2.newmodulemicro_chapter1_introductionofeconomics....pdf

Microeconomics Chapter 1 Introduction: Economics issues

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INTRODUCTION OF ECONOMY

Definition

Basic economy concepts

Basic economy problems

Economy statement

Economy systems

Limited Factors Unlimited Demand

Scarcity

Choice

Opportunity Cost

Assumptions

Curve and shift

in PPC

Calculation

Whom How What

Normative economy

statement

Positive economy

statement

Socialism economy/

Command economy

Mixed economy

Capitalism/ Free Market

Curve and shift in PPC

Assumption

Chapter objectives

To define economics and distinguish between microeconomics and macroeconomics

To describe basic economics concepts: scarcity, choices, and opportunities cost.

To explain the basic economics problems.

To use production possibilities curve to explain economics concepts.

To explain the three types of economics system


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1.0 INTRODUCTION: ECONOMICS ISSUES 1.1 DEFINITION OF ECONOMIC

Economics is a field of social science that studies the behavior of individuals and society in the distribution and allocation of limited factors of production to maximize the production of goods and services to fulfill mans unlimited wants and demands. Research in economy is included the microeconomics and macroeconomics issue. The both of thats, is the research about the different part in economy. Microeconomics is the study of small economic units namely action by the Firm and Household. For example the study about how the prices are determined. Macroeconomics is research about the whole of economy issue in the country included the inflation, unemployment, economy growth and so on.


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Exercise 1 1. The analysis of the behavior decision-making units is the definition of:

A. macroeconomics. B. microeconomics. C. positive economics D. normative economics.

2. The study of economics is primarily concerned with __________

A. keeping private businesses from losing money. B. demonstrating that capitalistic economies are superior to socialistic economies. C. choices which are made in seeking to use scarce resources efficiently. D. determining the most equitable distribution of societys output.

3. Microeconomic __________

A. is concerned with individual economic units and specific markets. B. is the aggregate or total levels of income, employment and output. C. is not concerned with details, but only with the overall big picture of the

economy. D. is the establishing of an overall view of the operation of the economic system.

4. Which of the following is a microeconomic statement? A. The real domestic output increased by 3.5% last year. B. The price of coconut oil declined last year. C. Unemployment was 5.3% of the labour force last year. D. The general price level increased by 3% last year.

5. Define economic

________________________________________________________________________

________________________________________________________________________

________________________________________________________________________


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6. Differentiate between microeconomics and macroeconomics. (4 marks)

i. _____________________

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

ii. ______________________

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________


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1.2 POSITIVE ECONOMIC STATEMENT AND NORMATIVE ECONOMIC STATEMENT.

i. Positive economy statement is a statement which based on facts and not value

judgement. Can be tested and verified.

Example: Ethiopia is the poorest nation in the world.

ii. Normative economy statement is a statement which is bases on value

judgement and on personal opinion. Cannot be tested.

Example: The government of Ethiopia is very inefficient.

Exercise 2

1. Which of the following is a normative statement?

A. The government must lower the prize of essential goods to decrease

the inflation.

B. the price of this shoes is RM50.

C. I get grade A in macroeconomics exam.

D. An increase in the collage tuition fees will cause a few of students

to apply for collage.

2. Explain the difference between positive and normative statements. (4 marks)

i. _________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________.

ii. _________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________.


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1.3 THE BASIC ECONOMIC CONCEPTS.

Economics is the science which studies human behavior as a relationship between choice, scarcity and opportunity cost. i. Scarcity

The problems of economics arise because we do not have enough resources to produce everything we want. The factors of production are limited and the amount of output that can be produced is also limited. It means that there are not enough available goods for everyone to freely take as much as they want. Due to this, we have to choose the best alternative of goods and services to be produced by the society.

ii. Choice Because of the resources in the world are limited, we cannot satisfy all our wants and force us to choose. Choice involves a rational decision to be made due to scarcity of resources in order to satisfy unlimited human wants. A choice has to be made among several wants which involves some trade off known as opportunity cost.

iii. Opportunity cost Opportunity cost is concerned with the problem of choice and the fact of scarcity, forces us to make choices. So, that opportunity cost is defined as the value of the best alternative foregone when a choice is made.

Example:

Dina has RM5 and she would like to buy two things: a book and a pen which cost RM5 each (unlimited wants but limited resources). Dina has to choose either to purchase a book or a pen which would satisfy her needs (choices). If Dina chooses the book, then the pen is the opportunity cost because it is the second best alternative which she has to forgone.


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1.4 THE BASIC ECONOMIC PROBLEMS.

To achieve maximum satisfaction, people need making the best choice as the guide, so five economics basic question need to be answered first.

1. What to produces

This problem is concerned with that goods and services will be produces.

This problem was happen because limited factors of production but demand for the goods and services is not limited.

So, the firms will produces goods base on demand of the goods and the goods must give the maximum utility to people.

2. How much to produces

The firm must decide how many quantity of the product should be produces.

So, it must be based on total demand for the goods.

If goods are high demand, the firm must produces with the high quantity. 3. How to produces

How the goods will produces, usually the firm will make decision either use the labor intensive or capital intensive.

The producers will choice the intensive will decreasing the production cost.

4. For whom to produces

This is the target market in to sell the product.

This problem will cause the producer to decide to distribute the goods and services to society.

The goods are distributing base on income of people.

Usually, people with high income are able to consume more goods and services than people with low incomes.


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Exercise

1. Every economy in the world faces the same fundamental economic problems though the

solutions to the problems differ. In regards to this statement explain briefly what are

these basic economics problems? (6 marks)


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1.5 FACTORS OF PRODUCTION

Factors of production are the basic resources used in the production process in order to produce economic goods and services. Economists have classified the factors of production into four groups namely; i. Land

This is free gift of natures either on the surface or in the earth. The value based

on quality and location. Return to the land is fees. Examples are land, air, water,

forest and others.

ii. Labour

The services contributed by people in the production process that involve both

mental and physical effort. Thats include the skill and unskillful. Return to the

labour is wages. Examples are lectures, construction workers and others.

iii. Capital

Human made resources which are used in the production process to produce

other goods and services. Return to the capital is interest. Examples are

machinery, raw material, buildings, tools and others.

iv. Entrepreneurship

- Its human are manages their firm to produces the goods and services.

- The entrepreneur must be risks and organize the others factors of productions.


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Foods (units)

Cloths (units)

10

20

A

B

C

Curve 1 : Production possibilities curve

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1.6 PRODUCTION POSSIBILITIES CURVE (PPC)

Production possibilities curve (PPC) show the maximum combination on goods that can

be produced given the available factors of production and the available technology of

production.

Purpose to using the production possibilities curve is:

To understand the concept of scarcity and constrained choice.

To emphasize the distinction between movements along a PPC and shifts the

PPC.

To show the concept of opportunity cost using the PPC model.

3 assumptions to build the PPC

i. There are only two goods will be produce (food and cloth).

ii. The production of technology is available and not changes.

iii. Limited factor of production.

iv. Economy has achieved level of full employment.


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Attainable and unattainable combination

i. Attainable and efficient combination

With reference to PPC graph, the best possible combinations are point a, b, c, d,

and e (attainable). Where resources are fully utilized and the country is said to

be at full employment level. The firm is also to be efficient (no waste in the use

of resources).

ii. Attainable but not efficient combination

Combination f (inside PPC) is attainable because it can be produced, but the

economy is not efficient and the resources are not fully utilized (unemployment

exist).

iii. Not attainable combination

Combination g is not attainable because it situated outside the PPC. It cannot be

producing because not enough resources and no new technology.

iv. Extreme combination

Extreme combination is combination can be produced and it efficient but all

resources will use for produce only one goods.

Foods (units)

Cloths (units)

10

20

c

b

f

Curve 2 : Combination of output in PPC

14

14

d

a

e

g

0


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Change in production possibilities curve

Each combination of production possibilities curve can increase or decrease due to

several factors. Increased or decreased in production possibilities curve can occur for

one side product only, or both. There are many factors that cause the shift of

production possibilities curve.

a. Increasing in population

Manufacturers will increase the volume of goods when there is an increase in

the population. Production of both goods will increase. This causes production

possibilities curve to shift to the right.

b. Technology progress.

The factor can shift the PPC outward through an improvement in technology. It

allows more efficient production using existing economics resources. Based on

diagram above, if the improvement of production (technology progress)

happened only in producing goods X, the economy will produce more goods X

compare to goods Y. so, the PPC will shifted outward towards the horizontal axis.

Goods X

Goods Y

Goods X

Goods Y


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How to determine the Opportunity Cost (Based on table)

Consumption Goods Capital Goods

10 0

9 1

7 2

4 3

0 4

1. In Exhibit 1, according to the information, the opportunity cost of producing 7 units of

consumption goods is:

A. 3 units of capital goods.

B. 4 units of capital goods.

C. 2 units of capital goods.

D. 7 units of capital goods.

2. Any point on the production possibilities curve illustrates:

A. minimum production combinations.

B. maximum production combinations.

C. economic growth.

D. a non-feasible production combination.


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Exercise

Use this table for questions 1 and 2.

Type of good A B C D E F G

Consumer goods 36 30 24 18 12 6 0

Capital goods 0 15 23 26 28 29 30

1. The production possibilities curve for the economy depicted in the table is ____

A. a downward-sloping straight line.

B. a downward-sloping line that is concave to the origin of the graph.

C. an upward-sloping straight line.

D. a downward-sloping line that is bowed inwards towards the origin of the graph.

2. For an economy that chooses combination C in the table, the opportunity cost of

producing six extra units of consumer goods would be ____

A. 23 fewer units of capital goods.

B. eight fewer units of capital goods.

C. three fewer units of capital goods.

D. eight more units of capital goods.


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How to determine the Opportunity Cost (Based on diagram)

a. Calculate opportunity cost if

i. Firm move the production from combination B to C

ii. Firm move the production from combination C to A

b. Calculate opportunity cost if

i. Firm want produce 600 million unit of computer

ii. Firm want produce 8000 million unit of furniture


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Name : ----------------------------------------------------------- ID No. : Class : Quiz 1 1. Define economics?

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.

2. Explain each of the economy's problems below.

i. Scarcity --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.

ii. Choice ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.

iii. Opportunity cost ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.

3. Explain the factors of production.

i. --------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.

ii. --------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.

iii. --------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.

P D A 1 0 0 1

D I A 2


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Exercise

The following table shows the production possibilities combination of country A that produces

two products: CDs and TVs.

Production combinations

A B C D E

CD (million) 0 5 10 15 20

TV (million) 20 18 15 6 0

a. Based on the table above draw the production possibilities curve for country A.

b. Calculate the opportunity cost

i. Of producing 5 million of CDs

ii. Of producing 15 million of CDs

iii. When the production of CDs increases from 10 million to 20 million.

c. Country A wishes to produce 25 million CDs and 30 million units of TVs.

i. What is the implication?

ii. Suggest two (2) ways in which this production combination can be achieved.


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1.7 ECONOMIC SYSTEM

A. Free market economy / capitalist / laissez faire Definitions - Is an economy system was operation without government intervention. Features: - Decisions are taken by individual and firm with no government intervention. - It usually associated with a pure capitalist, where land and capital are privately

owned. - The price mechanism used in this system whereby changes in price in response to

change in demand and supply have the effect of making demand equal to supply.

Advantaged:

- Individual are free to make their own economic choice - Freedom to workers and firm to choose where to work and what production

methods to use.

Disadvantages:

- Existence of wide gap between the rich and the poor. - Existence of unemployment problem.


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B. Centrally planned or command economy / socialist economy Definitions - Is economy was fully controller by government.

Features:

- Decision are taken by the government or central authorities - It usually associated with a socialist or communist economy system, where land and

capital are collectively owned. The government or central authorities plan the allocation of resources.

Advantages:

- Decisions of allocation of resources always are in the interests of society as a whole and with specific national goals.

- Unemployment could be largely avoided if the government carefully planned the allocation of labour.

- Same income distribution - Produces the goods and services at efficiency level.

Disadvantages:

- Mistake decide in economy (decision made by some people only) - Technology and innovation are undeveloped because all productions are decided by

government.

C. Mixed economy Definitions - Is a economy system that incorporates a mixture of private and government

ownership or control ( capitalism and socialist)

Features:

- This system use market mechanism and allow government intervention in economy activities.

- Price level determine by prices mechanism but basic economys problem resolved together between government and private.

- Individual and firm free to have properties.


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Advantages:

- The government will try to reduce gap of income between rich and poor people. ( taxes and subsidies)

- Government will also control the existence of monopolies.

Disadvantages:

- Business freedom is not totally offered for enterprise.

D. Islamic economy Definitions: - Economy which uses Allah's creation natural resources with most efficient and fair

way based on Islamic laws.

Features:

- Al Quran and Hadith was the main source in Islamic economics activities. - Individual free to own property - individual no give priority to profit in business - fair competition permitted - free to decide in economics

Advantages:

- Good in the world and afterworld - Free competition


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EXERCISE 1. Which of the following is a characteristics of capitalism

A. an economic system characterized by private ownership of resources and

market.

B. an economic system that include a mixture of command and market system.

C. a system that answers the what, how, and for whom question by central

authority.

D. an economic system that follows the syariah.

2. Which of the following might be considered to be a characteristic of a planned economy?

A. There is no incentive for people to work hard.

B. Goods and services produced reflect consumer sovereignty.

C. Price is relatively unimportant as a means of allocating resources.

D. All income is completely evenly distributed.

3. Briefly explain three (3) advantages of free market economy. (9 marks)

4. State five (5) characteristics of free market economic system. (5 marks)

5. Define command economy and capitalist economy. (4 marks)

6. Explain ONE (1) reason why the government intervene certain market in mixed

economic system. (3 marks)


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Example of final exam questions [Jan-Jun 2012]

Section A; Multiple choice questions

2. Microeconomics focuses on __________ A. issues such as economic growth, inflation and unemployment. B. the working of the whole economy. C. factors that affect the total demand for goods and services. D. the behavior of individuals and organizations towards scarce resources.

3. The economic problem can best be stated as _________ A. given scarce resources, how exactly do large complex societies go about deciding

what to produce, how to produce and for whom to produce. B. how can the economy improve technology so as to shift the production

possibility frontier up and to the right. C. given the fact that the economy is inefficient, how much and what type of

government intervention should be used to improve the efficiency of the economy.

D. what is the best rate of economic growth for a society.

4. Which of the following is concerned with microeconomics? A. The unemployment rate decrease by 30%. B. In 1994, the national income of a country is RM23,400.00 million. C. The price of chicken increases significantly during Hari Raya season. D. The economic growth of the country is expected to be 6% in 1995.

5. Which of the following represents a point lying outside the production possibility curve? A. unemployment. B. High prices. C. Increasing cost. D. Unattainable production in the combination of two goods.

6. If an economy is employing all of its resources fully, it can only increase output by ___

A. lowering prices. B. increasing the velocity of circulation of money. C. improving the state of technology. D. reducing unemployment.


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7. The government promises the people of more funding for AIDS research and child care, and assures them they will not have to sacrifice any other goods or services to obtain the additional programs: A. This is possible if the economy have unemployed resources. B. This is possible only in a fully-employed resources economy. C. This is possible if the economy is producing on its production possibilities. D. None of the above.

Section B;

1.

(a) Define Public goods. (2 marks)

(b) Explain the difference between positive and normative statements.(4 marks)

(c) Briefly explain three (3) advantages of free market economy. (9 marks)

[TOTAL: 15 marks]


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Section C; Quantitative Question

1. The following table shows the production possibilities for motorcycle and laptop.

(a) Fill in the opportunity cost (motorcycles forgone) of producing the first through the fifth laptops. (2 marks)

(b) Referring to above table, draw the production possibility curve. (4 marks)

(c) Based on the diagram (b), explain the concept of scarcity, choice and opportunity cost. (6 marks)

(d) Between which points (combinations) is the opportunity cost per thousand unit of laptops the highest? (2 marks)

(e) Label point Y inside the curve. Explain why this is inefficient point. (3 marks)

(f) Label point Z outside the curve. Explain why this is an unattainable point. (3 marks)

(g) Based on the diagram, identify all efficient points and explain why these points are efficient. (5 marks)

Combination motorcycles

(thousands)

laptop

(thousands)

A 30 0

B 26 1

C 21 2

D 15 3

E 8 4

F 0 5


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(h) Does this production possibilities curve reflect the law of increasing opportunity costs? (3 marks)

(i) What is the shape of the production possibilities curve? (2 marks)

[Total: 30 marks]

2.newmodulemicro_chapter1_introductionofeconomics....pdf

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