CHAPTER 1

INTRODUCTION TO
MICROECONOMICS
DEFINITION OF ECONOMICS

Economics is a study of how

people use their limited
resources to try to fulfill
unlimited wants and involves
alternatives or choices.
 MICROECONOMICS VS.
MACROECONOMICS

MICROECONOMICS MACROECONOMICS

The study of The study of the

individual parts of the economic system as a
economy such as whole such as
public choices, national income,
business choices and unemployment rate,
personal choices. 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.
FACTORS OF PRODUCTION
SCARCITY CHOICE
CHOICE
SCARCITY

BASIC ECONOMIC
BASIC ECONOMIC
CONCEPTS
CONCEPTS

OPPORTUNITY
OPPORTUNITY COST
COST
 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.
Scarcity is a universal problem faced by poor
as well as rich nations in order to fulfill their
needs.
 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 for
another choice which gives more
satisfaction.
 PRODUCTION POSSIBILITIES CURVE
(PPC)
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.
 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)
Assumptions:

1. Only produce Two types of goods/

Products
2. The economy is operating in full
employment and full production capacity
(full efficiency).
3. The amount of resources available are
fixed.
4. The state of technology does not change
throughout the production.
 PRODUCTION
POSSIBILITIES :
example

CHOICES A B C D E

Chilies 10 9 7 4 0
(kg)
Tomato 0 2 4 6 8
(kg)

At choice A, all the resources is used-up to produce chilies,

so the amount of chilies produced is maximum i.e. 10
units of chilies (production of tomato = 0); and at choice
E, due to resources all being used-up to produce tomato (8
tomato) and no chilies can be produced (0 chilies).
 Point X (attainable) is
Production Possibilities
the point where the
production is not yet
Curve (PPC)
reaching maximum level.
At this point it is
considered that production CHILLIES
is inefficient and there is a
waste of resources or
10
A B
unemployment. Therefore
any points inside the PPC
shows a waste of
Y
resources, inefficiency C
and unemployment
problem.
D
X
Point Y ( unattanaible) E
is unattainable because it
lies outside the PPC. Any
points outside the PPC is 8 TOMATO
unattainable due to the
problem of scarcity. This
means that we cannot The point on the PPC shows the concept of
reach this point due to choices. We have to make the choices among the
limited amount of various combinations of tomato and chilies. To
resources and fixed level move from alternative `A to alternative `B , we
of technology. The scarcity have made a choice of producing more chilies and
of resources makes it
less tomato.
impossible for us to
 Production possibility curve also provides explanations
on opportunity cost. For example, a movement from
point B to C or D, involves sacrificing the production of
chilies in order to produce more tomato. We can say
that, the opportunity cost of producing more tomato is
the decrease in the product of chilies and vice-versa.

How to calculate opportunity cost?

Suppose we are at point B and would like to increase another 2
kg. of tomato that is producing 4 kg. of tomato (point C), we can
only produce 7 kg. of chilies. This means that in order to produce
an additional 2 kg. of tomato we have to sacrifice 2 kg. of chilies
(9 kg. 7 kg. = 2 kg.).

Moving from point C to point D, if we intend to produce 6 kg. of

Tomato, only 4 kg. of chilies can be produced. This mean that the
opportunity cost of producing 6 kg. of tomato is 3 kg. of chilies (7
kg. 4 kg.). The figure shows that as more tomato are to be
produced, more and more chilies had to be sacrificed and it shows
an increasing opportunity cost. Therefore, the PPC is a concave.
 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)
If it allocates all its resources to sewing machine, it will produce
Sewing Machine at Point A.
If it allocates all its resources to butter, it will produce at Point F.
16
A
The country Jaya, produces two products butter and sewing
14 machine.

12 C
If the country Jaya is at Point C on
the PPC, it can produce the
10 D combination of 2,000 kg butter and
12,000 units of sewing machine.
8
Point D shows the production of
6 3,000 kg butter and 9,000 units of
sewing machine.
4
2
F
0 1 2 3 4 5 Butter
 PRODUCTION POSSIBILITIES
CURVE (PPC) (cont.)
Point outside the PPC
Sewing Machine
(Point Z) SCARCITY

16 Z
A
Any point along the
14 B UNATTAINABLE PPC CHOICES

12 Y C

10 D
8
ATTAINABLE
6 Point inside the PPC
(Point Y) Waste of E
4 resources and inefficiency
2
F
0 1 2 3 4 5 Butter
 Factors that Influence the Shift of PPC
1. Economic Growth

Sewing Machine

16

14
When the country
enjoys economic
12 growth, the PPC bounds
outward.
10

8
When the country is
struck by natural
6 disasters, economic
growth will decline and
4 the PPC will shift to the
left.
2
Butter
0 1 2 3 4 5
 Factors that Influence the Shift of PPC
2. Improvements in Technology

Sewing Machine

16
Technology increases
the production of
14 sewing machine.

12

10
Technology increases
8
the production of
butter.
6

4
2

0 Butter
1 2 3 4 5
 Factors that Influence the Shift of PPC
3. Population

Sewing Machine

16

14
Increase in population
12

10

8
Decrease in population
6

4
2

0 Butter
1 2 3 4 5
 Shape of PPC

Sewing Machine PPC IS CONCAVE

16

14

12 Increasing Opportunity
Cost- increasing
10 opportunity cost means
that when a country
8 produces more good, it
has to forgone more
6 amount of another
goods.
4
2

Butter
0 1 2 3 4 5
 Shape of PPC (cont.)
Sewing Machine
PPC IS CONVEX
16

14

12
Decreasing
Decreasing Opportunity
Opportunity
10 Cost- decreasing
Cost- decreasing
opportunity
opportunity cost
cost occurs
occurs
8 when
when aa country
country produce
produce
more
more of
of one
one good,
good, it
it
has
has to
to forgone
forgone lesser
lesser
6
amount of another
amount of another
good.
good.
4
2

Butter
0 1 2 3 4 5
 Shape of PPC (cont.)
Sewing Machine
PPC IS LINEAR
16

14

12 Constant Opportunity
Cost means that
10 when a country
produces more of one
8 good, it has to forgone
same amounts of
6 another goods.

4
2
Butter
0 1 2 3 4 5
 BASIC ECONOMIC PROBLEMS (cont.)
1. WHAT TO PRODUCE?
Refers to the type of goods and services to be produced

2. HOW MUCH TO PRODUCE

Refers to how many quantities of goods shall be produced.

3. HOW TO PRODUCE?
Refers to the cheapest method of production

4. FOR WHOM TO PRODUCE?

Refers to the distribution of income