Preparation for Exam

Chapter 1 and 2

1.Define economy
- Study the behaviour of individual 
- allocation the limited factor of production
- maximize production of goods

2.Explain each of the economic problem below.

I) Scarcity
- Limited factor of production 
- Not enough resources to prpducre everything we want .

II) Choice 
- Choice involves rational decision to be made due to scarcity of resources

III) Opportunity cost
- Second best alternative foregone when a choice is made .

3. Explain the factor of production

I ) Land
- This is free gift of nature .Return of land is fees

II) Capital
- Human made resources which are used in production process . Return of the land is interest

III ) Labour
- Production process that involves both mental and physical effort . Return of the labour is wages .

1. A) With the aid of a diagram , discuss how a market could achieve equilibrium 
- Equal
  
 B) Explain by using appropriate diagrams, the effect on the market for Perodua's car in each of the following cases :

i) an increase of the price of petrol
- increase in quantity supply , increase price
ii ) an increase in the cost of tyre
- Increase in quantity supply , increase price
iii ) a decrease in using labour
- Decrease in quantity supply .

Elasticity

Elasticity

• Measure of responsiveness of a variable
• Four types of the elasticity:

- Price elasticity of demand

- Income elasticity of demand

- Cross elasticity of demand

- Price elasticity of supply

Price elasticity of demand

Typed of elasticity of demand

Income elasticity of demand

Cross-price elasticity of demand

-the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good.

The value of cross elasticity

Chapter 2 - Pricing Theories

How Markets Work

• DEFINITION OF DEMAND

- The willingness and ability of buyers to buy product or services . So consumers must have money to buy product .

• The law of demand

-When the price of product increase, the quantity demanded will decrease and When the price of product decrease, The quantity demanded will increase .

• DETERMINANTS OF DEMAND

a ) Price of related goods -  The demand for a product is affected by a change in price of related      goods

1. Substitute Good
2. Complementary goods

B ) Consumers Income - When the income increase , consumers demands for goods and services  will increase

C ) Taste and Fashion 

D ) Population

E ) Price expected

• DEFINITION OF SUPPLY

- The willingness and ability of producer to make offer or service

• The law of Supply 

-  When the price of product increase , the quantity supplied will increase and When the price of product decrease , The quantity supplied will decrease .

• DETERMINANTS OF SUPPLY

1 ) Price of related goods - The supply of product can be influence by the price of related goods

• Substitute Goods
• Complementary Goods
• Cost of production
• Expected future price
• Number of seller

Chapter 1 - Economic Systems

Economic Systems

A. Free market economy / Laissez faire

• Definition

- An economy system was operation without government intervention

• Features

- Decision are taken by individual based on supply and demand
- Free market to sell what they choice
- Price based on supply and demand

• Disadvantages

- Existance of unemployment problem
-Existance of wide gap between rich and poor

B.Command economy/Socialist economy

• Definition

- An economy fully controlled by government

• Features

-Decision are taken by goverment
- Goverment plan the allocation of resources

• Advantages 

-Unemployment could be largely avoided
-Same income distribution
-Produces the good and services at efficiency level

• Disadvantages

- Mistake decide in economy
-Technology and innovation are undeveloped

C.Mixed economy

• Definition

- Economy system that mixtures of private and government ownership or control .

• Features

-Individual and firm free to have properties
-Basic economy problem resolved together

• Advantages

- The goverment will try to reduce gap of income
-Control the existence of monopolies

FACTOR OF PRODUCTION

Factor of production are the basic resources used in 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 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. That's include 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 managers their firm to produce their goods and services.
- The entrepreneur must be risks and organize the others factors of production.





PRODUCTION POSSIBILITIES CURVE ( PPC )

Show the max combination on goods that can be produced given the available factors of production and the available factors of production and the available technology of production.


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.


1. Attainable and efficient combination.

Combination A, B, and C ( 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 )


2. Attainable and not efficient

Combination D ( inside PPC )
-waste resources.
-economy is not efficient


3. Not Attainable

Combination E ( outside PPC )
- not enough resources
- no new technology


4. Extreme Combination

'


Combination E and A ( point at 0 )
- Use 1 firm to produce only 1 goods.

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.

                        A                                                    B

factor can shift the PPC outward through an improvement in technology. It allows more efficient production using existing economics resources. Based on diagram B above, if the improvement of production ( technology progress ) happened only in producing Necessities, the economy will produce more necessities compare to luxery goods. So, the PPC will shifted outward towards the horizontal axis.

Chapter 1 - Introduction to Microeconmics

Definition of Economics

• Economy is a social research about individual and society attitude to contribute and distributed the limited factor of production to produce the unlimited demand of good and services .

Different of Microeconomics and Macroeconomics

Basic Concepts

• Scarcity : The fundamental economic problem of having seemingly unlimited human wants in a world of limited resources. it takes that society that insufficient productive resources to fulfill all human wants and needs.
• Choice :  Choose involves a rational decision to be made due to scarcity of resources in order to satisfy unlimited human wants.
• Opportunity cost : The second best alternative foregone when choice is made.

Positive And Normative Statements

Positive Statements
Positive statements are objective statements that can be tested, amended or rejected by referring to the available evidence. Positive economics deals with objective explanation and the testing and rejection of theories. For example:

• A fall in incomes will lead to a rise in demand for own-label supermarket foods
• A rise in average temperatures will increase the demand for sun screen products.
• Higher interest rates will reduce house prices
• Cut-price alcohol has increased the demand for alcohol among teenage

Normative Statements

Normative statements are subjective statements rather than objective statements – i.e. they carry value judgements. For example:

• Pollution is the most serious economic problem
• Unemployment is more harmful than inflation
• The government should increases the minimum wage to RM12 per hour to reduce poverty
• Resources are best allocated by allowing the market mechanism to work freely.

Basic Economics Problems

• The fundamental economic questions facing any economy are What, How and For Whom to produce goods.
• The What question asks exactly which goods are to be produced and in what quantities.
• The How To Produce is about how the goods will produce, firm make decision for Labor Intensive or Capital Intensive 
• The For Whom problem concerns the division of output among society's citizens.