chapter one micro

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N O R A Z U R A I S M A I LD E C E M B E R 2 0 1 2

MICROECONOMICSPB102



COURSE LEARNING OUTCOME

• Upon completion of this course, students should beable to:

• CLO 1

•

Apply effectively the knowledge of basic theories in the world ofmicroeconomic.

6/2/2013 NOR AZURA ISMAIL 2



INTRODUCTION TO MICROECONOMIC

• 1.1 Understand microeconomicin general• 1.1.1 Define microeconomics

• 1.1.2 Compare between study fields ofeconomics: micro and macro

economics• 1.2 Know Economic Problems

• 1.2.1 Describe three economicproblems.

• 1.2.2 Discuss the concept of economicproblems

• a. Scarcity

• b. Choice

• c. Opportunity cost

• 1.2.3 Apply Production Possibility Curve(PPC) to explain concept of economicproblems

• a. Assumption of PPC

• b. Factors that influence the shift of PPC

• 1.3 Learn how the world ofeconomic systems solve theBasic Economic Problems• 1.3.1 Describe the economic problems:

what, how much, how to be produced

and to whom the product should beproduced

• 1.3.2 Discuss the characteristic of worldeconomic systems

• a. Capitalism (free market)

• b. Central Planned

• c. Mixed economic

•

d. Islamic Economic• 1.3.3 Explain the merits and demerits of

world economic system

• 1.3.4 Compare the benefits of everyworld economic system

• 1.3.5 Compare how the worldeconomic systems can solve basic

economic problems6/2/2013 NOR AZURA ISMAIL 3



MICROECONOMIC IN GENERAL

• Definition of microeconomics:-

• L. Robbins:

• Economics is a science that studies human behavior as a relationshipbetween ends and scarce means which have alternative uses.

•

K. E. Case and R.C. Fair:• Economics is a study of how people use their limited resources to try to

fulfill unlimited wants and involves alternatives or choices.

• David N. Hyman:

• Economics as a study of how scarce resources are allocated amongalternative uses.




MICROECONOMIC IN GENERAL

• Comparison between study fields of economics: micro and macro economics

MICROECONOMICS MACROECONOMICS

Definition The study of individual parts of the economysuch as public choices, business choices andpersonal choices.

The study of the economic system as a wholesuch as the national income, the trade cycle,the unemployment rate, inflation and generalprice levels.

Approach takes a bottoms-up approach. With thisapproach, aspects of the economy from thebottom up, the consumer, are studied first.This information is analysed by working uptowards the whole economy.

Takes a top-down approach, starting with thetop of the economy: the government. It worksits way down to the consumer, trying to relateeffects and patterns of the economy, in order to develop theories.

Decisions focuses on individuals and business decisions. focusing on country and governmentdecisions.

Goods and Services focuses on supply and demand and theeffects of prices.

focuses on larger issues that control consumer spending such as unemployment, nationalincome and rate of growth.

Issues Studied the study of individual choices, how thesechoices are decided, what motivatesconsumers and the effects they have on theeconomy.

calculates and studies gross domesticproduct (GDP) and the national debt.

Example study the types of cars consumers arepurchasing study the car industry as a whole.6/2/2013 NOR AZURA ISMAIL 5



ECONOMIC PROBLEMS




ECONOMIC PROBLEMS

• Three Problems of Economic Organizations :• In every economy; economic organizations, irrespective of

their type, have to face and solve three problems ofeconomics. These three problems are as follows:

1. What to produce: This problem is what should the economy produce in order to satisfyconsumer wants as best as possible using the limited resources available.

2. How to produce: How to combine production inputs to produce the goods decided in

problem 1 as most efficiently as possible. An economy achievesproductive efficiency if it produces goods using the least resources

possible.3. For whom to produce: Should the economy produce goods targeted towards those who have

high incomes or those who have low incomes. What sort of demographicgroup should the goods in the economy that are produced be targetedtowards?




CONCEPT OF ECONOMIC PROBLEMS

1. Scarcity2. Choice3. Opportunity cost




SCARCITY

• Human wants• Unlimited wants

• Resources•

used to produce goods / services to satisfy human wants• limited in supply

• scarce: i.e. their quantities are insufficient to satisfy allhuman wants

• Types of resources• Natural resources: e.g. sunshine, rain, crude oil

• Human resources: labor service

• Man made resources: e.g. machines, equipment




SCARCITY

• Economics, then, tries to solve the problem ofscarcity.• This doesn’t mean to make unlimited stuff, but figuring how

to distribute scarce, limited stuff in the best way to meet

wants.

• It also wants to see how people satisfy needs and wants bythe choices they make.

• Why X and not Y? Why McDonald’s? Why did banks buymortgage-backed securities? Why TXU and not Gexa? Why

Crocs?• Seriously… why Crocs?




SCARCITY




SCARCITY

• Do they face scarcity problem?• United States

• Hong Kong

•

North Korea• Africa

• Are they scarce?• Sunshine in Thailand

• A free sample of candies given at a shopping centre

• Fresh air in a café with many smokers

• Sand in the desert




MAKING CHOICES

• Due to the limited resources available, businessesmust determine what to produce first to satisfydemand.

•

All Choices in a finite world have “opportunitycosts”. Alternative uses of finite resources

• Opportunity cost is the value of the next bestalternative sacrificed




MAKING CHOICES

• Choice among options• Rank options according to a person’s preference order

• Option 1 going to cinema

• Option 2 going to sing karaoke

• Option 3 sleeping at home

• What is the cost of going to the cinema?• Going to sing karaoke (highest-valued option forgone)

• We cannot choose option 2 and option 3 at the same time,

we only forgo option 2 when we select option 1




MAKING CHOICES

• Choosing a career / job• Option 1 being an actress ( $10 Mn. p.a.)

• Option 2 being a nurse ( $ 0.5 Mn. p.a.)

• Income forgone being an actress < income forgonebeing a nurse

• Cost being an actress < cost being a nurse

• Choose the job with the lowest opportunity cost




MAKING CHOICES

• Full cost• Option 1 going to a 1 hour concert and pays $200 for a

ticket

• Option 2 working in Park’n as a salesman earning $30 per

hour • Option 3 working as a tutor earning $100 per hour

• Full cost of attending the concert = price of ticket +

income forgone (highest-valued option forgone)• Full cost of attending the concert = $200 + $100 =

$300




MAKING CHOICES

• Complimentary tickets• Going to Hong Kong Disneyland

• Ticket : Free of charge

•

Money spent on food, transport..=$200• Income forgone = $500

• Full cost of going for Disneyland (HK) =$700




OPPORTUNITY COST

• Opportunity cost is defined as the second bestalternative that has to be forgone for another choice which gives more satisfaction.

•

Opportunity cost is the highest-valued optionforgone

• The best alternative that we give up, or forgo, whenwe make a choice or decision.




OPPORTUNITY COST

• Example• The opportunity cost of deciding not to work is the lost wages

foregone

• The opportunity cost of spending money on a foreign holiday is

the lost opportunity to buy a new dishwasher or the chance toenjoy two short breaks inside the United Kingdom

• The opportunity cost of the government spending £20 billion oninterest payments on the national debt is the extra money itmight have allocated to the National Health Service

• The opportunity cost of an economy investing its resources in

new capital goods is the current production of consumer goods that is given up

• The opportunity cost of using arable farm land to producewheat is that the land cannot be used in that productionperiod to harvest potatoes




PRODUCTION POSSIBILITY CURVE (PPC)

• Production Possibility Curve (PPC) on the conceptof economic problems:

• Is used to explain the basic economic concepts of scarcity,choices and opportunity cost.

• PPC Examples





• Graphs that visually represent the relationship between twodifferent goods or services

• As there are limited resources available to produce any givenitem, an increase in the quantity produced of one item will lead to

a corresponding decrease in the quantity produced of thecomparison item

• This relationship is generally not a direct proportion as someresources are better suited to making one item over the other





• PPC Curve graphs are therefore very useful indetermining what quantities of each item would bethe most efficient to produce





• Example• In the previous example, it can be seen that as more of Item 2,

lets call that Hats, is produced, less of Item 1, Wheat perhaps, isproduced.

• However, the relationship between the two items is not

constant.• For example, moving from producing 0 Hats to 5 Hats yields a

decrease in production of Wheat of 5 units (20 to 15).• Yet when we move from producing 5 Hats to 8, we have a

decrease in production of Wheat of 10 units (15 to 5)!• Therefore, it can be determined that it is becoming more costly

to produce Hats in terms of the loss of Wheat.• This is logical when one considers the production resources

used to make the different items.• A farmer equipped to produce wheat will have real difficulty

producing hats!





• Factors that influence the shift of PPC:• Economic growth

• The production capability of a country increases as there is anexpansion of resources such as land labor, capital, ad

entrepreneurship this will shift the PPC to the right.• Improvements in technology

• Possible reasons for an increase in output are new innovations,applications of new and efficient techniques of production, or the development of a better way of producing goods andservices.

•Population• A larger population will result in an increase in production.

• However, if workers migrate to other countries, there will be areduction in population.




ECONOMIC SYSTEMS SOLVE THE BASICECONOMIC PROBLEMS

• economic problems:• what,

• how much,

•

how to be produced and• to whom the product should be produced

• Given scarce resources, how exactly do large,complex societies go about answering the basiceconomic questions?





• CAPITALISM • A.k.a. Free market economy is an economic system where

individuals make all the main economic decisions withoutany government intervention.

• Characteristics• Private ownership of resources

• Freedom of enterprise and choice

• Consumers sovereignty

• Competition

• Government intervention• Price system

• Price mechanism-free operation of demand and supply forceswithout any intervention.





Merits Demerits

Production according to the needsof consumers

Inequality of distribution of wealthand income

Economic freedom Inflation and high unemployment

rateEfficient utilization of resources Lack of social welfare

Variety of consumer goods Unnecessary variety and wastefulcompetition

Enhanced trade, business, and

research and development

Misallocation of resources

Automatic incentives Social costs

Flexibility





• Economic decisions in capitalism


Economic problem Economic decisions

What to produce An entrepreneur will only produce goods and

services for which there is a demand from consumersso as to enjoy higher profit.ex: mobile phone

How to produce Firms can produce any product or provide anyservice using more than one method whichdepends on the relative price of the resourcesinvolved.Ex; a designer of mobile pones has identified threemethods of producing the product; by machinery,by hand or by combination of labor and machinery.

For whom to

produce

The price system; the person that can afford them

can obtained the goods and services.




• SOCIALISM

• A.k.a. command economy or a planned system

• All the economic decisions are made by the government or a central authority

• Characteristic

• Public ownership of resources

• Central planning authority

• Price mechanism of lesser importance

• Central control and ownership





Merits Demerits

Production according to basicneeds

Lack of incentives and initiative yindividual

Equal distribution of income and

wealth

Loss of economic freedom and

consumer sovereignty/power Better allocation of resource Absence of competition

No serious unemployment or recession/inflation

Waste of economic resources

Rapid economic development

Social welfare





• Economic decisions in a Socialistic System



What to produce Planning authorities decide what to produce.

How to produce The Central Planning Authority also decides on thetechniques to be used in the production of differentgoods and services.

For whom toproduce

Decided by the Central Planning Authority is donethrough a set of administered fixed processes.

Necessity goods are fixed at lower prices, and luxurygoods at higher prices and the purpose is to reduceinequalities in the distribution of income.




• MIXED ECONOMY• Combines both capitalism and socials to solve basic

economic problems.

• Both the public and private sectors play a role in the

economy.

• Most countries practice mixed economy.





• Characteristics• Public and private ownership of resources

• Price mechanism and economic plans in making economicdecisions

• Government helps to control income disparity

• Government intervention in the economy

• Co-operation between the government public and businesssectors

•

Government control of monopolies.





• Economic decisions in a Mixed Economy System



What to produce Decide by both the public and private sectors.

The goods produce is depend on the considerationof social welfare and economic growth.

How to produce The public and private sectors will decide on thetechniques of production to be used in theproduction of the different goods and services

For whom toproduce Decided by the public and private sector. Thegovernment intervenes directly through pricecontrols and indirectly through the imposition ofindirect taxes and subsidies.




• ISLAMIC ECONOMIC SYSTEM• Muslims are to recognize that wealth, earnings, and material goods

are the property of God, and that we are merely His trustees.• The principles of Islam aim at establishing a just society wherein

everyone will behave responsibly and honestly.

•

The fundamental principles of the Islamic economic systemare as follows:• Muslims are not to deal in interest.• It is forbidden to gain property or wealth by fraud, deceit, theft, or

other falsehoods.• It is particularly hateful for a guardian to take from an orphan's

property.•

Forbidden are earnings from gambling, lotteries, and the production,sale, and distribution of alcohol.• It is unlawful to hoard food and other basic necessities.• A Muslim should be responsible in spending money.• Muslims are encouraged to give constantly in charity.





• M. A. Mannan• A social science which studies the economic problems of

people imbued with Islamic values.

• Akram khan• As a study of how man can achieve al-falah (human well-

being materially and spiritually) through his control,ownership and uses of these worldly resources based on theconcepts of cooperation and partnership.

•

Amir Mohd Al-Fayssal al Saud• it is a study used by man to fulfil his as well as the society’s

wants according to syariah principles





• Economic decision:• The philosophic foundations consists of four principles:

• Rububiyyah• belief that Allah alone determines the sustenance and nourishment

of His creation and will direct those who believe in Him toward

success.• Khalifah

• the man’s role as Allah’s vicegerent on earth.

• Tazkiyyah• refers to the growth and purification or cleansing of man as a

necessary prerequisite before man undertakes the responsibility laidout to him.

• Ukhwah• aka brotherhood has many aspects which give the Muslim society

and active and positive quality and the character of equality andcooperation.





END OF CHAPTER

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chapter one micro

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