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Chapter 1 introduction to micro & macroeconomics 1


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Chapter 1 introduction to micro & macroeconomics 1

  1. 1. Principles of Microeconomics
  3. 3. . . . The word economy comes from a Greek word for “one who manages a household.” • The study of how scarce, or limited, resources are used to satisfy unlimited wants and needs. • The study of how people make decision in a world of scarcity. Economy. . .
  4. 4. © 2007 Thomson South-Western ECONOMICS RESOURCES & FACTORS © 2011 Cengage South-Western
  5. 5. © 2007 Thomson South-Western Types of goods 1)ECONOMICS GOODS Supply is limited Involves price and opportunity cost Divided into two: a)Consumer goods gives satisfaction to customers -Long lasting- Radio, car - Not long lasting(perishable) – Food, fruits
  6. 6. © 2007 Thomson South-Western • Capital goods -To produce other goods – machinery, factory 2) FREE GOODS From nature and can be obtained without cost Unlimited supply so there is no price and the opportunity cost is zero. Essential to human e.g air and water. There is some cost involved because of pollution.
  7. 7. © 2007 Thomson South-Western 3)PUBLIC GOODS Owned by the government, paid from tax payers’ money e.g. public road, light house. Everyone can use them and we cannot exempt anyone from using them. 4)PRIVATE GOODS Owned by individual or companies. Others get to use them if they pay or allowed by the owner e.g:House, car,highway
  9. 9. © 2007 Thomson South-Western WHAT IS SCARCITY? • The limited/scarce products and services that can be produced to satisfy the unlimited needs/desires of humans. • This problem comes about due to the limited economic resources.
  10. 10. © 2007 Thomson South-Western WHAT IS CHOICE? • The problem of scarcity leads to choice. • Humans should make a choice between products and services that are needed and also decided on current or future consumption. • The consumer will make the efficient/effective choice in order to maximize their satisfaction. • The producer will make choices or decisions to produce products and services using the limited resources in order to maximize their profits.
  11. 11. © 2007 Thomson South-Western WHAT IS OPPORTUNITY COST? • Choice will lead to opportunity cost. • Second best product or services that we let go in order to obtain the best product or services. • E.g: We assume the government has RM2 million to build either a hospital or a school. If the government use the money to build a school, the opportunity cost would be the hospital. • It exist due to the scarcity of resources.
  12. 12. © 2007 Thomson South-Western • Decisions require comparing costs and benefits of alternatives. • Whether to go to college or to work? • Whether to study or go out on a date? • Whether to go to class or sleep in? • The opportunity cost of an item is what you give up to obtain that item.
  13. 13. © 2007 Thomson South-Western PRODUCTION POSSIBILITIES CURVE (PPC) • PPC is used to explain scarcity, choice and opportunity cost. • PPC shows the various possible combinations of goods produces within a specific time with given resources and technology. • Assumption of PPC: 1) There are only two goods. 2) Factors of production cannot be further increased. 3)Level of technology is fixed and stagnant. 4)The economy has achieved maximum efficiency (full employment)
  14. 14. © 2007 Thomson South-Western Example: A country produces milk powder and bottle making machines. Milk powder is a consumer good whereas the bottle making machine is capital good. PRODUCTION POSSIBILITY MILK POWDER (‘000 KG) BOTTLE MACHINE (UNIT) A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5
  15. 15. © 2007 Thomson South-Western Milk powder Bottle Machine
  16. 16. © 2007 Thomson South-Western EXPLAINATION OF PPC ON THE PPC • Points A to F are the best possible combinations of resources to enable full utilization and to ensure the country is at full employment. • If all the resources are used to produce milk powder only , 15,000 kg of milk bottle will be produced. • If all resources are used to produce bottle machine only, 5 bottle machines will be produced. • Points A to F shows choice.
  17. 17. © 2007 Thomson South-Western INSIDE THE PPC • Any point inside the PPC is attainable (Point Y) • Attainable means it is possible to produce both the goods. • Points inside PPC show wastage of resources because the production has not reached its maximum capacity.
  18. 18. © 2007 Thomson South-Western OUTSIDE PPC • Any point outside the PPC is unattainable (point Z) • Unattainable means it is not possible to produce both the goods. • points outside PPC show scarcity where the country is unable to meet production due to limited resources and technology.
  19. 19. © 2007 Thomson South-Western