Microeconomics:

The study of individual decision-making units and

markets within the economy
It looks at decision making and how it influences
the behavior of individuals in households and
businesses.

Macroeconomics:

The study of the operation of the economy as a

whole.
It looks at the total economy and how it
functions and studies the economic behavior of
groups such as households, business and the
government units

Household

A person living alone or a group of

related or unrelated persons who occupy
a house, an apartment, or other housing
unit.
Household Income & Expenditures

Household Income: The source

Personal Income (gross, or pretax)
1. Earned Income
-Wage, salaries and other labor income
-Proprietors income
-Rental income
-Dividends
-Interest

Unearned income
-Transfer Payment (money from government
for
which no direct work is performed in return)

2.

3. Personal contributions for social insurance (normally

subtracted from personal income)

Household Expenditures:
1. Spending
-Durable

Good
Good that has a useful lifetime of more than one
year.
- Nondurable Good
Good that has a short, useful lifetime.

2. Saving
3. Paying taxes & Debts

Household income and

Expenditures survey in
Household income
Malaysia
(DOS)survey:

The Household Income Survey (HIS) was

conducted by the Department of Statistics,

Malaysia since 1973.
However, starting from 1987, The Basic
Amenities Survey was conducted together
with Household Income Survey and known
as Household Income/Basic Amenities
Survey (HIS/BA).
The latest HIS/BA survey was carried out in
2009.

Objectives:
The main objectives of the HIS/BA survey are-

-to measure the economic well-being of the

population;
-to collect information on income distribution
pattern
of household classified by various socio-economic
characteristics;
-to identify the poor groups;
-to collect information on basic amenities of
household; and
-to study the effects of the implementation of
national
development program

Household expenditures survey:

The Household Expenditure Survey

(HES) was first conducted in the year

1957/58.
Beginning 1993/94 it was carried out at
an interval of five years and
subsequently in 1998/99.
The recent survey was undertaken in
2009/2010.
The survey covers private households
in urban and rural areas

Objective:
The main objective of HES is to collect information on

the level and pattern of consumption expenditure by

households on a comprehensive range of goods and
services.
This information serves as the basis for determining
the goods and services to be included in the basket of
the Consumer Price Index (CPI).
It is also used to update the CPI weights where the CPI
is a measure of the average rate of change in prices of
a fixed basket of goods and services which represents
the expenditure pattern of households in Malaysia
HES has become an invaluable source of information
for government and private sectors, researchers and
university students

Average monthly household income

is RM3686 (EPU)

Sources of Personal Income

(Percentage Distribution for
Selected Years

Average Household Income

Goals & Decisions of

Households/Individuals
Maximizing Satisfaction from Consuming

Goods & Services

Obtaining the greatest possible satisfaction,
or return, from an economic decision.
Utility
Satisfaction realized from consuming a good
or service.
Total Utility
Total satisfaction from consuming a
particular combination of goods and services.

The Utility-Price Rule states that in order to

maximize total utility from spending a given

income, a buyer must weigh the utility received
from each good against the money spent on that
good.

Maximizing Satisfaction from Earning

Income
The goal is to maximize economic well-being

 Business
A business is an organization

established to produce and to sell

goods and services.
Business decisions about the level of
output and the prices have a
powerful influence on the economy
Employs millions of people

Legal Forms of Business:

Proprietorship (One-owner
business)

Advantages
-Relatively easy to start.
-Independence in decision making.
-Not answerable or responsible to
any one

 Disadvantages (limitations)
-Difficulty in raising money.
-Unlimited liability:
Business owners personal
assets are subject to use as
payment for business debts.

 Partnership
Legal organization of a business
that is similar to a proprietorship
but has two or more owners.

Allows the pooling of money,

experience, and talent.
General partner (owner in the
partnership) has the burden of
unlimited liability (100%
responsibility)

Corporation
-Legal entity, owned by stockholders.
-Can carry on in its own name business
functions normally performed by
individuals.
-Limited liability (personal asset not
subject to pay debt)
-Can continue indefinitely
Preferred StockPays a stated dividend to its holder before
dividends are issued to common
stockholders

Common StockPays a dividend dependent on the profit

of a firm after all other financial
obligations have been met.
Corporate Board of Directors
Governing body of a corporation.

Bond

Structure of a Corporatio

Financial instrument through which a

corporation can borrow long-term funds.

Not all corporate

stock
owned by
Business
Ownership
ofisBusiness
private individuals but by others also
like funds (pension, unit trust fund,
endowment funds etc) and by other
corporation by acquisition or merger.

Merger (Acquisition)
-The acquiring of one company by
another through buying controlling
shares of stock.
Types of Merger:
Conglomerate Merger
-Corporation acquires another corporation
that
produces unrelated goods and services.

 Vertical Merger

Corporation acquires another

corporation that supplies its inputs or
distributes its products.
Horizontal Merger
Corporation acquires another
corporation that competes in the same
market.
Holding Company
Corporation formed for the purpose of
owning or holding stock in other
corporations. Produces nothing itself

 Business firms face many decisions

Ultimate purpose or goals of the

decisions making are assumed to

maximize a firms profit or minimize
its loss.
Measuring profit or loss:
Profit or loss = revenue costs
Revenue is defined as the m oney or

income that a company receives from

selling its product.
Costs in a business refers to those incurs
for labor, materials, transportations,
insurance and other inputs.

Islamic Principles of Business

Shariah provides general

Organization

guidelines for Muslims to follow in

relation to both one's daily life and
business conduct.
As long as business dealings are
concerned, Muslims are required to
behave Islamically because Allah
(swt) Himself is witness to their
transactions. Quran states:

"O you who believe! eat not up your

property among yourselves in vanities:

but let there be amongst you traffic and
trade by mutual good-will: Nor kill (or
destroy) yourselves: for verily ALLAH
hath been to you Most Merciful" [4:29]
"In whatever business you may be, and
whatever portion you may be reciting
from the Qur'an and whatever deed you
may be doing We are Witnesses thereof
when you are deeply engrossed
therein. [10:61]

Some key business principles that Muslims

should follow are:

Honesty & Truthfulness:
Honesty and truthfulness are qualities which

a Muslim business person should develop

and practice in himself. Truth, for example,
has a self-reinforcing effect. In a hadith
reported in Sahih al Bukhari.
The

Prophet (peace be upon him) said, "Truthfulness

leads to righteousness, and righteousness leads to
Paradise. A man continues to tell the truth until he
becomes a truthful person. Falsehood leads to al fujuwr
(i.e. wickedness, evil-doing), and al fujuwr (wickedness)
leads to the (Hell) Fire, and a man may continue to tell
lies till he is written before Allah, a liar." [Hadith No.
8.116]

Keep your word/promise:

In a hadith narrated by Abu Hurayrah,

the Prophet (peace be upon him) is

reported to have said:
If

you guarantee me six things on your

part I shall guarantee you Paradise.
Speak the truth when you talk, keep a
promise when you make it, when you
are trusted with something fulfill your
trust (amanah), avoid sexual
immorality, lower your guise, and
restrain your hands from injustice."
[Ubadah Ibn al Samit, Ahmad,
Bayhaqi]

Do not deal in fraud (cheating)

Businessmen should avoid duplicity

(dishonesty, fraudulence). They should

treat others in the same righteous and
fair manner that they themselves would
like to be treated. Quran states;
Woe

to those that deal in fraud those

who when they have to receive by
measure from men exact full measure.
But when they have to give by
measure or weight to men give less
than due. Do they not think that they
will be called to account? [Al Qur'an
83:1-4]

Do Not Bribe
Businessmen may sometimes be
tempted to offer bribes or baqshish in
order to persuade another party to give
them special favors or to allow them to
get away with dishonest practices. The
practice of bribery is forbidden in Islam.
The

Apostle of Allah (peace be upon him)

cursed the one bribes and the one who
takes bribes. [Abd Allah ibn Amr ibn Al As,
Abu Dawud, hadith no 3573]

Deal Justly
The general principle that applies
across all transactions including those
pertaining to business is that of justice
or 'adl. Allah emphasizes this point in
the Qur'an:
Deal

not unjustly, and you shall not

be dealt with unjustly. [Al Qur'an
2:279]

Forms of Business
Mudharabah
Organization

Musharaka: (Shirkat-ul-Milk & Shirkat-ul-Aqd)

Shirkat-al-Mufawada

(equal share: capital, labor,

profit & loss)

Shirkat-al-`Ainan (Contribution may be less or more
the above)
Shirkat-al-Sanai or Al Abdan (Mixed )
Shirkat-al-Wujooh (business on credit)

Joint stock companies

Business on commissions
Cooperation
Sole proprietorship

CHAPTER 12
Production and the
Costs of Production

PRODUCTION BASICS:

Sectors & Industries

Producing Sectors
Broad classification system for
grouping goods and services, and the
firms that produce them.
Industry
An useful and narrower classification.
An industry is a group of firms
producing similar products or using
similar processes.
Example, Automobile industry,
aircraft industry, health care industry,
soft drinks industry and so on.

Major Producing Sectors of the Economy

Producing Sectors shares as a percentage

to GDP
(Malaysian case, at current prices)
Sectors:
Agricultures

200
5

200 2009 2011

p
7

8.3

10.0

9.2

11.9

Mining &
Quarrying

13.3

13.3

11.4

10.4

Manufacturing

27.5

26.1

23.8

24.4

3.0

2.8

3.3

3.2

46.8

46.9

51.3

49.2

Plus imports
duties

1.2

0.9

1.0

1.0

TOTAL

100

100

100

100

Construction
Service

Services sector includes:

(Finance + Insurance, Real estate + Business,
Transportation +
Storage , Communication, wholesale & retail trade,
Accommodation & Restaurant, electricity, gas &
water ,
government & other services)

Sample Industries and Products in the

Manufacturing Sector

Methods of Production
Production Function
- Shows the type and amount of
output that results from a particular
group of inputs when those inputs
are combined in a certain way.
Choosing a Production Function:
Efficient Method of Production
-Least-cost method of production.
Technology
-Body of knowledge that exists
about production and its
processes.

 Creative Destruction
New, technologically advanced
machinery and production methods
cause the disappearance of old
machinery and methods.
Example, introduction of robotics
into assembly lines has affected the
demand for labor and has caused
much of the machinery and
equipment in automobile plants to
become obsolete.

ECONOMIC TIME, PRODUCTION, AND

THE PRODUCTION COSTS:
Time Frame:

-The production function that a firm

chooses
is influenced by the time frame in
which it
views or plans its operation.
Short Run:
Production time frame in which some
factors of production are variable in
amount and some are fixed.

Variable Factors
Factors of production that change in
amount as the level of output
changes.
Variable Costs
Costs of using variable factors (e.g.
hourly
wages, payment for raw materials,
machinery parts etc)

 Fixed Factors

-Factors of production that do not

change in amount as the level of
output changes.
Fixed Costs
-Costs of using fixed factors.

Long Run:
Production time frame in which all
factors
of production are variable in amount.

PRODUCTION COSTS:
In market economies, a wide variety of

businesses produces a wide variety of

goods & services.
Each of those businesses requires
economic resources in order to produce its
products.
In obtaining and using resources, a firm
makes monetary payments to resource
owners (e.g. workers).
The firm also incurs opportunity costs
when using resources it already owns (e.g.,
entrepreneurial talent).

Those payments and opportunity costs

together make up the firms costs of

production

Economic Costs
It includes all payments a firm must

make, or incomes it must provide to

resource suppliers to attract those
resources away from their best
alternative production opportunities. The
payments are Explicit

(revealed & expressed)

Implicit (present but not obvious)

Explicit costs : Monetary payments that

the firm makes to its resource suppliers

Implicit costs: Opportunity costs of
using the firms self-owned, self employed
resources which could have earned in
their best alternative use. (example.)
Profit:
Economic profit (pure profit) =TR-(Explicit

costs + implicit costs)

Accounting profit = TR-TC (Explicit

costs)

Economic & Accounting Profit:

Short-Run Production Costs

Short Run
Total Fixed Cost (TFC)
-Cost of all fixed factors.
-Does not change as the level of output
changes
and must be paid even when output is zero.
Total Variable Cost (TVC)

-Cost of all variable factors of production.

-Increases as the level of output increases, but
is
zero when output is zero.

 Total Cost (TC)

-Cost of acquiring and using all factors of
production.
-Total fixed cost plus total variable cost.

Average Total Cost (ATC) or Unit

Costs

-Cost per unit of output produced.

-Total cost divided by the number of units
produced.

Marginal Cost
-Change in total cost when one more unit of
output is produced.

Example: Output (Q), TFC, TVC & TC

Level of output

Total Cost Pattern

TFC

Level of output

Example: Output (Q), TC, ATC, MC

Level of output

Pattern of MC & ATC

Level of Output

Example: Summary of Short-Run Costs

Short-Run Production
Relationships
Total product (TP) is the total
quantity, or total output, of a
particular good produced.

Marginal product (MP) is the

change in total output resulting from
each additional input of labor.

Average product (AP) is the

total product divided by the total
number of workers.

The Law of Diminishing (also

marginal) Returns:
This law assumes that technology is

fixed and thus the techniques of

production do not change.
The law states that as additional units
of a variable factor are added to a
fixed factor, beyond some point the
additional product from each additional
unit of the variable factor decreases.

Relationship between TP,MP and AP

(Hypothetical data)

The Long-Run Production

Costs:
Long-Run Costs
Long-Run Total Cost: Total cost
Long Run Average Cost: Per

unit costs
Long Run Marginal Cost: Cost
per additional unit of output.

Long-Run Total Cost, Average Total Cost, and Marginal Cost

Phases of Long-Run Average Total

Costs:
Economies of Scale
Occurs

when the increasing size of production in

the long run causes the per unit cost of
production to fall. (labor specialization,
managerial specialization, efficient capital, other
factors etc.)

Diseconomies of Scale
Occur

when the increasing size of production in

the long run causes the per unit cost of
production to rise.

Constant Returns to Scale

Occur

in the range of production levels in which

long-run average total cost is constant