Teaching PowerPoint Slides - Chapter 1.ppt

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PRINCIPLES OF ECONOMICS Third Edition
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 1

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CHAPTER 1
INTRODUCTION TO
MICROECONOMICS

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DEFINITION OF ECONOMICS
 Economics is a science which studies human
behaviours as a relationship between ends
and scarce which have alternative uses.
OR
 Economics is a study of how people use their
limited resources to try to fulfil unlimited
wants and involves alternatives or choices.

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MICROECONOMICS
VS. MACROECONOMICS
MICROECONOMICS
The study of
individual parts of the
economy, such as
public choices,
business choices and
personal choices.
MACROECONOMICS
The study of the
economic system as
a whole, such as
national income,
trade cycle,
unemployment rate,
inflation and general
price level.

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POSITIVE VS. NORMATIVE
ANALYSIS
 A positive analysis is to deal with the question
of “what is” and no indication of approval or
disapproval. It focuses on facts and cause-and-
effect relationships.
 A normative analysis is to deal with the
question of “what ought to be”. It incorporates
value judgements about what the economy
should be or what policy should be used to
achieve economic goals.

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BASIC ECONOMIC
CONCEPTS
SCARCITY
OPPORTUNITY COST
CHOICE

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BASIC ECONOMIC CONCEPTS
 SCARCITY
– One of the important concepts in economics is
scarcity.
– Scarcity is defined as wants always exceed limited
resources to satisfy them.
– Scarcity is a universal problem faced by poor as well
as rich nations in order to fulfil their needs.

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BASIC ECONOMIC CONCEPTS
(cont.)
 CHOICE
– When scarcity exists, choices are to be made.
 OPPORTUNITY COST
– Opportunity cost is defined as the second best
alternative that has to be forgone for another choice
which gives more satisfaction.

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BASIC ECONOMIC PROBLEMS
1. WHAT TO PRODUCE?
 Refers to the type of goods and services to be produced
2. HOW TO PRODUCE?
 Refers to the cheapest method of production
3. FOR WHOM TO PRODUCE?
 Refers to the distribution of income

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PRODUCTION POSSIBILITIES
CURVE (PPC)
 Used to explain the basic economic concepts:
Scarcity, Choices and Opportunity cost.
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.

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CURVE (PPC) (cont.)
Assumptions:
1. The economy is operating in full employment
and full production capacity (full efficiency).
2. The amount of resources available are fixed.
3. The state of technology does not change
throughout the production.

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CURVE (PPC) (cont.)
Sewing Machine
Butter
12
4
D
C
6
5
A
F
2
4
8
10
14
16
0 1 2 3
If it allocates all its resources to sewing machine, it
will produce at Point A.
If it allocates all its resources to butter, it will
produce at Point F.
The country Jaya, produces two products –
butter and sewing machine.
If the country Jaya is at Point C
on the PPC, it can produce the
combination of 2,000 kg butter
and 12,000 units of sewing
machine.
Point D shows the production of
3,000 kg butter and 9,000 units
of sewing machine.

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CURVE (PPC) (cont.)
Sewing Machine
Butter
12
4
D
C
6
5
A
F
2
4
8
10
14
16
0 1 2 3
B
E
Z
Y
Point inside the PPC
(Point Y)  Waste
of resources and
inefficiency
ATTAINABLE
UNATTAINABLE Point outside the PPC
(Point Z)  SCARCITY
Any point along the PPC
 CHOICES
Movement from one point
to another (point C to D)
 OPPORTUNITY COST

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FACTORS THAT INFLUENCE
THE SHIFT OF PPC
1. Economic
Growth
5
Sewing Machine
Butter
12
4
6
When the country
enjoys economic
growth, the PPC
bounds outward.
2
4
8
10
14
16
0 1 2 3
When the country
is struck by natural
disasters, economic
growth will decline
and the PPC will
shift to the left.

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THE SHIFT OF PPC (cont.)
2. Improvements
in Technology
Butter
12
4
6
5
Technology increases the
production of sewing machine.
2
4
8
10
14
16
0 1 2 3
Technology increases the
production of butter.
Sewing Machine

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THE SHIFT OF PPC (cont.)
3. Population
Sewing Machine
Butter
12
4
6
5
Increase in
population
2
4
8
10
14
16
0 1 2 3
Decrease in
population

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SHAPE OF PPC
Butter
4 5
PPC IS CONCAVE
Sewing Machine
12
6
2
4
8
10
14
16
0 1 2 3
Increasing Opportunity Cost

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SHAPE OF PPC (cont.)
Sewing Machine
Butter
12
4
6
5
2
4
8
10
14
16
0 1 2 3
PPC IS CONVEX
Decreasing Opportunity Cost

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SHAPE OF PPC (cont.)
Butter
5
Sewing Machine
12
4
6
2
4
8
10
14
16
0 1 2 3
PPC IS LINEAR
Constant Opportunity Cost

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MERITS DEMERITS
 Production according to
consumers’ needs
 Economic freedom
 Efficient utilization of
resources
 Variety of consumer goods
 Enhanced trade, business
and R&D
 Automatic incentives
 Flexibility
 Inequality of distribution
of wealth and income
 Inflation and high
unemployment rate
 Lack of social welfare
 Wasteful competition
 Misallocation of
resources
 Social cost

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MERITS DEMERITS
 Production according to
basic need
 Equal distribution of
income and wealth
 Better allocation of
resources
 No serious unemployment
or inflation
 Rapid economic
development
 Social welfare
 Lack of incentives and
initiative by individuals
 Loss of economic
freedom and consumer
sovereignty
 Absence of competition
 Waste of economic
resources

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CHARACTERISTICS
 Public and private ownership of resources
owned by God
 Price mechanism and limited government
intervention
 Distribution of wealth
 Prohibition of interest
 Freedom of economic enterprise

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