MICROECONOMICS

(ECN60104)
Module Leader:
Dr. Marina

Tutors:
Dr. Marina, Dr. Yap Wai Weng,
Dr. Deboshree, Mr. Gan Khai Siong &
Ms. Lee Yin Lan
 Module Structure & Assessments

COMPULSORY
LECTURE
LECTURE – 1 INDEPENDEN
ACTIVITY - 1
HOUR T STUDY
HOUR

MID-TERM INDIVIDUAL FINAL EXAM –

TEST – 15% ASSIGNMENT – 50%
35%
Main Text (Either Edition)
Economics

8th edition, Global

Edition

LECTURE 1 – CHAPTER 1

INTRODUCTION TO ECONOMICS
PROBLEM
Chapter Outline (Student To Go Through)

1.1 Three Key Economic Ideas

1.2 The Economic Problem

That Every Society Must Solve

1.3 Economic Models

1.4 Microeconomics and

Macroeconomics
Copyright © 2023 Pearson Education, Ltd. All Rights Reserved
 What is economics all about?

The Basic Economic

Problem
Wants - Things that we do not really
need but we would like to have….
Factors of Production

Factors of production, or
productive inputs, are the
resources we use to produce
goods and services.
Land

Land includes all natural physical resources – e.g. fertile farmland, water,
mineral, oil and gas deposits, climatic conditions or the harnessing of wind
power and solar power and other forms of renewable and non-renewable
resources.
Labor

The human effort, physical and mental, used by workers in the production of goods and services.
Capital
i) Physical capital - All the machines, buildings,
equipment, roads and other objects made by
human beings to produce goods and services.

ii) Human capital - the knowledge and skills

acquired by a worker through education and
experience.
Entrepreneurship
The effort to coordinate the production and sale of goods and services. Entrepreneurs take risk and commit time and money to a
business without any guarantee of profit.
 Choosing What
We Want

Due to the problem of

scarcity:

Choices are necessary

as people try to attain
their goals…...
•
Therefore, Economics is the study of the choices that people
make to attain their goals, given their scarce resources.
1.1 Three Key
Economic Ideas
Economic agents
interact with one
another in markets.
Market:
A group of buyers and
sellers of a good or
service and the
institution or
arrangement by which
they come together to
trade.
 1.1 Three Key
Economic Ideas
In analyzing markets, we generally assume:

1. People are rational

- Use all information and,
weigh benefits and costs of
actions and try to make the
best decision possible.

Example: Apple doesn’t randomly choose the

price of its smartwatches; it chooses the
price(s) that it thinks will be most profitable.
1.1 Three Key Economic
Ideas
2. People respond to economic
incentives
As incentives change, so do the actions
that people will take.
Example: In many states, convicted
felons are required to submit DNA
samples. DNA from new crimes is
checked against the databased of
submitted DNA, so repeat offenders are
more likely to be caught.
The introduction of this process reduced
repeat convictions by serious violent
offenders by 17%. Even criminals
respond to economic incentives.
1.1 Three Key Economic Ideas

3. Optimal decisions are made at the margin

While some decisions are all-or-nothing, most

decisions involve doing a little more or a little less of
something.

Example: Should you watch an extra hour of TV, or

study instead?

A marginal decision – For economists, decisions

like this compare the marginal cost and marginal
benefit (MC and MB): the additional cost or benefit
associated with a small amount extra of some
action.
 1.2 The Economic
Problem That Every
Society Must Solve

THE ECONOMIC PROBLEM CAN ALSO

BE EXPRESSED IN THE FORM OF
THREE FUNDAMENTAL ECONOMICS
QUESTIONS.
 1. What goods and services will be produced?

Individuals, firms, and governments must decide on the goods and

services that should be produced.

An increase in the production of one good requires the reduction in

the production of some other good. This is a trade-off and the cost of
this trade-off is known as the opportunity cost - the highest-valued
alternative given up in order to engage in some activity due to
scarcity of productive resources.

Example: the opportunity cost of increased funding for space

exploration might be giving up the opportunity to fund cancer
research.
 • A firm might have several different
methods for producing its goods and
services.

• Example #1: A music producer can

make a song sound good by
• Hiring a great singer, and using
standard production techniques;
2. How will the • Hiring a mediocre singer and using
Auto-Tune to correct the inaccuracies.
goods be
produced? • Example #2: As the cost of
manufacturing labor changes, a firm
might respond by
• Changing its production technique to
one that employs more machines and
fewer workers;
• Moving its factory to a location with
cheaper labor
 Distribution of goods -
3. Who will The way we are most
receive the familiar with in the
goods and United States is that
services people with higher
produced?
incomes obtain more
goods and services.
 Economic systems are the basic
arrangements made by societies
to solve the economic problem
(what, how & for whom). They
Economic
include:
Systems
• Centrally-planned (command) economy
• Free market (capitalism or laissez-faire)
economy
• Mixed economy
 Through the government ownership of
state enterprises, the government
either directly or indirectly, determines
what to produce, the level of output to
produce, the method of which it is
produced and to whom it is produced
for.
Command
Economy/
Centrally The government owns most of the
business firms.
Planned
Economy
Examples: Soviet Union (until 1990s),
China (until 1970s), Old Egypt, North
Korea, Cuba and Venezuela.
 Free/Market Economy
Free economic
freedom. The
economic questions
are answered without
the help of a central
Individuals and firms
government plan or Firms owned by the
pursue their own self
directives. The market private sector.
interests.
forces of demand and
supply coordinates
economic activities
(e.g., price
determination).
Examples: United States,
Government is only
UK, Canada, Australia,
responsible for the
Western Europe (e.g.
provision of public
Ireland, Germany),
goods and other
Singapore, Ireland and
facilities.
Hong Kong
 Mixed Economy
In reality, there
are no pure The individual
planned/ enterprise exists,
command All systems are
in some sense and government
economies or
pure free mixed. involves in the
market decision making
economies in as well.
the world.

The basic questions

Government
are jointly answered Examples:
involvement in
by the market Malaysia, United
inequality issues,
forces and the Kingdom, Japan
consumer sovereignty
government and most of the
and labor protection
(economic countries in the
through regulation
planning, price world.
over private sector.
system).
 Efficiency of Economies & Source
Market economies tend to be more efficient than centrally-planned
economies. Market economies promote:

• Productive efficiency, where goods or services are produced at the

lowest possible cost - due to competition; and

• Allocative efficiency, where production is in accordance with

consumer preferences; in particular, every good or service is
produced up to the point where the last unit provides a marginal
benefit to society equal to the marginal cost of producing it.
Allocative efficiency arises due to voluntary exchange.

Voluntary exchange: A situation that occurs in markets when both the

buyer and the seller of a product are made better off by the
transaction. Transactions continue until no further improvement can
take place.
Caveats about Market Economies
Markets may not result in fully efficient outcomes. For
example:
• People might not immediately do things in the most efficient
way
• Governments might interfere with market outcomes
• Market outcomes might ignore the desires of people who are
not involved in transactions – ex: pollution

Economically efficient outcomes may not be the most

desirable. When markets result in high inequality; some
people prefer more equity.
Market Economies and Equity

Equity: The fair distribution of economic benefits

An important trade-off for a government is that between

efficiency and equity.

• Example: If we tax income, people might work less or

open fewer businesses; but those tax receipts can fund
programs that aid the poor.
 1.3 Economic Models
Economists study choices using economic models, simplified
versions of reality used to analyze real-world economic
applications.

BEHAVIORAL TESTABILITY ECONOMIC REVISE THE

ASSUMPTION (HYPOTHESI VARIABLES MODEL IF
S AND S) - CAN BE (MEASURAB IT FAILS
SIMPLIFICATI VERIFIED LE DATA) – AND
ONS OR PRICE, RETAIN
DISPROVEN INCOME,
In analysis: ETC.

Positive analysis: analysis concerned with statement of

“facts” and “what is”
Normative analysis: analysis concerned with statement of
“opinion” or “judgement” and “what ought to be”
Economists mostly perform positive analysis.
Economics as a Social Science (Student
Reading)
Social sciences study the actions of individuals; economics is a social
science, like psychology, political science, and sociology.

Compared with other social sciences, economics puts more emphasis

on how individuals’ actions and decisions affect outcomes like prices,
and how changes in conditions and policies affect those outcomes.

Economics considers the actions of individuals in every context, not just

business.

Government policymakers have increasingly relied on economic analysis.

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Apply the Concept: What Can Economics
Contribute to the Debate over Tariffs? (Student
Reading)

Governments can impose tariffs (taxes on

imports) to raise revenue or discourage
imports.

Economic theory can identify the likely

winners and losers from a particular tariff.

Economic analysis can use models and data to

estimate the dollar amounts gained by the
winners and lost by the losers.
• Typically, the losses outweigh the gains, so
economists generally discourage tariffs.
• But policymakers may place higher value on the well-
being of some groups—a normative judgment.
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 1.4 Microeconomics and Macroeconomics

Microeconomics - the study of

how households and firms make
choices and interact in markets,
as well as how the government
attempts to influence their
choices.
Macroeconomics - the study of
the economy (the aggregate
behavior of households, firms
and government), including
topics such as inflation,
unemployment, and economic
growth.
Table 1.1 Issues in Microeconomics and
Macroeconomics (Student Reading)
Examples of Microeconomic Issues Examples of Macroeconomic Issues
• How consumers react to changes in • Why economies experience periods of
product prices recession and increasing unemployment

• How firms decide what prices to • Why, over the long run, some economies
charge for the products they sell have grown much faster than others

• Which government policy would most • What determines the inflation rate
efficiently reduce opioid addiction
• What determines the value of the U.S. dollar
• The costs and benefits of the federal in exchange for other currencies
government’s approving the sale of a
new prescription drug • Whether government intervention can reduce
the severity of recessions
• The most efficient way to reduce air
pollution

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1.6 A Preview of Important Economic
Terms (Student Reading)
Define important economic terms.

Like all fields of study, economics uses terms or jargon with specific,
precise meanings.
Sometimes these terms will be used in ways that differ even from closely
related disciplines.
Examples:
• Technology: the processes a firm uses to produce goods and services
• Capital: manufactured goods that are used to produce other goods
and services

Pay close attention to terms defined in class and in the textbook!

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