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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
Scarcity
Definition
Choice
Capitalism/ Free Market
Assumption
Basic
Economy
economy Opportunity Cost
systems
Socialism economy/ concepts
Command economy
INTRODUCTION
OF ECONOMY
Calculation
Mixed economy
Basic
Economy
economy
statement
problems
Normative economy
statement
Positive economy
statement
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Microeconomics Chapter 1 Introduction: Economics issues
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 man’s unlimited wants and demands.
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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Microeconomics Chapter 1 Introduction: Economics issues
Exercise 1
A. macroeconomics.
B. microeconomics.
C. positive economics
D. normative economics.
3. Microeconomic __________
5. Define economic
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Microeconomics Chapter 1 Introduction: Economics issues
i. _____________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
ii. ______________________
__________________________________________________________________
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__________________________________________________________________
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Microeconomics Chapter 1 Introduction: Economics issues
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.
Exercise 2
i. _________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________.
ii. _________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________.
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Microeconomics Chapter 1 Introduction: Economics issues
i. Scarcity
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.
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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Microeconomics Chapter 1 Introduction: Economics issues
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.
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.
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Microeconomics Chapter 1 Introduction: Economics issues
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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Microeconomics Chapter 1 Introduction: Economics issues
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 nature’s 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. That’s 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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Microeconomics Chapter 1 Introduction: Economics issues
Foods (units)
10 A
0
20 Cloths (units)
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.
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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Microeconomics Chapter 1 Introduction: Economics issues
Foods (units)
a
b g
14
10 c
d
f
0 e
14 20 Cloths (units)
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).
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Microeconomics Chapter 1 Introduction: Economics issues
a. Increasing in population
Goods Y
Goods X
b. Technology progress.
Goods Y
Goods X
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.
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Microeconomics Chapter 1 Introduction: Economics issues
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Microeconomics Chapter 1 Introduction: Economics issues
Exercise
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 ____
2. For an economy that chooses combination C in the table, the opportunity cost of
producing six extra units of consumer goods would be ____
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Microeconomics Chapter 1 Introduction: Economics issues
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Microeconomics Chapter 1 Introduction: Economics issues
Name : -----------------------------------------------------------
ID No. : P D A 1 0 0 1
Class : D I A 2
Quiz 1
1. Define economics?
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i. Scarcity
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ii. Choice
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i. ---------------------------
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ii. ---------------------------
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iii. ---------------------------
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Microeconomics Chapter 1 Introduction: Economics issues
Exercise
The following table shows the production possibilities combination of country A that produces
two products: CDs and TVs.
combinations
Production
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.
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Microeconomics Chapter 1 Introduction: Economics issues
Definitions
Features:
Advantaged:
Disadvantages:
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Microeconomics Chapter 1 Introduction: Economics issues
Definitions
- Is economy was fully controller by government.
Features:
Advantages:
Disadvantages:
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 price’s mechanism but basic economy’s problem resolved
together between government and private.
- Individual and firm free to have properties.
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Microeconomics Chapter 1 Introduction: Economics issues
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:
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:
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Microeconomics Chapter 1 Introduction: Economics issues
EXERCISE
6. Explain ONE (1) reason why the government intervene certain market in mixed
economic system. (3 marks)
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Microeconomics Chapter 1 Introduction: Economics issues
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.
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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Microeconomics Chapter 1 Introduction: Economics issues
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:
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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Microeconomics Chapter 1 Introduction: Economics issues
1. The following table shows the production possibilities for motorcycle and laptop.
motorcycles laptop
Combination
(thousands) (thousands)
A 30 0
B 26 1
C 21 2
D 15 3
E 8 4
F 0 5
(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)
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Microeconomics Chapter 1 Introduction: Economics issues
(h) Does this production possibilities curve reflect the law of increasing opportunity
costs? (3 marks)
[Total: 30 marks]
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