microeconomics - lec 1-sept 2012 (1)

8/10/2019 Microeconomics - Lec 1-Sept 2012 (1)

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1

ECONOMIC

CONCEPTS

Chapter 1


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2

Lecture Plan

What is Economics?

Scarcity

Basic economic

problems

Production possibilityanalysis

The two sector circularflow model


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Comes from

Greek


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(house) (custom or law)

ECONOMICS

NomosOikos +

Management of a household


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Father of Economics
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Inquiry into the Nature and Causes

of the Wealth of Nations
http://upload.wikimedia.org/wikipedia/commons/d/de/Wealth_of_Nations_title.jpg


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Adam Smiths primitive study of economics

paved the way for all future study. He was thefirst to analyze economic theory and its

importance. Adam Smiths ideas still prove to be

very valid today.


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Jean-Baptiste Say (5 January 1767

15 November 1832)
http://upload.wikimedia.org/wikipedia/commons/2/2e/Jean-baptiste_Say.jpghttp://upload.wikimedia.org/wikipedia/commons/2/2e/Jean-baptiste_Say.jpg


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David Ricardo(19 April 177211September 1823)
http://upload.wikimedia.org/wikipedia/commons/0/09/Ricardo.gif


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John Stuart Mill (20 May 18068 May

1873),
http://upload.wikimedia.org/wikipedia/en/9/9b/John-stuart-mill-sized.jpg


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14

What is Economics

Alfred Marshall's ------- Principles of Economics

a study of wealth; and on the other, and moreimportant side, a part of the study of man."


15/63Milton Friedman 1912-2006

"Economics is thescience of how a

particular societysolves its economicproblems.


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"Economics is a studyof how people use theirlimited resources to tryto fulfill unlimited wantsand involves alternativesor choices


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THE BASIC ECONOMIC

PROBLEMS

Economics is the study of howindividuals and groups makedecisions with limited (scarce)resources as to best satisfy theirunlimited wants and desires.

resources are scarce

human wants are unlimited.


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Resources

Resources are inputs that can be used to produce goodsand services of various types to help satisfy peoplesunlimited wants. Goods and services are scarcebecause resources are scarce

Often referred to as the factors of production.

Resources include land, capital, labourand

enterpreneurship.


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Land

Gifts of nature includingNatural resources

Soil

Trees

Water

Air

Mineral

sunlight

Oil reserves
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Capital

Physical capital : producedgoods that can be used asinputs for furtherproduction.

Examples :factories,

machinery tools,

ComputerHuman capital : consistsof the knowledge and skill

people acquire to enhance

their labor productivity
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Labour

Labour is the physical and mentalwork of people, whether, skilled orunskilled

Examples:

mechanics,doctors,

farmers,

computer programmers,clerks,

fisherman


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Entrepreneurship

Refers to the particulartalent that some peoplehave for organizing the

resources of land, laborand capital to producegoods, seek new businessopportunities and

develop new ways ofdoing things.


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Private vs Public Goods Private goods have two important features

First, private goods are rival in consumptionthe amount consumed by one person is

unavailable for others to consumer

Second, private goods are exclusive

the supplier of a private good can easily

exclude those who fail to pay

Example : car, computer, private college,

private medical centre


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Public Goods

Public Goods are non-rival in consumption

one persons consumption does not

diminish the amount available to others.

Example : public school, public hospital, national

defense.


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Public Goods

Furthermore, once produced, public

goods are available to all they are non-

exclusive suppliers cannot easily

prevent consumption by those who fail to

pay

Because public goods are non-rival and

non-exclusive, private sector firms cannotsell them profitably.


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Need Want

Food Toys

Shelter Jewellery

Clothing Entertainment


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Consumer Needs and Wants

Needs Wantslimited Unlimited

those thingsnecessary forhumansurvival

goods/servicesdesired by theconsumer for acomfortable life

Similar for allindividuals

Varies from one toanother

Example :Food, shelter,clothes

Example : luxurycars, travel,


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28

SCARCITY

CHOICES

OPPORTUNITY COST

ECONOMIC PROBLEM


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Scarcity.. .means that society has limited

resources and therefore cannot produce all thegoods and services people wish to have.


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Because of scarcity, we all have tomake choices. No one, not even you, can haveeverything they want. Every time you make a

choice, you have to give up something.

Decisions require comparing costs and benefitsof alternatives.

Example : Whether to go to college or to work?Whether to go to class or sleep in?


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The opportunity costof an item is what you give upto obtain that item.

Opportunity costDefinition : The second best alternative

forgone in choosing one need or want

rather than another.

Note: Situations where there is NO opportunity cost = freegoods


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Jason has to make a choice.

If he chooses to goshopping, then theopportunity cost will be

going for holiday.
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Example 2 : Government

Malaysian government has 4 Billion and it wants to buildschools and police stations for the welfare of the citizens.However, the government also faces scarcity because thefund is not sufficient to build both schools and policestations.


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Example 3: Firm


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Example 3: Firm

Firm A wants to diversify its business. It wants to expand its

production to produce dolls and toaster. But the fund it has is

not sufficient to produce both type of products.
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Therefore firm A has to

make a choice, whether

to produce dolls ortoasters.

If it chooses to produce

dolls, then theopportunity cost will be

toasters
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Basic Economic Problem

How much to produce ?

The amount of production. Example : 10000cars per month or 1000 cars per month?

What to produce ?

Every society must choose what goods orservices to produce. Example : computer orradio?


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40

E ONOMI S

MICROECONOMICS MACROECONOMICS


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Microeconomics vs. Macroeconomics

Microeconomicsfocuses on the individual parts of theeconomy.

(Micro = the ancient Greek word for small)

How households and firms make decisions and howthey interact in specific markets

Macroeconomicslooks at the economy as a whole. (Macro is the Greek word for large)

Economy-wide phenomena, including inflation,unemployment, and economic growth


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The production possibilities curve is used toexplain the basic economic concepts of scarcity,choicesand opportunity cost.

The PPC shows various possible combinationsof goods and services that can be produced with

the given amount of resources in a given periodof time.

Production Possibilities Curve (PPC)


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Production Possibility Curve

The following assumptions are made to illustratethe PPC.

There is a fixed quantity of resources

The economy only produces two products

Allresources within the economy are used


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Production Possibility Schedule

Combination Consumer

Goods (Unit)

Capital Goods

(Unit)

A 0 15

B 4 14

C 7 12

D 9 9

E 11 5

F 12 0


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Production Possibility Curve


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Calculation of opportunity cost

Opportunity to move from B to C : (12-14)/(7-4) = - 2/3

meaning : to increase 1 unit of consumer goods, capital goodsmust be reduced as much as 2/3 units.

Opportunity to move from D to E : (5-9)/(11-9)= -2,

meaning : to increase 1 unit of consumer goods, 2 units ofcapital goods must be reduced

This example explains the concept or law ofincreasing opportunity cost.


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Points along the PPC

Any point along thePPC such as A, B, C,D and E and F are

known as efficientpoints because theresources are used

efficiently.


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Points Inside PPC

Point T is known asinefficient pointbecause the resources are

not being fully employed.This point also shows

unemployment.


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Economic Growth

When the country enjoys economic growth, thePPC bounds outward. With economic growth,the production capability of a country increases

as there is expansion of resources such as land,labour, capital and entrepreneurship.

Increase in resources or technology can shift the

PPC to right.

Ri h d Shif i PPC i


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Rightward Shift in PPC - Economic

Growth

Leftward Shift in the Economys PPC


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Leftward Shift in the Economy s PPC

Decrease in the availability

or the quality of resources

shifts the PPF inward

Parallel shift again implies

that the change was equallyapplicable to both consumer

and capital goods

Decrease in availableresources

F t th t Shift th PPF


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Factors that can Shift the PPF

Changes in Resource Availability Increase in Quantity of resourses rightward shift Reductions in Quantity of resources leftward shift

Changes in Quality of Resources

Improvement in Quality of resourses rightward shift Reductions in Quality of resources leftward shift

Increases in the Capital Stock Increases rightward shift

Decreases leftward shift

Technological Change Employs available resources more efficiently rightward shift

Shift in th E n PPF


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Shifts in the Economys PPF

I ncrease in resour ces

or technological

change that benefi ts

consumer goods

Shifts in the Economys PPF


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Shifts in the Economy s PPF

I ncrease in resources

or technological

advance that benefi ts

capital goods

Model:


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Model:

The Circular-Flow Diagram

The Circular-Flow Diagram: A visual model of theeconomy, shows how dollars flow through marketsamong households and firms.

Includes two types of actors:

households

firms

Includes two markets:

the market for goods and services

the market for factors of production


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FIGURE 1: The roles of firm and household

Households: own the factors of production,

sell/rent them to firms for income

buy and consume goods & services

Households


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FirmsHouseholds

Firms:

buy/hire factors of production,use them to produce goods

and services

sell goods & services

Th Cir l r Fl Di r


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The Circular-Flow Diagram

Markets forFactors of

Production

HouseholdsFirms

IncomeWages, rent,profit

Factors of

production

Labor, land,

capital

Spending

G & Sbought

G & Ssold

RevenueMarkets for

Goods &Services

Markets


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Markets

Product markets

Markets in which goods and services are

bought and sold.

Example : supermarket, shoe shop,

restaurant

Resource Markets

Markets in which the resources are

exchanged Example : Job market is the most important

of the resource markets


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Households supply resources in the

resource market and demand goods andservices in the product market.

Firms supply goods and services inproduct market and demand resources in

the resource market


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Money flows in resource market determinewages, interest, rents, and profits which flow

as income to households

Product markets determine the prices for

goods and services which flow as revenue to

firms

microeconomics - lec 1-sept 2012 (1)

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