Chapter 1 Introduction To Microeconomics ECO162

CHAPTER 1
INTRODUCTION TO
MICROECONOMICS
Principles of Economics second edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 1: 1
LEARNING OUTCOMES
 LO1 Define economics and distinguish

between microeconomics and
macroeconomics (from conventional
and Islamic perspective).
 LO2 Describe basic economic concepts.
 LO3 Use the production possibilities curve
to explain the basic economic
concepts.
 LO4 Explain basic economic problems.
 LO5 Explain the four types of economic
systems

What is Economics?
(conventional perspective)
Study of how
Economics people use their
limited
RESOURCES to
fulfill unlimited
wants.
Microeconomics
 study choices made by
Macroeconomics
 The study of the nation’s economy
individual participants
as a whole.
(households, firms and
government) and how these  Eg: economic growth, inflation,
choices affect the markets for unemployment
goods and services
 Demand and supply for car in
Malaysia
Cont… (Islamic Perspective)
Study of man’s activities in line with syariah

to obtain, use and manage the economic
resources for the betterment of oneself and
others both materially and spiritually in order
to achieve the blessing of Allah

ECONOMIC RESOURCES

BASIC ECONOMIC CONCEPTS

PRODUCTION POSSIBILITIES CURVE
(PPC)
 Scarcity, Choices and Opportunity cost can be

explained using the PPC
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.

(PPC) (cont.)
Assumptions:
To draw PPC, we need 4 assumption:

Producing 2 goods
Fixed resources
Fixed technology
Producing at full employment

(PPC) (cont.)
Sewing Machine Alternative Sewing Butter

Machine
16 A 15 0
A
B B 14 1
14
C 12 2
12 C
D 9 3
10 D E 5 4
8 F 0 5
6
E
4
2
F
0 1 2 3 4 5 Butter

(PPC) (cont.)
Point outside the PPC

Sewing Machine
(Point Z)  SCARCITY
16 Z
A
14 B
12 C
Any point along the
10 D PPC  CHOICES
Eg Point A-F
8 Y
6 Point inside the PPC
(Point Y)  Attainable E
4 BUT inefficiency
2
F
0 1 2 3 4 5 Butter

Tutorial 1
Alternative/ Combination Car (unit) Book (unit)
A 0 30
B 10 20
C 20 10
D 30 0
The following is a set of hypothetical production possibilities of an

economy
1) Using a GRAPH PAPER plot the PPC for the above table.
2) What is the consequences when the economy try to produce:
i. 10 units of car and 30 units of book?
ii. 15 units of car and 5 units of book?
iii. 30 units of car and 0 unit of book?

Calculating Opportunity Cost Using
Table
Alternative/ Car (unit) Book (unit) Opportunity cost of Book
Combination
A 0 30 (10-0=10 units of car)
B 10 20 (20-10= 10 units of car)

C 20 10 (30-20= 10 units of car
D 30 0 0 unit of car
(no car should be let go because no
production of book
*** Opportunity cost of book means that how much of car should be let go when we
produce book.
Start calculating from the biggest value of car i.e at combination D because in this case car
should be let go to enable more book production

Tutorial 2
Alternative/ Car (unit) Book (unit) Opportunity cost

Combination of Car
A 0 30
B 10 20
C 20 10
D 30 0
Remember!!!
*** Opportunity cost of Car means that how much of Book
should be let go when we produce more car.

The Shape of PPC
Concave Convex Linear

x x
x
y y
y
Increasing Opportunity Decreasing Opportunity Constant Opportunity

Cost Cost Cost

TUTORIAL QUESTION
Calculating the Opportunity Cost
Calculate the opportunity cost:

1.when the production of food
increase from 2kg to 4 kg
2.of producing 9 units of cloth
3.of producing 6 unit kg of foods
Explain
1.Why point G is unattainable?
2.Even point F is attainable is it
inefficient? Why?

Factors that Influence the Shift of PPC
1. Economic Growth
Sewing Machine
16
14
When the country
enjoys economic
12 growth, the PPC bounds
outward.
10
8
When the country is
6
struck by natural
disasters, economic
4 growth will decline and
2 the PPC will shift to the
left.
Butter
0 1 2 3 4 5
2. Improvements in Technology
Sewing Machine
16
Technology increases
the production of
14 sewing machine.
12
10
Technology increases
8
the production of
butter.
6
4
2
0 Butter
1 2 3 4 5
3. Population
Sewing Machine
16
14
Increase in population
12
10
8
Decrease in population
6
4
2
0 Butter
1 2 3 4 5
BASIC ECONOMIC PROBLEMS

1) Capitalism
The decision made by individuals & sellers is

based on price mechanism.
Countries applied capitalism are:

Japan, US, France, Western Germany, Italy,
Canada & UK.
Also known as free market economy &

laissez-faire

Characteristic of Capitalism

Advantage of Capitalism
1. Production according to the needs of

consumers
2. Economic freedom: freedom of enterprise &

a choice of occupations.
3. Efficient utilisation of resources:

Competition create efficiency in production,
consumer can get better quality goods

Cont..
4. Variety of consumer goods: competition

enable the cons. to enjoy wide variety of the
same goods.
5. Improve trade, biz & R&D
6. Flexibility: its provide flexibility that

automatically changes with circumstances.

Disadvantages of capitalism

Economic decision on capitalism

2) Socialism
It is an economic system in which economic

decision are made by the gov. or central
authority.
It is also known as command economy and

planned economy.
It is applied in China, Cuba, North Korea and

Russia

Characteristic of Socialism

Advantage of Socialism

Disadvantage of Socialism

Economic decision on socialism

3) Mixed Economy
 It’s combines both capitalism & socialism to

solve the basic economic problems
In the real world, most countries practice

mixed economy including Malaysia

Characteristic
of mixed economy

Economic decision
on mixed economy

4) Islamic Economics (IE)
IE is a social science that studies how man

fulfill his as well as society’s desires according
to syariah principles.
 IE objective is to achieve the blessing of

Allah

Cont..
 The Main philosophic trust under IE are based

on:
1.Hablumminaan Allah
◦ The r/s between man & Allah S.W.T
2.Hablumminaanaas
◦ The r/s between man & his fellow
3.The r/s between man & nature
(r/s: relationship)

Hablumminaan Allah
 The r/s between man & Allah S.W.T is term as

Tawhid (the belief & understanding that Allah is
the creator, the lord, the sustainer & the giver)
 Concept of Tawhid Rububiyah:

 It is about the belief & understanding that Allah alone
protect, sustains, develops and lead His man towards
perfection.

Duties & responsibilities
as a Muslim

Role of Man in
Managing Economic Resources
Unlike conventional economics, scarcity of

resources doesn’t exist in IE.
Resources are plentiful based on evident in

the Quran where Allah says,
“and HE gives you all that you ask of Him, and if you count
Allah’s favor, you will never be able to calculate it, surely
mankind is unjust, ungrateful”
(Ibrahim:34)

Cont..
 All the plenty resources is however are not
created and made ready for use.
 Man should be hardworking, industrious &
innovative to develop the resources.
 Thus, in IE man has limited/scarce ability to
control, to acquire, develop and use the
resources.
 As a result they need to decide what to
produce with these limited resources, & how
to produce the good & services needed & how
to distribute it so at the end of the day they
can get the blessing

Principle of IE System

Cont..
1. Balance between private & public ownership of
resources
◦ Individuals are allowed to own economic resources
& wealth personally to produce permissible goods
& services.
2. Regulated or limited economic freedom
◦ Islam doesn’t allow absolute freedom to any
decision maker, all economic activities are fully
guided by syariah
3. A need for government intervention
◦ Gov. must play a role in providing the facilities &
welfare to every member of society. They also
responsible in reducing the poverty incidence &
promoting equitable distribution of income among
the citizen.
EXERCISE
Using your own words, prepare a mind map

that discuss the economic systems including
Islamic economic system.
In each of the economic system, you shall
describe the:-
 Definition
 Features/Characteristics
 Advantages
 Disadvantages (except for Islamic economic system)
 How each economic system solve their basic

economic problem(s)

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CHAPTER 1

Principles of Economics second edition All Rights Reserved

 LO1 Define economics and distinguish

Principles of Economics second edition All Rights Reserved

Study of man’s activities in line with syariah

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

 Scarcity, Choices and Opportunity cost can be

Principles of Economics second edition All Rights Reserved

To draw PPC, we need 4 assumption:

Principles of Economics second edition All Rights Reserved

Sewing Machine Alternative Sewing Butter

Principles of Economics second edition All Rights Reserved

Point outside the PPC

Principles of Economics second edition All Rights Reserved

Alternative/ Combination Car (unit) Book (unit)

The following is a set of hypothetical production possibilities of an

Principles of Economics second edition All Rights Reserved

B 10 20 (20-10= 10 units of car)

Principles of Economics second edition All Rights Reserved

Alternative/ Car (unit) Book (unit) Opportunity cost

Principles of Economics second edition All Rights Reserved

Concave Convex Linear

Increasing Opportunity Decreasing Opportunity Constant Opportunity

Principles of Economics second edition All Rights Reserved

Calculating the Opportunity Cost

Calculate the opportunity cost:

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

The decision made by individuals & sellers is

Countries applied capitalism are:

Also known as free market economy &

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

1. Production according to the needs of

2. Economic freedom: freedom of enterprise &

3. Efficient utilisation of resources:

Principles of Economics second edition All Rights Reserved

4. Variety of consumer goods: competition

5. Improve trade, biz & R&D

6. Flexibility: its provide flexibility that

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

It is an economic system in which economic

It is also known as command economy and

It is applied in China, Cuba, North Korea and

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

 It’s combines both capitalism & socialism to

In the real world, most countries practice

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved