MICROECONOMICS

ECN1123

Week 1
Introduction to Microeconomics
 Learning Objectives

1. DEFINITION OF ECONOMICS
2. POSITIVE AND NORMATIVE ANALYSIS
3. MICROECONOMICS VS MACROECONOMICS
4. FUNDAMENTAL ECONOMIC QUESTIONS
5. TYPES OF ECONOMIC SYSTEMS
 DEFINITION OF ECONOMICS
Economics is the study of the wealth of a nation (Adam Smith )
"Wealth of Nations," The word 'wealth' is
discussed in terms of four key aspects, namely
the production of wealth, the exchange of
wealth, the distribution of wealth, and the
consumption of wealth. Smith rejected the view
that wealth consisted solely of a nation's
produce. He proposed that this wealth
consisted of output (including produced and
manufactured goods) and input (the labor
required to produce and manufacture.)
Simplified Terms
A farmer and his laborers produce apples and sell these
through a local farm stall (production of wealth.) The
apples are then purchased by consumers (exchange of
wealth), and the profit shared .amongst the farmer,
laborers and stall staff, depending on their contribution
(distribution of wealth.) The consumer will then consume
the apples (consumption of wealth).
 DEFINITION OF ECONOMICS
(CON’T)

Economics is a science that studies human

behaviour as a relationship between ends and
scarce means which have alternative uses.’
(L. Robbins)
DEFINITION OF ECONOMICS
(CON’T)

‘Economics is a study of how people use their

limited resources to try to fulfill unlimited wants
and involves alternatives or choices’
(K.E. Case and R.C. Fair).
POSITIVE AND NORMATIVE
ANALYSIS

A positive statement deals with the question

of ‘what is’ and there no indication of
approval or disapproval. Positive analysis
focuses on facts and the cause-and-effect
relationships.
POSITIVE AND NORMATIVE
ANALYSIS (CON’T)
A normative statement deals with the
question of ‘what ought to be’. Normative
analysis incorporates value and judgments
about what the economy should be or what
policy should be used to
achieve economic goals.
 MICROECONOMICS VS
MACROECONOMICS

MICROECONOMI MACROECONOMICS
CS
Analyzes specific Analyzes aggregate
economic units in behaviour of the entire
detail such as economy such as
households, firms and national income, trade
government. cycle, and
international
trade .
 OPPORTUNITY
OPPORTUNITY COST
COST
CONCEPTS
ECONOMIC
BASIC
CHOICES
CHOICES SCARCITY
SCARCITY
CONCEPTS
BASIC ECONOMIC
 BASIC ECONOMIC
CONCEPTS (CON’T)

2. CHOICES
When scarcity exists, choices are to be made.
3. OPPORTUNITY COST
Opportunity cost is defined as the second best
alternative that has to be foregone for another
choice which gives more satisfaction.

MICROECONOMICS 12
 PRODUCTION
POSSIBILITIES CURVE (PPC)
It is used to explain the basic economic concepts of
scarcity, choices and opportunity cost.
DEFINITION
The PPC shows various possible combination of
goods and services produced within a specified time
with its resources fully and efficiently employed.
 ASSUMPTIONS OF
PRODUCTION
POSSIBILITIES CURVE (PPC)

1. Economy is in full employment and full

production capacity (full efficiency).
2. Resources available are fixed and
limited.
 THE ASSUMPTIONS OF
PRODUCTION
POSSIBILITIES CURVE (PPC)
(CON’T)

3. The state of technology does not

change throughout production.
4. It is assumed that the country is
only producing two goods.
 PRODUCTION
POSSIBILITIES CURVE (PPC)
(CON’T)
Defence Goods (million)
North Korea If it allocates its resources to
produces two defence goods, it will produce at
products—defence Point A
A goods and If it allocates its resources to
150 B consumer goods consumer goods, it will produce at
Point F
C
120 If North Korea is at point C on the
D PPC, it can produce the
90 combination of 120 million defence
goods and 20 million units of
E consumer goods
60
Point D shows production of 90
30 million defence goods and 30
million units of consumer goods
F Consumer Goods (million)
0 10 20 30 40 50
 PRODUCTION
POSSIBILITIES CURVE (PPC)
(CON’T)
Defence Goods (million)
Point outside the PPC
Z (Point Z)  SCARCITY
150 A
B UNATTAINABLE
Point along the PPC 
C
120 Y CHOICES

D
90 Movement from one point
ATTAINABLE to another (point C to D)
 OPPORTUNITY COST
60 Point inside the PPC (Point E
Y)  Waste of resources
30 and inefficiency

F
Consumer Goods (million)
0 10 20 30 40 50
 SHIFTS OF PPC DUE TO
ECONOMIC GROWTH
Defence Goods (million)

160
150
When the country enjoys
120 economic growth, the
PPC moves outward

90
When the country
is struck by natural
60 disaster, economic
growth will decline
30 and PPC shifts to
the left
Consumer Goods (million)
0 10 20 30 40 50
 SHIFTS OF PPC DUE TO
IMPROVEMENT IN
TECNOLOGY
Defence Goods (million)
160
Technology increases
150 production of defence
goods

120

90 Technology increases
the production of
consumer goods
60

30

Consumer Goods (million)

0 10 20 30 40 50

MICROECONOMICS 19
 SHIFTS OF PPC DUE TO
POPULATION
Defence Goods (million)

160
150
Increase in population
120

90

60 Decrease in
Population
30

Consumer Goods (million)

0 10 20 30 40 50
CONCAVE SHAPE OF PPC
CURVE
Good Y

A
6
B
5 Increasing
Opportunity Cost
4
C
3

1
D
0 Good X
1 2 3
CONVEX SHAPE OF PPC CURVE
(CON’T)
Good Y

6 A

Decreasing
4
Opportunity Cost
B
3

2
C
1
D
Good X
0
1 2 3
LINEAR SHAPE OF PPC CURVE
(CON’T)
Good Y

6 A

5
B Constant Opportunity
4
Cost
3
C
2

1
D
Good X
0 1 2 3

MICROECONOMICS 23
 FUNDAMENTAL ECONOMIC
QUESTIONS
1. WHAT TO PRODUCE ?
Depends on the what type of goods and
services to produce.

2 HOW TO PRODUCE ?
Depends on the cheapest method
of production.

3. FOR WHOM TO PRODUCE ?

Depends on the distribution of
income
 5 Economic Questions
Society (we) must figure out
1. WHAT to produce (make)
2. HOW MUCH to produce (quantity)
3. HOW to Produce it (manufacture)
4. FOR WHOM to Produce (who gets what)
5. WHO gets to make these decisions?
 ECONOMIC SYSTEMS

TYPES OF ECONOMIC
SYSTEMS

MARKET PLANNED MIXED

ECONOMY ECONOMY ECONOMY
MARKET ECONOMY

CHARACTERISTICS

MARKET ECONOMY
 Individuals and sellers make
economic decisions using a price system.

MERITS AND DEMERITS

CHARACTERISTICS OF A
MARKET ECONOMY

1. Private ownership of resources

2. Freedom of enterprise and choice
3. Consumers’ sovereignty
4. Competition
5. Government intervention
6. Price system
MERITS AND DEMERITS OF A
MARKET ECONOMY
MERITS
 Production according to
consumers’ need
 Economic freedom
 Efficient utilization of resources
 Variety of consumer goods
 Enhanced trade, business and
R&D
 Automatic incentives
 Flexibility
DEMERITS
 Inequality of distribution of
wealth and income
 Inflation and high
unemployment rate
 Lack of social welfare
 Wasteful competition
 Misallocation of resources
 Social cost
 PLANNED ECONOMY

CHARACTERISTICS

PLANNED ECONOMY
 Economic decisions are made by the
MERITS
government or AND DEMERITS
central authority.
 CHARACTERISTICS OF A
PLANNED ECONOMY

1. Public ownership of resources

2. Central planning authority

3. Price mechanism of lesser

importance
4. Central control and ownership
MERITS AND DEMERITS OF A
PLANNED ECONOMY
MERITS DEMERITS
 Production according to  Lack of incentives
basic need and initiative by
 Equal distribution of individuals
income and wealth  Loss of economic
 Better allocation of freedom and
resources consumer
 No serious unemployment sovereignty
or inflation  Absence of
 Rapid economic competition
development
 Waste of economic
 Social welfare
resources
 MIXED ECONOMY

CHARACTERISTICS

MIXED ECONOMY
An economic system which combines
both capitalism and socialism.
 CHARACTERISTICS OF
MIXED ECONOMY
1. Public and private ownership of resources
2. Price mechanism and economic plans in making
decision
3. Government helps to control income disparity
4. Government intervention in the economy
5. Co-operation between the government, public
and business sectors
6. Government control of monopolies
 Reference and Content

 Main reference supporting the Microeconomics

course by Oxford University Press Malaysia,2010

Additional reference supporting the Economics by John Solman

course Peterson 2013

WEEK LESSON PLAN L T P O T

Week 1 1. DEFINITION OF ECONOMICS 3 6 9
2. POSITIVE AND NORMATIVE ANALYSIS hours
3. MICROECONOMICS VS
MACROECONOMICS
4. TYPES OF ECONOMIC SYSTEMS