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Teaching andLearning Modes

This course will be delivered using thefollowing means :

Lecture (3 hours per week).

Tutorial (1 hour per week).

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Assessment

Coursework (40%)

1. Group Assignment (15%)

2. Midterm Test (15%)

3. Presentation (10%)

A two-hour final examination (60 %)

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Reading Materials

• Main Text:

Tucker, I.B (2008). Economics for today’s world. (5th ed.). Mason, OH: Thomson South Western.

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Syllabus Chapter 1 : Introduction to Factors of

Production & Consumer and producer surplus

Chapter 2 : Consumer choice theory Chapter 3 : Production and costs

Chapter 4 : Perfect Competition & Monopoly

Chapter 5 : Monopolistic Competition & Oligopoly

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Syllabus Chapter 6 : Measuring national income and cost

of living

Chapter 7 : Aggregate demand and aggregate supply

Chapter 8 : Introduction to inflation,

unemployment & business cycles

Chapter 9 : Fiscal Policy Chapter 10 : Monetary Policy & Money creation

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IMPORTANT!!!

•Attendance is taken for lectures and tutorials. You must meet the 80% minimum requirement or you may be barred from taking the final examination.

•No resit of tests should they absent from the tests without ACCEPTABLE reasons.

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Topic 1:Introduction to

Factors of Production &Consumer &

Producer Surplus

Economics is the study of how individuals and society choose to allocate scarce resources in order to satisfy unlimited wants. Faced with unlimited wants and scarce resources, we must make choices among alternatives.

Unlimited wants Scarcity Society chooses Opportunity cost

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Introduction• Because of the problem of

scarcity (human wants exceed available limited resources),

• No society has enough resources to produce all the goods and services necessary to satisfy all human wants.

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What are Resources?The basic categories of inputs used to produce goods and services.- These include land, labour, capital & entrepreneurship.

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What are the FOUR categories of resources?

LandLabourCapitalEntrepreneurship

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What is aLand Resource?

A shorthand expression for any natural resource provided by nature.

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• Includes anything natural above or below the ground.

• Eg: forests, gold, diamonds, oil, wildlife, rivers, lakes, seas, air, sun, moon, etc.

• Natural resources:–Renewable resources – nature can

automatically replace (clean air).–Non-renewable resources – nature

cannot automatically replace (oil).

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What is Labour?

The mental and physical capacity of workers to produce goods and services.

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• Service of farmers, lecturers, lawyers, bankers, etc – all forms of labour.

• Labour resource measured by:– Number of people available for work– The skills and qualities of workers

• Ability to produce differs from one country to the other because of difference in:– Education– Experience– Health– Motivation of workers

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What is Capital?

The physical plants, machinery, and equipment used to produce other goods; they do not directly satisfy human wants.

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Financial Capital

•Capital in everyday conversation means money or money value of paper assets such as stocks, bonds or house deed.

•This is actually financial capital.•Financial capital is not productive, instead it is only paper claim on economic capital.

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What isFinancial Capital?

The money used to purchase capital. Financial capital by itself is not productive; it is a paper claim on capital (factor of

production - physical plants, machinery, equipment used to produce goods)

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What is Human Capital?

• The productive knowledge and skill people receive from:–Education

–On-the-job training

–Health

–Other factors that increase productivity

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What is Entrepreneurship?

Creative labor of individuals that enables them to seek profits by combining resources – to produce innovative products.

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• Entrepreneur – motivated person who undertakes risky activities:–seeks new products or invent

new ways to accomplish tasks.

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Ordinary People as Entrepreneurs

• We become entrepreneurs when:– We find better ways to manage our

households – Or our study time

• Rather than make money, our profits:– Greater enjoyment– Additional time for recreation– Better grades

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LandLandLaborLabor CapitalCapital

Entrepreneurship organizesresources to produce goods

and services

Entrepreneurship organizesresources to produce goods

and services

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EXAMPLE• Bill Gates• an American business magnate, philanthropist,

author, and chairman of Microsoft, the software company he founded with Paul Allen.

• He is ranked consistently one of the world's wealthiest people and the wealthiest overall as of 2009.

• During his career at Microsoft, Gates held the positions of CEO and chief software architect,

• and remains the largest individual shareholder with more than 8 percent of the common stock.

• Gates is one of the best-known entrepreneurs of the personal computer revolution.

Q1:Scarcity exists:

a. when people consume beyond their needs.

b. only in rich nations.

c. in all countries of the world.

d. only in poor nations.

Q2: which of the following would eliminate scarcity as an economic problem?

a. moderation of people’s competitive instincts.

b. discovery of sufficiently large new energy reserves.

c. resumption of steady productivity growth

d. none of the above because scarcity cannot be eliminated

Q3: which of the following is not a resource?

a. land

b. labor

c. money

d. capital

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Q4: economics is the study of

a. how to make money

b. how to operate a business

c. people making choices because of the problem of scarcity

d. the government decision-making process

Q5: computer programs, or software, are an example of

a. land

b. labor

c. capital

d. none of the above

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Q6: Microeconomics approaches the study of economics from the viewpoint of

a. individual

b. Federal Reserve operation

c. economy wide effects

d. national economy

Q7: Economic theory claims that rise in gasoline prices will cause gasoline purchases to fall, ceteris paribus. Ceteris paribus means

a. other relevant factors like consumer income must be held constant

b. gasoline prices must be adjusted for inflation

c. theory is widely accepted but cannot be tested

d. consumers’ need for gasoline remains the same regardless of price

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Q8: Which of the following would not be classified as capital resource?

a. building

b. bulldozer

c. computer

d. 100 shares of stock

Q9: Explain why both rich and poor nations face the problem of scarcity. If you won RM1 million in a lottery, would you escape the scarcity problem?

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• A poor nation with many people who lack food, clothing & shelter experiences wants beyond the availability of goods & services to satisfy these unfulfilled wants.

• On the other hand, no wealthy nation has all the necessary resources to produce everything that everyone wishes to have.

• Even if you had RM1 million, your other wants would still be unfulfilled like love & happiness.

• There is never enough time & resources to accomplish all the things that you can imagine to be worthwhile.

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REFERENCE

•Tucker, 2008

•Chapter 1

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Consumer & Producer Surplus

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Consumer Surplus• Measures the value

between the price consumers are willing to pay for a product along the demand curve and the price they actually pay.

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How is consumer surplus measured?

By the total area under the market demand curve and above the equilibrium price.

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$20

$15

$10

$5

3 4 5 6 7 8 9 10 11

Consumer Surplus

D

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SConsumer surplus

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Example: Consumer Surplus for Ice Tea

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Producer SurplusMeasures the value between the actual selling price of a product and the price along the supply curve at which sellers are willing to sell the product.

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How is producer surplus measured?

• By the total area under the equilibrium price and above the supply curve.

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$20

$15

$10

$5

3 4 5 6 7 8 9 10 11

Producer Surplus

D

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S

Producer s

urplus

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Total Surplus•The sum of consumer surplus and producer surplus

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$20

$15

$10

$5

3 4 5 6 7 8 9 10 11

Total Surplus

D

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S

Producer s

urplus

Consumer surplus

Total Surplus

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Deadweight Loss• The result of a market that

operates in disequilibrium,• The net loss of both

consumer & producer surplus resulting from underproduction or overproduction of a product.

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$20

$15

$10

$5

3 4 5 6 7 8 9 10 11

Deadweight Loss

D

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SC

F

Producer s

urplus

Consumer surplus

Deadweight loss

D

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Market Efficiency• Competitive markets are

efficient when they maximize the sum of consumer and producer surplus.

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Conclusion Made• The total value of potential

benefits not achieved is the deadweight loss,

• resulting from too few or too many resources used in a given market.

Q1: if Bill is willing to pay $10 for one good X, $8 for a second, and $6 for a third, and the market price is $5, then Max’s consumer surplus is

a. $24

b. $18

c. $9

d. $6

Q2: ABC willing to sell Y for $10, a second Y for $12, a third for $14, and a forth for $20, and the market price is $20. What is ABC’s producer surplus?

a. $56

b. $24

c. $20

d. $10

Q3: in an efficient market, deadweight loss is

a. maximum

b. minimum

c. constant

d.zero

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Q4: deadweight loss results from

a. equilibrium

b. underproduction

c. overproduction

d. none of the above are correct

e. either b or c

Q5: total surplus equals

a. consumer surplus + producer surplus – deadweight loss

b. consumer surplus – producer surplus – deadweight loss

c. consumer surplus – producer surplus + deadweight loss

d. consumer surplus + producer surplus

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Reference•Tucker, 2008

•Chapter 3 (appendix)