, everybody has a
job

-Private firms aim to maximise profits to -Less inequality in the society

meet consumer needs
->Private firms would aim to meet
consumer needs
-Efficiency and more incentive to
->Allows for a more equal opportunity,
and income.
-Everybody guaranteed housing
 innovate due to market competition, -Most people have the same
Thus, higher quality and lowest cost is government wage, whatever their jobs
achieved. are.

-Individuals are allowed to start their

own businesses (More enterprise)

-More incentive (E.g. bonus) to work as

workers aim for higher wages
->Workers more wanting to work

When the price mechanism leads to an inefficient allocation of resources

Capital goods vs consumer goods:

Capital goods Consumer goods

-Any kind of machinery, tools or These are used for immediate
equipment (Factor of productions) used consumption, which include food,
to make consumer goods. clothing, and household appliances e.g.
-They are not used for immediate Clothes
consumption e.g. Factory Machinery
->Products that creates consumer
goods

Symptoms of recessions:
1. A fall in purchases of components and raw materials from supply-chain
businesses
2. A fall in real national output (GDP)
3. Rising unemployment 
4. A rise in the number of business failures
5. A decline in consumer and business confidence
6. A contraction in total consumer spending & a rise in the percentage of income
saved
7. Falling business capital spending
8. A sharp drop in the value of exports and imports of goods and services
9. Deep price discounts offered by businesses
10. Heavy de-stocking as businesses look to cut unsold stocks when demand is
weak
11. Government tax revenues are falling