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7/31/2019 Chapter 1 eco120
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Ch. 1: 1
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
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Ch. 1: 2
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
INTRODUCTION TOMICROECONOMICS
CHAPTER 1
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
DEFINITION OF ECONOMICS
Economics is a science which studies humanbehaviours 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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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
MICROECONOMICS VS.
MACROECONOMICS
MICROECONOMICS
The study ofindividual 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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Ch. 1: 5
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
POSITIVE VS. NORMATIVE ANALYSIS
Apositive 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 economyshould be or what policy should be used to
achieve economic goals.
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
SCARCITY
SCARCITY
OPPORTUNITY COST
OPPORTUNITY COST
CHOICE
CHOICE
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
BASIC ECONOMIC CONCEPTS
1. SCARCITY One of the important concepts in economics is
scarcity.
Scarcityis defined as wants always exceedlimited resources to satisfy them.
Scarcity is a universal problem faced by pooras well as rich nations in order to fulfil theirneeds.
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
BASIC ECONOMIC CONCEPTS (cont.)
2.CHOICE When scarcity exists, choices are to be
made.
3.OPPORTUNITY COST Opportunity cost is defined as the second
best alternative that has to be forgone foranother choice which gives more satisfaction.
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
BASIC ECONOMIC PROBLEMS (cont.)
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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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
PRODUCTION POSSIBILITIES CURVE
(PPC) Used to explain the basic economicconcepts: Scarcity, Choices and Opportunitycost.
DEFINITION:
The PPC shows the various possiblecombinations of goods and services
produced within a specified time periodwith all its resources fully and
efficiently employed.
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)
Assumptions:
1. The economy is operating in fullemployment and full production capacity(full efficiency).
2. The amount of resources available arefixed.
3. The state of technology does not changethroughout the production.
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Sewing Machine
Butter
12
4
D
C
6
5
If it allocates all its resources to sewing machine, it will produceat Point A.
If it allocates all its resources to butter, it will produce at Point F.
A
F
PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)
2
4
8
10
14
16
0 1 2 3
The country Jaya, produces two products butter and sewingmachine.
If the country Jaya is at Point C onthe PPC, it can produce thecombination of 2,000 kg butter and12,000 units of sewing machine.
Point D shows the production of3,000 kg butter and 9,000 units of
sewing machine.
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Sewing Machine
Butter
12
4
D
C
6
5
Any point along thePPC CHOICES
A
F
PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)
2
4
8
10
14
16
0 1 2 3
Point outside the PPC(Point Z) SCARCITY
B
E
Z
Y
Point inside the PPC(Point Y) Waste ofresources and inefficiency
ATTAINABLE
UNATTAINABLE
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Sewing Machine
Butter
12
4
6
5
When the country
enjoys economicgrowth, the PPC boundsoutward.
2
4
8
10
14
16
0 1 2 3
When the country is
struck by naturaldisasters, economicgrowth will decline andthe PPC will shift to theleft.
Factors that Influence the Shift of PPC
1. Economic Growth
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Factors that Influence the Shift of PPC
2. Improvements in Technology
Sewing Machine
Butter
12
4
6
5
Technology increasesthe production ofsewing machine.
2
4
8
10
14
16
0 1 2 3
Technology increasesthe production ofbutter.
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Sewing Machine
Butter
12
4
6
5
Increase in population
2
4
8
10
14
16
0 1 2 3
Decrease in population
Factors that Influence the Shift of PPC
3. Population
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Sewing Machine
Butter
12
4
6
5
2
4
8
10
14
16
0 1 2 3
Increasing OpportunityCost
Shape of PPC
PPC IS CONCAVE
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Sewing Machine
Butter
12
4
6
5
2
4
8
10
14
16
0 1 2 3
Shape of PPC (cont.)
PPC IS CONVEX
Decreasing OpportunityCost
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Sewing Machine
Butter
12
4
6
5
2
4
8
10
14
16
0 1 2 3
Shape of PPC (cont.)
PPC IS LINEAR
Constant OpportunityCost
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
CAPITALISM SOCIALISM MIXEDECONOMY
ECONOMIC SYSTEM
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
CAPITALISMAn economic system where individuals and sellers make
economic decisions using a price system
CHARACTERISTICS
MERITS AND DEMERITS
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
CHARACTERISTICS
1. Private ownership of resources
2. Freedom of enterprise and choice
3. Consumers sovereignty
4. Competition
5. Government intervention
6. Price system
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
MERITS DEMERITS
Production according to
consumers needs Economic freedom
Efficient utilization ofresources
Variety of consumergoods
Enhanced trade, businessand 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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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
SOCIALISMAn economic system where all the economic decisions are
made by the government or a central authority
CHARACTERISTICS
MERITS AND DEMERITS
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
CHARACTERISTICS
1. Public ownership of resources
2. Central planning authority
3. Price mechanism of lesser importance
4. Central control and ownership
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
MERITS DEMERITS
Production according tobasic need
Equal distribution ofincome and wealth
Better allocation ofresources
No serious unemploymentor inflation
Rapid economicdevelopment
Social welfare
Lack of incentives andinitiative by individuals
Loss of economicfreedom and consumersovereignty
Absence of competition
Waste of economicresources
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Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
MIXED ECONOMY
An economic system which combines both capitalism andsocialism
CHARACTERISTICS
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CHARACTERISTICS
1. Public and private ownership of resources
2. Price mechanism and economic plans inmaking decisions
3. Government helps to control incomedisparity
4. Government intervention in the economy
5. Co-operation between the government,public and business sectors
6. Government control of monopolies