Principals of Economics Chapter 1- Introduction to Microeconomics

Chapter 1- Introduction to Microeconomics

Economics- How people use their limited resources to fulfill unlimited wants - A science that studies human behavior as a relationship between ends and scarce means which have alternative uses. Economics divided to 2 types: 1) Macroeconomics- Studies the aggregate behavior of the entire economy. The study of the economic system as a whole such as the national income, the trade cycle, the unemployment rate, inflation, deflation and general price levels. Examples: What is the unemployment rate in Malaysia? What cause inflation? 2) Microeconomics- The study of individual parts of economy such as public choices, business choices and personal choices. Micro means looking closer into small units. Microeconomics concept can be applied to our daily lives. Examples: Individual- Shall I buy a DVD player or LCD TV? Firms- Shall we use more labors or machines? Government- Shall we allocate budget for hospital or schools or clinics? Positive vs normative Analysis Positive anlysis is to deal with the question of What is and no indication of approval or disapproval. It focuses on the facts and cause-and-effect relationships. It will predict the changes in economic phenomena such as production, consumption, and consumers income due to change in government policy. Example: Suppose the government removes its subsidiary for petrol. What is the impact on the consumers and automobile industry? Will consumer prefer bigger or smaller car? This calls positive analysis because we need to analyze the cause-and effect relationship. Normative analysis is to deal with the question of what ought to be. This analysis incorporates value judgments about what the economy should be or what policy should be used to achieve economic goals. Examples: refer to example above, Should the car manufacturer produce a more fuel efficient car? Should government impose lower corporate tax on oil producing companies? Basic economic concepts (*****) 1) Ends- Unlimited human wants. Human never satisfied and always want more. Like when you own a Vios, you want a Lancer. When you stay in Puncak Jalil, you want to move to Avira. So, you have to choose between the most urgent needs and the most urgent wants when there is unlimited wants. 2) Scarce (insufficient to supply the needs or demands) - Wants which are unlimited although the means to satisfy these wants are limited. In other words, there are limited resources. Almost all things men desire or want are scarce. 3) Alternatives- Choices which may be made and involves opportunity cost. Scarce, recourses can be put to various uses. If you no money to buy Lancer, you can buy Kancil with your limited income, haha.

Principals of Economics Chapter 1- Introduction to Microeconomics Scarcity Wants are always exceeding limited resources to satisfy people. no scarcity, no economics Needs or wants are unlimited, but the world has only a limited amount of resources of factors or production. Factor of production classified to 4 groups: 1) Labour The services contributed by people. 2) Capital- Human made resources( eg. Machinery, toolsetc) 3) Land- natural resources(eg. Water, air) 4) Entrepreneur- Human ability and capability to combine land, labour and capital to develop production of goods and services. Choice- When there is scarcity, choices have to be made. Eg. You want a cat and a car plate no, but you only have limited resources (RM 1000), then you have to choose which you want to buy. Opportunity Cost-cost of one choice in terms of the best forgone alternative. If you cannot obtain what you need then you have to choose among the alternatives. The next alternative that you choose not to do is the cost of the thing that you choose to do. Opportunity cost is defined as the second last alternative that has to be forgone for another choice which gives more satisfaction. Eg, when you choose to buy the car plate no, you have to forgone the cat. Hence, cat becomes your opportunity cost. Basic Economic Problems Due to limited resources, a nation or society has to decide how to allocate the resources efficiently to satisfy the peoples needs. What to produce? Justify what is most important and needs to produce. How to produce?- cheapest and most efficient method For whom to produce? Refers to distribution of the product. Production possibilities curve(PPC) Used to explain the basic economic concepts of scarcity, choices and opportunity cost. Various possible combinations of goods and services produced within a specified time with given technology and resources. Calculate the opportunity cost.** Refer to page 8& 9 -

Principals of Economics Chapter 1- Introduction to Microeconomics Factors that influence the shift of PPC 1) Economic Growth When the country enjoys economic growth, PPC bounds outward. When the country is struck by a natural disaster, thus the economic will decline and brings the PPC inward. 2) Improvements in Technology Technological advances will increase the production capability. If advance technology introduce to product A, the production for A will increase and shift the PPC for product A to the right. 3) Population Population increase- PPC shift outwards Population decrease- PPC shift inwards Shape of the Production Possibilities Curve (PPC) 1) Increasing opportunity cost- PPC is concave( the country producing more of one product and sacrificing production of another product) 2) Decreasing opportunity cost- PPC is Convex (if in producing additional product A but fewer products B is forgone). 3) Constant opportunity cost- PPC is linear (When additional production for A but equal number of B needs to be sacrified). Economic System A way in which an economy is organized to answer basic economic question. 1) Capitalism or free market economy(individual make decision without government intervention) An economic system where individuals and sellers make economic decisions using a price system. Price system is where buyers and sellers meet and make transactions through market prices. Characteristics - Private ownership of resources - Freedom of enterprise and choice(Individuals free to own resources and establish enterprise) - Consumers sovereignty(Consumers taste and preferences affect the production of goods and services) - Competition( producer compete among themselves) - Government intervention( limited government control) - Price system( free operation of demand and supply without intervention)

Principals of Economics Chapter 1- Introduction to Microeconomics Merits of Capitalism - Production according to the needs of consumers - Economic freedom - Efficient utilization of resources - Variety of consumer goods - Enhanced trade, business, and research and development(R&D) - Automatic incentives(Encouragement to efficient producers) - Flexibility (Automatically changes with circumstances, eg. When wars, produce more military than others). Demerits of capitalism - Inequality distribution of wealth and income - Inflation and high unemployment rate - Lack of social welfare (Owner not provide pension,accident benefit to employee.Insufficient provision of social amenities like schools,hospital. Crime tend to be high in this system) - Unnecessary variety and wasteful competition (Too much competition leads to unnecessary high cost of production). - Misallocation of resources (only produce products with high profit. Lack of production of goods for poor) - Social cost (Focus on high profit and neglects welfare of their worker and the environment) Economic decision in Capitalism - What to produce- only produce goods and services with high demand to enjoy higher profit. - How to produce- Use more than one method which is the most cost effective - For whom to produce- Anyone who can afford. 2) Socialism An economic sustem where all the economic decisions are made by the government or central authority. Characteristics - Public ownership of resources (All resources own and operate by the government. Equal opportunity for all citizens regardless of their income). - Central planning authority - Price mechanism of lesser importance (Price fixed by government and not determined by demand and supply). - Central control and ownership ( Government controls production, consumption and distribution) Merits of socialism - Production according to basic needs

Principals of Economics Chapter 1- Introduction to Microeconomics - Equal distribution of income and wealth (no different between rich and poor. Equal opportunity god all citizens in earning an income). - Better allocation of resources - No serious unemployment of recession/inflation - Rapid economic development (Economy growth faster due to full utilization of resources, better planning and quick decisions). Demerits of Socialism - Lack of Incentives and initiative by individuals (no profit motive) - Loss of economic freedom and consumer Sovereignty (Consumer accept whatever produce). - Absence of competition - Waste of resources (overproduction goods with low demand and underproduction goods with high demand). Economic decision in Socialism What to produce- authorities will decide what to produce without taking consumer demand into consideration. How to produce- Choice between traditional and modern techniques For whom to produce- Fixed price of goods. Distributions decided by authority.

3) Mixed Economy- combine capitalism and socialism - In real world, most country practice mixed economy Characteristics - Public and private ownership of resources - Price mechanism and economic plans in making economic decisions(Price mechanism use to price both goods and services. However, commodities like sugar, oil and rice are declared as controlled item in Malaysia). - Government helps to control income disparity (Government control income disparity through income taxes and welfare payment. These direct control over profits, wages and rentals). - Government intervention in the economy ( Government interfere only particular industries) - Co-operation between the government, public and business sectors. - Government control of monopolies Economic decisions in Mixed economy system - What to produce (Decided by both public and private sectors, depends on the consideration of social welfare and economic growth). - How to produce (Public and private sectors decide what technique use). - For whom to produce (Government intervenes directly through price control and indirectly through imposition of taxes and subsidies).