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INTRODUCTION TO MICROECONOMICS
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LEARNING OUTCOMES
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Define economics and distinguish between microeconomics and macroeconomics. Describe basic economic concepts: Scarcity, choices and opportunity cost. Explain the basic economic problems. Explain graphically concept using PPC. basic economics
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Economics is a science that studies human behavior as a relationship between ends and scarce means which have alternative uses L.Robbins (1894-1984) . Economics is a study of how people use their limited resources to try to fulfill their unlimited wants and involves alternative or choices K.E. Case and R.C. Fair. Economics is the science of how a particular society solves its economic problems Milton Friedman (1912) Economics is the study of mans actions in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being. Thus it is on one side a study of wealth and on the other and more important side, a part of the study of man - Alfred Marshall (1824-1924)
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DEFINITION OF ECONOMICS
Economics is a social science study which concern on how human being allocates the limited resources in order to fulfill the unlimited needs and demands. Economic can be subdivided into two branch; macroeconomic and microeconomic. Microeconomic analyzes the specific economic units in details such as households, firms and government. Macroeconomics, on the other hand, analyzes the aggregate behavior of the entire economy.
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MICROECONOMICS VS MACROECONOMICS
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GOVERNMENT
HOUSEHOLDS
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Build more hirts ice of s , hospitals or Pr e decreas y schools? I bu OPEN ECONOMICS should less? r more o pact of Im doing How does ional internat inflation trade. What is occurs? the unemp loymen t rate in t Wha d the Malays ia? nce flue t rate to in res inte crease? FIRMS de
ECONOMIC CONCEPTS
Three main economic concepts involves; Scarcity (land, labour, capital and enterprise) Occurs as human wants are always greater than the available resources. The most important concept in economics. If there is no scarcity, then there will be no economics study. Choice When scarcity exists, choices are to be made out of the available alternatives. Opportunity cost (Second Best-Forgone alternative)
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The second-best alternative that has to be forgone for 4/18/12 another choice which gives more satisfaction.
ECONOMIC CONCEPTS
This economics concept is simple : Because the resources are scarce, therefore choices have to be made. Once choices are made, there will be an opportunity cost as the value of the next-best choice (alternative) available. What is the opportunity cost by choosing to study at university???
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What to produce? What kind of product/services are going to be produces. Depends on the type and quantity of goods and services needed by the countries How to produce? What resources are going to be used, what techniques are going to be used to produce. Depends on the cheapest method of production (Labor VS Machine). For whom to produce?
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Since with scarcity problem, no country in this world can produce unlimited numbers of goods. Therefore, an economy will produce goods depending on various combinations of factors of production. PPC shows the various possible combination of goods and services produced within a specified time period with given technology and resources. Assumptions to illustrate PPC includes;
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Full-employment
The economy is operating in full employment and full efficiency
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Fixed resources
The amount of available economic resources or factor of production are fixed 4/18/12
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Technology constant
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Clothes
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Good Y
Increasing opportunity cost means that when a country produces more of one good, it has to forgone more amounts of another goods. Figure 1.2 shows that 1 unit increase in Good X from 1 to 2 units had to forgone 1 unit of Good Y . Additional unit of Good X from 2 to 3 units involves 2 units of Good Y . This is called increasing opportunity cost as more units of Good Y are forgone for additional unit of Good X. PPC is concave due to
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Good X
Constant opportunity cost means that when a country produces more of one good, it has to forgone the same amounts of another goods. Figure 1.3 shows that same amount of Good Y is forgone for each additional unit of Good X. PPC is linear as the opportunity cost is constant.
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Figure 1.3 : Constant Opportunity 4/18/12 Cost
Good X
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occurs when a country produces more of one good, it has to forgone lesser amounts of another goods. Figure 1.4 shows that 1 unit increase in Good X from point A to B involves two units of Good Y forgone. An additional increase of Good X from point B to C forgone 1 units of Good Y and number of Good Y forgone continues to decrease. This is called decreasing opportunity cost as lesser units of Goods Y are forgone for additional unit of Good X.
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ECONOMIC SYSTEMS
Economic system is a way of organizing the relationship among individuals, firms and government to make choices on the basic economic questions. The three basic economic problems (what to produce, how to produce and for whom to produce) are solved depending on the economic system chosen by the society. Basically, there are four types of economic system which have been practiced, namely;
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Government intervention
There is no intervention by the government in the making of economic decisions. Government only exist as the law enforcer and set the rules and regulation to ensure the stability of economic condition of the country.
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Consumers sovereignty
Consumer is the king concept is practiced in this system. Consumers taste and preference will affect the production of goods and services.
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Competition
Market economy also characterized as highly competitive among the producers to obtain the highest profit.
In order to attract more customers, producers will use various marketing strategies to sell their 4/18/12 products better.
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Economic freedom
It means the right to earn and retain property as well as freedom of enterprises and choices of occupation.
Thus, it will lead to the sourcing of the countrys 4/18/12 manpower in different units of production.
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Unnecessary competition
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This happen as some producers will highly advertised their products in order to attract 4/18/12 consumer due to stiff competition in this market
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Social cost
Workers may face social cost (health problem) arising from the polluted environment caused by improper disposal of factory wastes since producers' intention is to increase the private 4/18/12
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HOW CAPITALIST MARKET SYSTEM SOLVE BASIC ECONOMIC What to produce? PROBLEM
In this economic system, production depends on the goods demanded by the consumer. An entrepreneur will only produce goods and services where there is demand from consumer in order to gain higher profit.
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How to produce?
Depends on the techniques of production whether to use labor intensive, capital intensive or combination of both techniques.
Cheapest method of production will be adapted not only to maximize profit but also to achieve 4/18/12
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Socialist market system is a centrally planned economy where government or central authority makes all economic decision. Any private individual has no right to make their own economic decisions. There will be no private property rights since all resources are owned by government. Also known as command economy and planned economy. There are only few countries which practice this economic system such as Russia, Cuba, Laos, Vietnam and North Korea. 4/18/12
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Government will plan and allocate the resources between current consumption and investment for 4/18/12
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Social welfare
Government will provide all citizens of the country full social security such as pensions, accident benefits and others.
With all concerns from government, labor 4/18/12 dispute and wastage of resources do not exist in
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There is absence of profit motive in individuals. Thus, this will lead to economic inefficiency since jobs are provided by the government and individuals are not motivated to work harder.
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Loss of consumers
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There is no choice given to consumer and they accept whatever the public enterprise produce. Since with the limited number of private enterprises, there are limited variety of goods
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This will lead to overproduction of certain goods 4/18/12 and underproduction of certain other goods.
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HOW SOCIALIST MARKET SYSTEM SOLVE BASIC ECONOMIC PROBLEM What to produce?
In this economic system, planning authorities decides what to produce. The Central Planning Authority will collect detailed statistics on the resources availability and fix up with national priorities.
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How to produce?
The Central Planning Authority will also decides on what techniques to be used in the production of goods and services. The choice techniques. is between traditional or modern
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Mixed market system is an economic system which has a mix of capitalist and socialist systems to solve basic economic problems. A mixed economy is where both public and private sectors play their roles in the economy. Most of the countries in the world practiced this type of economic systems. This includes Malaysia, Singapore, Thailand, Germany, South Africa and many others. 4/18/12
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Private enterprise conduct business freely. The government encourages private sectors by providing infrastructure and facilities. Price mechanism and economic plan used to make economic decisions. Price mechanism is used on pricing of goods and services. However, government will intervene in setting up prices on certain commodities. This includes sugar, oil, rice where government
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Government intervention
Government will not intervene in the economy except for particular industries. Government uses the legislation for unsafe goods, categorized as illegal products such as military items, drugs, etc. Government also uses direct provision such as education, defense and health to increase standard of living.
Besides, government also control the income disparity through income taxes and welfare payment. 4/18/12
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Social welfare
The government will provides public goods at an affordable price in order to enable lower income earners to benefit the public goods as well. Government will ensure that public and private enterprise provide all citizens of the country full social security such as pensions, accident benefits and others.
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HOW MIXED MARKET SYSTEM SOLVE BASIC ECONOMIC PROBLEM What to produce?
In this economic system, what to produce decided by the public and private sectors. The goods and services produced depends on the consideration of social welfare as well as economic growth.
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How to produce?
The private sector will choose the most efficient and cost-effective techniques of production (labor intensive vs. capital intensive) while government will enact laws to combat inefficiencies arising from externalities.
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Economic activities in Islam are not seen from the materialistic aspect only but also the spiritual aspect in this world and the life hereafter. The only objective of the Islamic Economic System is to achieve Al-Falah, which means success in ones life in the world and also the life hereafter. The basic philosophical foundation in the Islamic Economic System includes;
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HOW ISLAMIC MARKET SYSTEM SOLVE BASIC ECONOMIC PROBLEM What to produce?
In this economic system, what to produce are decided through the principles of Syariah as been stated in Al-Quran and As- sunnah. The goods and services produced must be permissible (halal) and in accordance with the classification of goods in Islam.
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How to produce?
The producer will choose the most efficient and cost effective methods of production. (labor vs. capital intensive)
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END OF CHAPTER 1
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THANK YOU
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