Chapter 1

• Scarcity- the condition in which unlimited wants for goods hitting up against limited resources
available (land, labour, time and etc)- [money- limited resources]
• Opportunity cost- most highly valued opportunity or alternative forfeited when a choice is
made. The higher the opportunity cost of doing something, the less likely it will be done.
• Resources used to produce goods and services (input or factors of production)
✓ Land- all natural resources such as minerals, forests, water and unimproved land. Example
of minerals are gold, silver and copper
✓ Labour- the physical and mental talents people contribute to the production process. For
example, a person building a house (physical talent)
✓ Capital- produced goods that can be used as inputs for further production. The example
are factories, machinery, tools, computers and buildings.
✓ Entrepreneurship- The particular talent that some people have for organising resources to
produce good, seeking new business opportunities and developing new ways of doing
things. For example, Bill Gates is the entrepreneur of Microsoft Office.

Positive Economics Normative Economic

Study of “what is” in economic matters
Deal with cause-effect relationship that can
be tested
Example:
What is the effect of a cut in income taxes on
unemployment rate
Study of “what should be” in economic
matters
Deal with value judgements and opinions
that cannot be tested
Example:
The income taxes should be cut because the
income tax burden on many taxpayers is
currently high.

Microeconomics
Deals with human behaviour and choices as
they relate to relatively small units- an
individual, a business firm, an industry, a
single market
Socialism
Undertaken by government
Price is viewed as being set by greedy
business with vast economic power
Macroeconomics
Deals with human behaviour and choices as
they relate to highly aggregate markets (e.g.,
the goods and services market) or the entire
economy.
Capitalism
Determined by the forces of demand and
supply/ by private sector
Government played limited role in this
system

Rationing device- deciding who gets what of available resources and goods. (Eg: dollar price)

PPF- Represents the possible combinations of two goods that can be produced in a certain period of
time under the conditions of a given state of technology and full employed resources
Straight line PPF- constant opportunity cost where the production of a good is accompanied by
foregoing the same quantity of another good

Concave downward PPF- increasing opportunity cost where the production of a good is
accompanied by foregoing the increasing quantity of another good.

Productive efficiency- the condition where the maximum output is produced with given resources
and technology

Productive inefficiency- the condition where less than the maximum output is produced with given
resources and technology.
Advance in technology
1) Ability to produce more output with a fixed amount of resources
2) Ability to produce same output with fewer resources
Chapter 2
Demand- the willingness and ability of buyers to purchase different quantities of good at different
prices during a specific time period
Law of demand- as the price of a good rises, the quantity demanded of the good falls, and as the
price of a good falls, the quantity demanded of the good rises, ceteris paribus
Why are demand curves downward sloping
✓ Substitution effect- people substitute lower priced goods for higher priced goods.
✓ Law of diminishing marginal utility
Quantity demanded- number of units that individuals are willing and able to buy at a particular
price during a time period.
Change in quantity demanded- a movement from one point to another point on the same demand
curve
✓ Caused by changes in price of its own good
✓ An increase in price will cause the quantity demanded to fall and vice versa. The curve will not
change.
✓ Inverse relationship between price and quantity demanded
Change in demand-shift the demand curve
Demand curve will shift to the left (fall in demand) or shift to the right (increase in demand).
Caused by 5 factors: income, preferences, prices of related goods, number of buyers, expectation of
future price
Supply- The willingness and ability of sellers to produce and sell different quantities of a good at
different prices during a specific time period.
Law of supply- as the price of a good rises, the quantity supplied of the good rises, and as the price
of a good falls, the quantity supplied of the good falls, ceteris paribus.
Why supply curve slope upwards
✓ a higher price is an incentive to producers to produce more good
✓ Higher price is necessary to generate more output in order to encourage producers to continue
production
Factors that cause the supply curve to shift
✓ Prices of relevant resources, technology, number of sellers, expectation of future prices, taxes
and subsidies, government restrictions
Subsidy- monetary payment made by government to a producer of a good or service
Surplus- a condition in which quantity supplied is greater than quantity demanded
Shortage- a condition in which quantity demanded is greater than quantity supplied
Price Ceiling- a government mandated maximum price above which legal trades may not be made.
Price Floor- government mandated minimum price below which legal trades cannot be made.
Price elasticity of demand- measure of the responsiveness of quantity demanded to change in
price.
Cross elasticity of demand- Measures the responsiveness of quantity demanded of one good to
changes in the price of another good.
Income elasticity of demand- Measures the responsiveness of quantity demanded to change in
income.
Price elastic of supply- Measures the responsiveness of quantity supplied to changes in price.
Four factors relevant to the determination of price elasticity of demand:
• Number of substitutes- the more substitutes for the good, the higher the price elasticity of
demand
• Necessities vs luxuries- the more that a good is considered a luxury rather thana necessity, the
higher the price elasticity of demand
• Time- the more time that passes, the higher the price elasticity of demand- allow people seeks
out substitute goods
• Percentage of one’s budget spent on the good- The greater the percentage of one’s budget that
goes to purchase a good, the higher the price elasticity of demand.
Chapter 3
• Utility- a measure of the satisfaction, happiness/benefit that results from the consumption of a
good
• Util- an artificial construct used to measure utility
• Total Utility- total satisfaction a person receives from consuming a particular quantity of good
Eg: Good X Utility
1st 10
2nd 8
3rd 7
TU for 3 units of good X= (10+8+7) utils= 25 utils
• Marginal Utility- additional utility gained from consuming an additional unit of some good
MU= ΔTU/ΔQ
• Law of Diminishing Marginal Utility: An additional unit of goods consumed will result in a
decline in marginal utility. The total utility of something can be rising as the marginal utility of
that something is falling.
Eg: Consumer use first unit to satisfy most urgent want and second unit to satisfy a less urgent want.

• Utility obtained between individual for the same thing cannot be compared because utility is
subjective.
• Diamond-water paradox
✓ Water is cheap, diamonds are expensive.
✓ Total utility of water is high- useful; total utility of diamond is low- not as useful as water
✓ Marginal utility of water is low- plentiful, people consuming at low MU; Marginal Utility of
diamonds is high- scarce, people consuming at high MU

Conditions for Consumer Equilibrium/ Utility Maximising Conditions

• Consumers spent all income on the particular combination of goods purchased. There is no
incentive to change the expenditure pattern.
• The marginal utilities per dollar spent on each good purchased are equal
𝑀𝑈𝑎 𝑀𝑈𝑏 𝑀𝑈𝑐 𝑀𝑈𝑧
= = =……
𝑃𝑎 𝑃𝑏 𝑃𝑐 𝑃𝑧
where A to Z represents the various goods purchased

• Substitution effect- the portion of the change in the quantity demanded that is attributable to a
change in its relative price
• Income effect- the portion of the change in the quantity demanded that is attributable to a change
in real income, brought by a change in absolute price. A person has more real income as the price
of a good falls, ceteris paribus.
Situation: Price of good A decrease (how income and substitution effects increase Qd)
• Substitution effect
✓ Relative price of good A decreases- cheaper than other goods
✓ Quantity demanded increase- consumer substitute present purchase with good A
• Income effect
✓ Fall in price of good A result in a rise in real income
✓ Consumer purchase more- purchasing power increase

Calculation

Quantity Marginal Utility for Marginal Utility for Marginal Utility for
good A good B good C
1 22 5.5 40 6.67 14 7
2 20 5 36 6 12 6
3 18 4.5 34 5.67 10 5
4 16 4 30 5 8 4
5 14 3.5 28 4.67 6 3
6 12 3 24 4 4 2
The table above shows the marginal utility of good A, good B and good C for Carmen:
i. Carmen has RM38 to spend on these goods. The prices of good A, good B and good C are
RM4, RM6 and RM2 respectively. Identify the combination of three goods that should be
purchased by Carmen to maximise her utility.

Combination 1: 2A+ 4B+ 3C= 2(RM4) + 4(RM6) + 3(RM2) = RM38

Combination 2: 4A+ 6B+ 4C= 4(RM4) + 6(RM6) + 4(RM2) = RM60
Carmen should buy 2 units of good A, 4 units of good B and 3 units of good C to maximise her
utility.

ii. Based on the answer above, what is the total utility received by Carmen?

Total Utility= (22+20) + (40+36+34+30) + (14+12+10) = 218utils

Chapter 4

• Explicit cost- a cost incurred when an actual payment is made

• Implicit- a cost that represents the value of resources used in production for which no actual
payment is made

Accounting Profit= Total Revenue- Explicit Costs

Economic Profit= Total Revenue- Explicit Costs- Implicit Costs

Fixed Input Variable Input

Quantity cannot be changed as output changes
in the short run
The costs associated with fixed inputs are fixed
costs. A fixed cost doesn’t change as output
changes.
Example: Land
Quantity can be changed as output changes in
the short run
The costs associated with variable inputs are
variable costs. A variable cost changes as output
changes.
Example: Labour

• Short run- A period of time in which some (at least one) inputs in the production process are
fixed.
• Long run- A period of time in which all inputs in the production process can be varied
• Total Cost- The sum of fixed cost and variable cost. TC= TFC+ TVC
• Marginal Cost- The change in total cost that results from a change in output: MC = ΔTC/Δ Q.
• Law of diminishing marginal return- as additional variable input added to fixed input,
eventually Marginal Physical Product (MPP) starts to decline
Relation between MPP and MC can be identified through
• Graph
1) When the MPP rising, the MC is falling
2) When the MPP is maximum, the MC is minimum
3) When the MPP is falling due to the diminishing marginal return, the MC is rising
• Table
1) When the MPP rising, the MC is falling
2) At the breaking point between 20 to 19, the MPP will be maximise and at the breaking point
between 1.00 to 1.05, the MC will be minimise.
3) When the MPP is falling due to the diminishing marginal return, the MC is rising

• Calculation using formula

• Average Fixed Cost (AFC) =TFC/ Q

• Average Variable Cost (AVC)= TVC / Q
• Average Total Cost (ATC)= TC / Q or AFC+ AVC
Average Marginal Rule
• Marginal Magnitude< Average magnitude, Average magnitude falls
• Marginal Magnitude= Average magnitude, Average magnitude is at the minimum point
• Marginal Magnitude>Average magnitude, Average magnitude rises

Sunk Cost

• Cost incurred in the past that cannot be changed by current decision and therefore cannot be
recovered. A person or a firm that wants to minimise losses will hold sunk costs to be irrelevant to
present decision.
• For example, money spent on a failed advertising is considered gone and shall be ignored.
Long Run Average Total Cost (LRATC)

Economies of Scale Constant Returns to Scale Diseconomies of Scale

Exist when inputs are increased by some percentage and
Output increases by a greater Output increases by an equal Output increases by a smaller
percentage, causing unit cost percentage, causing unit cost percentage, causing unit cost
to fall to remain constant to rise

Factors of economies of scale

Specialisation
• Plant size increase
• Greater specialisation of labour will lead to increase in productivity
• Output increase and average cost decrease
Larger scale firm
• More efficient (technologically superior) capital equipment that may only be suitable for use if
there is a large quantity of production
• Output increase and average cost decrease
Diseconomies of scale
• Reorganise, divide operations
• Hire new managers
• Take other measures to reverse the diseconomies of scale