Fundamentals of Microeconomics

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BQOE II FUNDAMENTALS OF MICROECONOMICS
Munzarina Ahmad Samidi Norehan Abdullah Jamal Ali Zalina Mohd. Mohaideen

Project Directors:

Prof. Dr. Mansor Fadzil Prof. Dr. Shaari Abd. Hamid Open University Malaysia Munzarina Ahmad Samidi Norehan Abdullah Jamal Ali Zalina Mohd. Mohaideen Universiti Utara Malaysia Wan Azman Saini Wan Ngah Universiti Putra Malaysia Lilian Kek Siew Yick Open University Malaysia

Module Writers:

Moderators:

Translated & Edited: Pearson (M) Sdn. Bhd. Compiled by: Desktop Publishing: Printed by: Lilian Kek Siew Yick Open University Malaysia Univision Press Sdn. Bhd. Meteor Doc. Sdn. Bhd. Lot 47-48, Jalan SR 1/9, Seksyen 9, Jalan Serdang Raya, Taman Serdang Raya, 43300 Seri Kembangan, Selangor Darul Ehsan

First Printing, Copyright @ Open University Malaysia (OUM), BQOE II All rights reserved. No part of this work may be reproduced in any form or by any means without the written permission of the President, Open University Malaysia (OUM). Version December 2008

Table of Contents
Course Guide TOPIC 1 INTRODUCTION TO ECONOMICS 1.1 The Scope and Method of Economics Studies 1.1.1 Economic Method 1.1.2 Microeconomics and Macroeconomics 1.2 Scarcity, Choice and Opportunity Cost 1.2.1 Problems of Scarcity 1.2.2 Choice and Opportunity Cost 1.3 Production Limitations 1.3.1 Production Possibility Table 1.3.2 Production Possibility Curve 1.4 Basic Economic Questions and Economic Systems 1.4.1 Basic Economic Questions 1.4.2 Economic Systems 1.5 Circular Flow of Income and Expenditure Summary Tutorial Question DEMAND, SUPPLY AND MARKET EQUILIBRIUM 2.1 Demand 2.1.1 Law of Demand 2.1.2 Demand and Quantity Demanded 2.1.3 Demand Determinants 2.1.4 Individual Demand and Market Demand 2.2 Supply 2.2.1 Law of Supply 2.2.2 Supply and Quantity Supplied 2.2.3 Supply Determinants 2.2.4 Individual Supply and Market Supply 2.3 Market Equilibrium 2.3.1 Equilibrium, Surplus, and Shortage 2.3.2 Change in Market Equilibrium 2.4 Market in the Form of Equation UTILITY ANALYSIS 3.1 Choice and Utility Theory 3.2 Cardinal Utility Theory ix - x 1 2 2 3 4 5 6 7 8 8 13 13 14 18 22 23 25 26 27 28 29 33 35 35 37 38 41 42 43 45 48 50 51 51

TOPIC 2

TOPIC 3

iv

TABLE OF CONTENTS

3.2.1 Total Utility and Marginal Utility 3.2.2 The Law of Diminishing Marginal Utility 3.2.3 Consumer Equilibrium 3.3 Ordinal Utility Theory 3.3.1 Choice and Priority 3.3.2 Indifference Curve 3.3.3 Budget Line 3.3.4 Consumer Equilibrium Summary Tutorial Question TOPIC 4 THEORY OF PRODUCTION AND COST THEORY 4.1 Production Process 4.1.1 Industry, Firm and Plant 4.1.2 Input and Output 4.1.3 Long-Run and Short-Run 4.2 Production in Short-Run 4.2.1 Total Product, Average Product and Marginal Product 4.2.2 Law of Diminishing Marginal Returns 4.2.3 Production Level 4.3 Concept of Cost 4.3.1 Economic Costs 4.3.2 Private Costs and Social Costs 4.3.3 Explicit Costs and Implicit Costs 4.4 Short-Run Production Cost 4.4.1 Total Cost 4.4.2 Average Costs 4.4.3 Marginal Costs Summary Tutorial Questions MARKET STRUCTURES 5.1 Economic Profit and Accounting Profit 5.2 The Characteristics of a Perfectly Competitive Market 5.3 Characteristics of a Monopoly Market 5.3.1 No Close Substitutes 5.3.2 Barriers to Entry into Industry 5.3.3 Firm as the Price Maker 5.4 Power Source of Monopoly 5.4.1 Control over Certain Production Resources 5.4.2 Economies of Scale 5.4.3 Legal Barriers 5.5 The Characteristics of a Monopolistic Market

52 54 55 59 59 60 65 68 73 74 76 77 79 80 81 82 83 85 86 88 89 89 90 91 92 93 94 98 99 101 101 103 105 105 106 106 106 107 107 107 111

TOPIC 5

TABLE OF CONTENTS

v

A Large Number of Sellers Unrestricted Freedom of Leaving or Entering Market 5.5.3 Goods that Can Be Differentiated 5.6 Characteristics of an Oligopoly Market 5.6.1 A Small Number of Firms 5.6.2 Homogenous Goods and Goods that Can Be Differentiated 5.6.3 Barriers to Entry Summary

5.5.1 5.5.2

109 110 110 111 111 112 112 113

COURSE GUIDE

COURSE...
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