TUNKU ABDUL RAHMAN UNIVERSITY COLLEGE

CENTRE FOR PRE-UNIVERSITY STUDIES

FOUNDATION IN BUSINESS

FPEC1054 MICROECONOMICS

LECTURE NOTES

ACADEMIC SESSION: 202205

PREPARED BY: Ms Veronica Yeow

Name:
Class:

*FOR INTERNAL CIRCULATION ONLY

 TUNKU ABDUL RAHMAN UNIVERSITY COLLEGE
Centre for Pre-University Studies

Course : Foundation in Business

Unit : FPEC1054 Microeconomics
Topic : 1 – INTRODUCTION

LEARNING OUTCOME – AFTER THIS LESSON STUDENTS WILL BE ABLE TO

- Identify the factors of production (economic resources)
- Production possibility curve

1. What is economics?
Economics is the study of how society uses scarce resources to produce goods and services to
satisfy unlimited human wants.

2. Factors of Production (Economic Resources)

Factors of production refers to the inputs that are used in the production of goods and services.

There are 4 factors of production as follows:

(i) Land – refers to all natural resources that are gifts of nature. Land includes rivers, forest, lakes,
minerals, sea and dry land. Land includes non-renewable resources such as commodities like
oil and gold or renewal resources such as forest or timber. The income earned by owners of
land is called rent.

(ii) Labour – is the human input into production. It refers to the human resource or the mental
and physical ability of workers to produce goods and services. An increase in the quantity and
the quality of the labour force is vital for a country to achieve economic growth. Labour can
be divided into skilled labour and un-skilled labour. The reward or income for labour is known
as wage.

(iii) Capital – refers to man-made aids used to produce other goods in the economy. This would
include machinery, assembly plant (factories), robots, buildings, trucks, roads. Capital goods
help to boost the productivity of labour. The income earned by owners of capital goods is
called interest.

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(iv) Entrepreneurship (Enterprise) – refers to the action of an individual that organizes the factors
of production. The other factors of production are land, labour and capital. Basically, an entrepreneur
combines the other three factors of production to produce goods and services. An entrepreneur is a
decision maker, he decides what, how and how much of a good or service to be produced to fulfill
human wants. An entrepreneur is a risk taker and he monitors and controls the business activities. An
entrepreneur is usually a sole proprietor, a partner, or the one who owns the majority of shares in a
business venture. Profit is the reward to an entrepreneur.

LAND

DRY LAND

MINERALS (OIL)

RIVERS

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 JUNGLE

FISH / SEA PRODUCE

LABOUR

SKILLED LABOUR

UNSKILLED LABOUR

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CAPITAL

PORTS

TRACTORS

ROBOTS

ENTREPRENEURSHIP/ ENTERPRISE

BRYAN LOO (FOUNDER OF TEALIVE)

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3. Production Possibility Curve (Production Possibility Frontier)
A production possibility curve shows various possible combinations of goods and services that the
economy/country can produce given a limited amount of resources and the most efficient technique
of production. (KELUK KEMUNGKINAN PENGELUARAN)

Assumptions (ANDAIAN) made when drawing a production possibility curve are as follows:
(i) The amount of economic resources in an economy is fixed
(ii) The economy produces only two types of goods
(iii)The economy is at full employment which means all the economic resources are fully utilized.
(iv)The level of technology is constant

Diagram

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▪ The country produces only two types of goods - Good X and Good Y

▪ Point A on the PPC indicates that the economy would allocate all its resources to provide good Y
only and zero units of Good X. At point A, the economy or country practices specialization in
Good Y.

▪ Point D indicates that the economy would allocate all its resources to provide good X only and
zero units of Good Y. At point D, the economy or country practices specialization in Good X.

▪ Points A, B, C and D that are located on the production possibility curve indicate that the
economy has achieved full employment where all economic resources in the economy are fully
utilized. It indicates the maximum output that the economy or country can produce at a given
time. In other words, the economy’s production is at full capacity given a fixed amount of factors
of production and at a specific time. There is no specialization at point B and C as the economy
produces both type of goods. However, to increase the production of one type of good, the
economy has to reduce the production of the other type of good. This is due to the problem of
scarcity.

▪ The economy can also produce any combinations located inside the curve, but this would mean that
some resources are unemployed or there is inefficient method of production is being used for
example point F. The economy could produce more of both goods by moving to a point such as
point C. At point F, the economy or country does not achieve maximum capacity (maximum
output) in production. There is unemployment in the economy as not all the economic resources
are fully utilitised. There is a wastage of economic resources and the economy will most likely
achieve a slow economic growth.

▪ A point or a combination of goods that is located outside the PPC such as point G is not attainable
with the present production capacity. This means that at present, the economy is unable to produce
the quantity of goods at combination G. Point G indicates scarcity in the economy. Scarcity means
that the economy is unable to produce everything that it wants because human wants are unlimited
but the economic resources that are available are limited.

The factors which would enable point G to be reached are as follows:

a) An increase or advancement in technology
b) Increase in labour force
c) Increase in population
d) Increase in resources example raw materials
e) Specialization and division of labour

In future, if the economy is able to achieve point G, this indicates economic growth.
(PERTUMBUHAN EKONOMI)

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 LEARNING OUTCOME – AFTER THIS LESSON STUDENTS WILL BE ABLE TO
- Differentiate increasing opportunity cost and constant opportunity cost
- Explain economic growth and economic decline

OPPORTUNITY COST – KOS LEPAS – IT IS DEFINED AS THE SECOND

BEST ALTERNATIVE FORGONE/ SACRIFICED WHEN MAKING A
CHOICE/DECISION.

4.(a) Production possibility curve with increasing opportunity cost

The production possibility curve displays a bowed-out shape due to the increasing opportunity cost.
The opportunity cost increases as production of one output expands.

Combination Good X (unit) Good Y (unit) Opportunity cost

A 0
B 1
C 2
D 3
E 4
10 -
9 10 – 9 = 1
7 9–7=2
4 7–4=3
0 4–0=4

Diagram

The production possibility curve displays a bowed-out shape (the shape is concaved to the
origin) due to the increasing opportunity cost. The opportunity cost increases as production
of one output expands. This means that to increase one unit of a good, the number of units
of the other good that needs to be forgone or sacrificed increase at each combination of
production. For example to increase 1 unit of Good X from 0 to 1, the economy has to
sacrifice 1 unit of Good Y(10 – 9) and to increase 1 more unit of Good X from 1 to 2, the
economy has to sacrifice 2 units of Good Y(9 – 7). This shows that the opportunity cost is
increasing.
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4.(b)Production possibility curve with constant opportunity cost
The production possibility curve displays a downward sloping straight line curve due to constant
opportunity cost. The opportunity cost remains the same as production of output expands.

Combination Good X (unit) Good Y (unit) Opportunity cost

A 0
B 1
C 2
D 3
E 4
10 -
8 10 – 8 = 2
6 8–6=2
4 6–4=2
2 4–2=2

Diagram

The production possibility curve is a straight line that is downward sloping. This means
that to increase one unit of a good, the number of units of the other good that needs to be
forgone or sacrificed is constant at each combination of production. For example to
increase 1 unit of Good X from 0 to 1, the economy has to sacrifice 2 units of Good Y (10 –
8) and to increase 1 more unit of Good X from 1 to 2, the economy has to sacrifice another 2
units of Good Y (8 – 6). This shows that the opportunity cost is constant and the production
possibility curve displays a downward sloping straight line curve.

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5. Economic Growth (PERTUMBUHAN EKONOMI)
The outward shift of the PPC is referred to as economic growth, the country’s capacity to produce
goods and services increases. This outward shift permits the economy to produce greater quantities
of output. Technology advances or growth in the resource base enables the PPC to shift outwards.

Diagram

The production possibility curve shifts outwards (shifts to the right) from PPC to PPC1
indicating economic growth. This means that the economy (country) is now able to produce
more goods and services. At point A, the economy produces 10 units of Good X and 10 units
of Good Y. With economic growth, the economy is able to produce more of Good X and Good
Y. This is shown by point B where the economy produces 18 units of Good X and 15 units of
Good Y.

Factors that may cause the production possibility curve to shift to the right are as follows :
• Increase in workforce due to population growth or the import of migrant workers.
• Increase in the productivity level of the workforce due to specialization of labour, training and
education.
• Technological improvements with the use of machines, robots in the production process which
can help boost the productivity level.
• The economy has found new resources like oil, coal, iron that can help increase output.
• The inflow of foreign investment that brings in new methods of production and better technology
level.

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6. Economic Decline (KEMELESETAN EKONOMI)
Production possibilities of a country could have declined where the PPC shifts inward or shift to the left.

Factors that lead to an economic decline are:

a) Depletion of natural resources
b) Natural disaster
c) War
d) Decrease in population

Diagram

The production possibility curve shifts inwards (shifts to the left) from PPC to PPC1
indicating economic decline. This means that the economy (country) is now able to produce
less (fewer) goods and services compared to before. At point A, the economy produces 8 units
of Good X and 7 units of Good Y. With economic decline, the economy is able to produce
fewer of Good X and Good Y. This is shown by point B where the economy produces 5 units
of Good X and 5 units of Good Y.

WAR

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 DEPLETION OF RESOURCES (COAL)

DEPLETION OF RESOURCES (DEFORESTATION)

NATURAL DISASTER

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