C1: INTRODUCTION TO MICROECONOMICS

DEFINITION OF ECONOMICS

Economics is a science which studies human behaviors as a relationship between ends and scarce means, 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.

RESOURCES/ FACTORS OF PRODUCTION

• Land

• Labour

• Capital

• Enterprise

ECONOMICS

Limited > Production > Purchased by consumer > satisfy needs and wants (unlimited)

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.

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.

BASIC ECONOMIC CONCEPTS

1. SCARCITY

• One of the important concepts in economics is scarcity

• Scarcity is defined as wants always exceed limited resources to satisfy them.

• Limited resources vs unlimited funds

• Scarcity is a universal problem faced by poor as well as rich nations in order to fulfil their needs.
  

2. CHOICE

• When Scarcity exists, choices are to be made

3. OPPURTUNITY COSTS

• Opportunity cost is defined as the second best alternative that has to be forgone for another choice which gives more satisfaction.

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

PRODUCTION POSSIBILITIES CURVE (PPC) /REFER SLIDE/

• 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.

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

FACTORS THAT SHIFT THE PPC (REFER SLIDE)

1. Economic Growth

2. Improvements in Technology

3. Population

TYPES OF ECONOMIC SYSTEM

1. Capitalism

2. Socialism

3. Mixed

1. CAPITALISM /

   Free market economy

An economic system where individuals and sellers make economic decisions using a price system

CHARACTERISTICS

• Private ownership of resources

• Freedom of enterprise and choice

• Consumers’ sovereignty

• Competition

• Government intervention

• Price System

Strength

• Production according to customer needs

• Economic freedom

• Efficient utilization of resources

• Variety of consumer goods

• Enhance trade, business and R&D

• Automatic Incentives

• Flexibilities

Weaknesses

• Inequality of distribution of wealth and income

• Inflation and high unemployment rate

• Lack of social welfare

• Wasteful competition

• Misallocation of resources

• Social cost

2. SOCIALISM/ Planned Economy

An economic system where all the economic decisions are made by the government or a central authority

Characteristics

• Public ownership of resources

• Central planning authority

• Price mechanism of lesser importance

• Central control and ownership

Strength

• 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

Weaknesses

• Lack of incentives and initiative by individuals

• Loss of economic freedom and consumer sovereignty

• Absence of competition

• Waste of economic resources

3. MIXED ECONOMY

An economic system which combines both capitalism and socialism

Characteristics

• Public and private ownership of resources

• Price mechanism and economic plans in making decisions

• Government helps to control income disparity

• Government intervention in the economy

• Co-operation between the government, public and business sectors

• Government control of monopolies