A231 PET3013 EModule Topic 1

PRINCIPLES OF ECONOMICS EMILDA HASHIM 2023/2024 PET3013 SEM 1 SESSION 2023/2024 E-MODULE

MESSAGE FROM THE INSTRUCTOR Bismillahirrahmanirrahim. Assalamualaikum and Good day everyone, Alhamdulillah, I'm able to come out with this semester edition of Principles of Economics's both e-module and e-workbook. Both e-books are used to accompany my lecture slides which are available in myGuru platform and google link. In this module, you will learn about eleven important topics consisting of two parts, specifically microeconomics and macroeconomics. After finishing each topic, you may answers some questions from the e-workbook to test your knowledge and understanding on that particular topic. This easy-to-use e-module and e-workbook is creatively designed to make learning easy, fun and interesting. In this edition, previous final examinations are also included in the e-workbook. Hopefully, these e-books will assist you throughout the course taking journey this semester. Wish you all the best. “FIGHT UNTIL YOUR LAST SWEAT” Sincerely, EMILDA HASHIM a.k.a. mommyemil

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 1 1 INTRODUCTION 1.1 LEARNING OUTCOMES At the end of the topic, you will be able to: 1) define economics. 2) distinguish between resources and wants. 3) differentiate between microeconomics and macroeconomics. 4) describe the three economic concepts. 5) describe the three economic problems. 6) discuss and illustrate the production possibility curve (PPC). 7) differentiate the four types of economic systems. 1.2 DEFINITION OF ECONOMICS 1) Economics is the most important aspect in human life whether we realize it or not. 2) The word ‘economy’ comes from a Greek word, which means ‘one who manages a household’. 3) Definition of economics according to famous economists: a) Adam Smith (1776) - Economics or political economy is an enquiry into the nature and cause of wealth of the nations. b) Milton Friedman (1962) - Economics is the science of how a particular society solves its problems. c) Richard Lipsey (1990) - Economics is the study of scarce resources to satisfy unlimited human wants. 4) American Economic Association defines economics as the study of scarcity; it is a study of how people use resources, or the study of decision-making. 5) The desire of human beings (wants) is unlimited and they will try as hard as possible to fulfil their demand to maximize satisfactions. 6) However, economics faces limited resources or factors of production. 7) Therefore, we can say that economic wants exceed society’s productive capacity.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 2 8) Economics studies how people fulfil their unlimited desire with the limited resources. 9) Economics is defined as ‘a social science that studies how people and society organize scarce and limited resources to satisfy their unlimited wants’. 10) Thus, economics is a social science that examines how people choose among the alternatives available to them. 11) It is social because it involves people and their behavior. 12) It is a science because it uses, as much as possible, a scientific approach in its investigation of choices. 1.3 RESOURCES VS WANTS 1) Resources are also known as factors of production (FOP) or inputs. 2) Factors of production are resources or inputs used to produce goods and services. 3) Factors of production are limited and society will try to use them efficiently to produce goods and services in order to satisfy their unlimited wants. 4) There are four categories of economic resources: land, labor, capital and entrepreneur. a) Land i) Land includes all-natural resources which are derived from the earth and land itself. ii) Two essential characteristics of natural resources: (1) they are found in nature—that no human effort has been used to make or alter them.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 3 (2) they can be used for the production of goods and services. iii) Examples of land are timber, oil, coal, soil and water. iv) The return to land is called ‘rent’. b) Labor i) Labor is human effort that can be applied to production. ii) People who work to repair tires, pilot airplanes, teach children, or enforce laws are all part of the economy’s labor. iii) Labor or workers are defined as people who contribute their energy mentally and physically in the production of goods and services. iv) Labor can be categorized into: (1) Skilled labor – workers who are gaining skills through education, training, or experience. (2) Semi-skilled labor – fairly trained and educated worker with certain skills. (3) Unskilled labor - untrained, uneducated person brings to a particular production process. v) ‘Wages/salaries’ are the returns to labor. c) Capital i) Capital refers to the stock of goods created by society to help them in the production of goods and services. ii) In other words, it is man-made goods used to produce other goods and services. iii) Economists refer to the purchase of capital goods as investment. iv) Examples of capital are machinery, tools and equipment, building and factories. v) Money is not capital. Firms can, however, use money to acquire capital. vi) Interest is the return to capital. d) Entrepreneur i) Entrepreneur is a person who organizes or employs other factors of production to produce goods and services. ii) Entrepreneur refers to a person who has the ability of planning, organizing, directing and controlling. iii) Entrepreneur takes initiative in combining the resources of land, labor, and capital to produce a good or a service. iv) The entrepreneur makes the strategic business decisions that set the course of an enterprise. v) The entrepreneur is an innovator. He or she commercializes new products, new production techniques, or even new forms of business organization. vi) The entrepreneur is a risk bearer. The entrepreneur has no guarantee of profit. The reward for the entrepreneur’s time, efforts, and abilities may be profits or losses. vii) ‘Profit’ is the return to the entrepreneur.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 4 viii)The difference between a labor and an entrepreneur is that, entrepreneur takes risk in setting up his own business. On the other hand, labor works for an entrepreneur and does not take risks. 5) Wants are defined as something that a person would like to possess, either immediately or at a later time. 6) Wants may vary from person to person and from time to time. 7) Our wants extend over a wide range of products, from necessities (for example, food, shelter, and clothing) to luxuries (for example, perfumes, yachts, and sports cars). 8) The unlimited wants consist of goods and services. a) Goods i) Goods refer to tangible things. ii) They can be seen and touched. iii) Economic Goods: goods or services a consumer must pay to obtain; also called scarce goods. iv) Free Goods: goods or services that a consumer can obtain for free because they are abundant relative to the demand. v) Examples: books, cars and computers. b) Services i) Services refer to intangible things. ii) They cannot be seen and touched. iii) Examples: transportation, education, healthcare and banking services. iv) They cannot be seen and touched, rather, we can enjoy the benefits provided by these services. 1.4 BASIC ECONOMIC CONCPETS 1) Selecting among alternatives involves three important basic economic concepts: scarcity, choice, and opportunity cost. 2) Scarcity a) Resources are scarce (limited) while desire are unlimited.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 5 b) With limited resources to fulfill our wants, we are facing scarcity. c) Scarcity means that there are never enough resources to satisfy all human desires. d) We would always like more and better housing, more and better education—more and better of practically everything. e) Basically, economics deals mainly with how to efficiently utilize scarce resources that are limited in relation to human wants in the society. f) Because our resources are limited, we cannot say yes to everything. To say yes to one thing requires that we say no to another. g) Therefore, wants are ranked according to priority. h) When this happens, due to unlimited wants and limited resources, society has to make choices. 3) Choice a) Choice is when the society needs to decide what to produce and who gets the final product. b) Every society, at every level, must make choices about how to use its resources to minimize wastage. c) Individuals or society must make the best choice possible. d) Individuals make choices that seek to maximize the value of some objective, and that they define their objectives in terms of their own self-interest. i) Consumers make choices to maximize satisfaction. ii) Producers make choices to minimize cost and maximize profit. iii) Government make choices to maximize society’s welfare. 4) Opportunity Cost a) Doing or choosing one thing requires us to give up another. b) Every choice is associated with opportunity cost. c) Thus, every choice has an opportunity cost and opportunity costs affect the choices people make as the saying goes, “There’s no such thing as a free lunch”.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 6 d) It is defined as the number of goods forgone to make the best choice or the best alternative forgone. e) It is the second-best alternative and its benefits that is given up to make the best choice. f) This is also applicable to policy makers and firms. g) For example, consider the cost of a college or university education. i) That includes the value of the best alternative use of money spent for tuition, fees, and books. ii) But the most important cost of a college education is the value of the forgone alternative uses of time spent studying and attending class instead of using the time in some other endeavor such as working at a fast-food restaurant or become a foodpanda or grab delivery guy. iii) Students sacrifice that time in hopes of even greater earnings in the future or because they place a value on the opportunity to learn. 1.5 BRANCHES OF ECONOMICS 1) There are two branches of economics: microeconomics and macroeconomics. 2) Microeconomics a) Microeconomics studies the behavior and decisions of individual entities, such as a person, a household, a firm, an industry and a market. b) In microeconomics, we look at decision making by individual customers, workers, households, and business firms. c) It studies in details how individual unit of economic entity market works, thus, at this level of analysis, the economist observes the details of an economic unit, or very small segment of the economy. d) We measure the price of a specific product or services, the production of an individual, a firm or an industry, the number of workers employed by a single firm, the revenue or income of a particular firm or household, or the expenditures of a specific firm, government entity, or family. 1 Scarcity • limited resources vs unlimited wants 2 Choice • Society must make a choice on how to use the FOP to minimize wastage and maximize satisfaction (self-interest) 3 Opportunity Cost • the number of goods forgone in making the best choice

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 7 e) Examples: price of a book, production of proton cars, and income of a teacher. f) Examples of topics in microeconomics: consumer behavior, individual labor markets, and the theory of firms (market structure). 3) Macroeconomics a) Macroeconomics is concerned with the overall performance of the economy. b) It seeks to present the bigger picture rather than the detailed individual choices. c) It studies the entire economy or a basic subdivisions or major aggregate of the economy such as the government, consumers, and business sectors. d) An aggregate is a collection of specific economic units treated as if they were one unit. e) Macroeconomics speaks of such economic measures as total output, total employment, total income, aggregate expenditures, and the general level of prices in analyzing various economic problems. f) Examples: Gross Domestic Product of Malaysia in 2021, unemployment rate in Thailand and total rubber exported to USA. g) Examples of fundamental issues of macroeconomics revolves around unemployment rates, the GDP of an economy, inflation, and the effects of exports & imports. 1 studies individual & specific economic units (households, firms, markets) 2 Analyze economic entities in detail 3 Looks at individual unit 4 Production - individual, firm, industry 5 Prices - individual goods & services 6 Income - distribution among factors of production 7 Employment - Household supply of labor 1 studies economy as a whole 2 analyze economic unit in general 3 Looks at aggregate / entire economy 4 Production - Gross Domestic Product (GDP), Gross National Product (GNP), aggregate demand and supply ndividual, firm, industry 5 Prices - average prices, Consumer Price Index (CPI) or inflation 6 Income - total wages & salaries, total profit 7 Employment - Total employment & unemployment Microeconomics Macroeconomics

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 8 1.6 FUNDAMENTAL ECONOMIC PROBLEMS 1) The choices we confront as a result of scarcity raise three sets of issues or problems in decision making. 2) Every economy must answer three fundamental questions: What to produce? How to produce? For whom to produce? 3) What to produce? a) It refers to the types and quantities of goods and services that should be produced in the economy. b) Decision must be made about what to produce with limited resources available. c) There are limits to what a nation can produce; deciding to produce more of one thing inevitably means producing less of something else. d) Producing better education, for example, may require cutting back on other services, such as health care. e) It will also depend on the demand from consumers. f) Therefore, decision must be made about what products to produce and how many to produce will involve resource allocation. g) ‘What to produce’ will focus on the production of commodities which give it a cost advantage over other products. h) It also focuses its economy most in its specializations. i) This proper resource allocation will ensure that scarce resources are utilized properly and efficiently. 4) How to produce? a) There are all sorts of choices to be made in determining how goods and services should be produced. i) Should a firm employ a few skilled or a lot of unskilled workers? ii) Should it produce in its own country or should it use foreign plants? iii) Should manufacturing firms use new or recycled raw materials to make their products? b) It refers to the technique or method of production: who will be producing the goods and services using what resources and technology? i) The method of production could be either labor intensive or capital intensive. (1) Labor intensive – More labors being used compared to capital.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 9 (2) Capital intensive - More capital being used compared to labors. ii) It involves the cheapest method of production in order to minimize possible cost of production and maximize profit. 5) For whom to produce? a) If a good or service is produced, a decision must be made about who will get it. b) A decision to have one person or group receive a good or service usually means it may not be available to someone else. c) It refers to the group of people in the society who will buy the goods and services. d) This relates to where the goods produced will end up, as such goods and services will be used by consumers in the society or exported to other countries. e) The production of goods and services depend on the society’s income level. f) People with higher income will be able to purchase more goods and services than the lower income people. g) Necessity goods are produced for everyone whereas luxury goods are only produced for elites or people with higher income and purchasing power. 1.7 ECONOMIC SYSTEMS 1) Every society needs to develop an economic system—a particular set of institutional arrangements and a coordinating mechanism—to respond to the economizing problem. 2) The economic system has to determine what goods are produced, how they are produced, who gets them, how to accommodate change, and how to promote technological progress. 3) Economic systems differ as to: a) who owns the factors of production. b) the method used to motivate, coordinate, and direct economic activity. • types of products & quantity of goods and services • resource allocation 1 What to produce • technique or method of production • labor vs capital intensive 2 How to produce • People who will buy the goods and services • lower vs higher income people 3 For whom to produce

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 10 4) There are four types of economic systems: Capitalist economic system, Socialist economic system, Mixed economic system, and Islamic economic system. 5) Capitalist Economic System or Capitalism is also known as free market economy or laissezfaire or free enterprise. Capitalism exhibits the dynamism, competition, and abundance of goods in the economy. Examples of Capitalism are United States of America, Canada, and Japan. 6) Socialist Economic System or Socialism is known as command economy, communism or central planning economic system. Socialism showcases the centralized planning, state control, and focus on public goods within command economies. Examples of Socialism are Russia, North Korea and Cuba. 7) Mixed Economic System or Mixed Economy is a mixture between capitalist and socialist economy systems. The market system is a mix of decentralized decision making with some government control. This system demonstrates the balancing act between market forces and social responsibility within mixed economies. This economic system is found in many countries worldwide. Examples of Mixed Economy are Malaysia, Singapore, Great Britain and Sweden. 8) Islamic Economic System is a system which is based on Al-Quran and Hadith. Majority of Islamic countries have practiced a mixture of Islamic and conventional economic systems. Examples of countries with strong elements of Islamic economic system are Malaysia, United Arab Emirates, Palestine and Sudan. 9) Characteristics of four economic systems: a) Characteristics of Capitalist Economic System i) Means of production are owned by private sectors. Individuals and businesses own resources and means of production. ii) Capitalism rests on the private ownership of property, freedom of enterprise, and freedom of choice. (1) Freedom of enterprise ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets. People interact in markets to buy and sell. (2) Freedom of choice enables owners to employ or dispose of their property and money as they see fit. It also allows workers to try to enter any line of work for which they are qualified. Finally, it ensures that consumers are free to buy the goods and services that best satisfy their wants within their budgets. iii) Thus, individuals and firms are free to make their own economic decisions and free to possess property, as well as wealth, without any limitations. Economic System Capitalism Socialism Mixed Economy Islamic

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 11 iv) In this type of economic system, government intervention is kept at a minimum in making economic decisions. This phrase “keep the government from interfering with the economy” works well in capitalism. Power of government just needed to: (1) protect private property from theft (2) provide a legal environment for contract enforcement v) Price mechanism is an important indicator in the free economy. (1) If consumers are willing to pay more for goods and services, they will receive more. (2) Those who pay less will get less goods and services. vi) The ultimate objectives are different between producers and consumers. The ultimate objective of a producer is to maximize profit and minimize cost, while the consumers’ objective is to maximize satisfaction. b) Characteristics of Socialist Economic System i) Centralized government control over production and distribution. (1) The government owns all factors of production in the economy, as well as the outputs produced. (2) The factors of production are allocated through the Central Planning Authority and rationed according to society’s needs. ii) State ownership of key industries. (1) The state often owns and controls the means of production, including factories and key industries. (2) the government exercises strict control over economic activities, and most industries are state-owned. iii) Government plans and policies guide economic decisions. (1) The government makes all economic decisions without the involvement of the private sector. (2) The government plans and policies outline the economic production goals and resource allocation strategies across different sectors in the economy. iv) Consumers have limited choices. (1) Individuals have no right to make their own economic decisions. (2) There is a very limited individual economic freedom. (3) The government has the absolute power and autocracy on individuals. (4) The government also determines what goods and services are available. (5) Prices may be set by the government rather than determined by market forces. c) Characteristics of Mixed Economic System i) Coexistence of Private and Public Ownership (1) Blend of market and command elements. (2) Resources are owned by both the government and the private sectors. ii) Government intervention in some sectors. (1) The government regulates certain industries, provides public goods, and addresses market failures.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 12 (2) government regulations exist to prevent monopolies, protect consumers, and ensure environmental sustainability (3) (e.g., healthcare, education) (4) Government will provide public goods and merit goods which private sectors are unwilling to produce. iii) Private sector drives majority of economic activities and decisions. (1) Individuals and firms can Individuals and businesses engage in profit-seeking activities and make economic decisions. (2) Individuals and firms are free to own wealth and need to pay tax to the government. iv) Balance between economic efficiency and social welfare. (1) There must be a balancing act between market forces and social responsibility by private sectors and the government within mixed economies. (2) Through this, they can achieve high living standards with social safety nets and responsible resource allocation. d) Characteristics of Islamic Economic System i) Concept of Tauhid (1) Tauhid, meaning "oneness" or "unification," is the core concept of Islam. (2) Tauhid asserts that Allah is the one and only true God. (3) It means believing there is no God to be worshiped except Allah; Allah alone has to be worshipped. (4) Tauhid also touches on two types of relationships: (a) relationship between human and Allah (Habluminallah). (b) relationship among mankind (Habluminannas). ii) Concept of Rububiyyah (1) It forms the basis for recognizing Allah as the Creator and the Most Powerful in the universe. (2) Allah is the ultimate Sovereign who sets the laws and regulations that govern the universe. (3) While Allah is also infinitely merciful and compassionate. (4) Allah is the ultimate destination of all creation. We will all return to Him in the afterlife, and our ultimate success will depend on our obedience and devotion to Him during our earthly life. iii) Concept of Tazkiyyah (1) It means "purification" elevating one's character and soul. (2) It is actively striving towards becoming a better person, both morally and spiritually. (3) In one aspect, a person hasto purify his or her wealth through giving zakat (the rich gives to the poor) and sadaqah (donation). iv) Concept of Khalifah

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 13 (1) Humans act as caliphate (Khalifah) on earth. "It is He who has made you successors (Khalifah) upon the Earth..." (Quran 35:39) (2) It emphasizes the responsibility of every individual to contribute to a just and equitable society. v) Concept of Ukhuwah (1) Ukhuwah in Islam is often translated as "brotherhood" or "sisterhood". (2) It suggeststhe deep bond of unity and solidarity that connects humans to each other. (3) Ukhuwah translates into everyday life through acts of kindness, generosity, and service. It can manifest in simple gestures like extending a helping hand, sharing knowledge, or offering advice. CHARACTERISTICS OF ECONOMIC SYSTEM Capitalism •1) privately owned resources. •2) Each firm is free to make economic decisions. •3) No government intervention in economic decision-making. •4) Price mechanism as indicator. •5) Objective – maximize profit & satisfaction Socialism •1) Centralized government control over production and distribution. •2) State ownership of key industries. •3) Government plans and policies guide economic decisions. •4) Limited individual economic freedom. Mixed Economy •1) Coexistence of Private and Public Ownership •2) Government intervention in some sectors (e.g., healthcare, education). •3) Private sector drives majority of economic activities and decisions. •4) Balance between economic efficiency and social welfare. Islamic Economy •1) Concept of Tauhid - worship Allah alone •2) Concept of Rububiyyah - Allah is the Creator & Most Powerful •3) Concept of Tazkiyyah - Purify wealth through zakat & sadaqah •4) Concept of Khalifah - Humans as caliphate •5) Concept of Ukhuwah - concept of brotherhood

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 14 10) Economic Decisions of four economic systems: a) Economic Decisions in Capitalism i) What to produce? (1) It depends on goods and services that are demanded by consumers. (2) Consumers hold the ultimate power in a market economy. They influence what gets produced and how it's produced through their purchasing decisions. This is known as consumer’s sovereignty. (3) Determined by supply and demand in the market. Businesses produce what they believe consumers will buy at a profit. There will be a wide variety of goods and services available. ii) How to produce? (1) The method of production relies on the efficacy of resource utilization. (2) It depends on the cheapest method of production that suit the objectives of the capitalists. It is based on cost-effectiveness and efficiency. (3) The objective of producers is to maximum profit and minimize cost, while the objective of consumers is to maximize their satisfaction. (4) Capitalism emphasizes on specialization and efficiency in different stages of production. iii) For whom to produce? (1) Goods and services to be produced by capitalists depend on society’s purchasing power. (2) People with higher income will get more goods and services because of their higher purchasing power than the lower income people. (3) Hence, only those who are able to pay the market price will be allocated the goods and services. b) Economic Decisions in Socialism i) What to produce? (1) Central planning authorities make decisions about what goods and services are needed. (2) Socialism focuses on specific sectors like heavy industry, infrastructure, or strategic resources. (3) It put less emphasis on consumer goods or individual preferences. ii) How to produce? (1) State-owned enterprises dominate production, thus, the government dictates resource allocation, production methods, and technological advancements. (2) Government itself will decide on the methods of production with the least cost methods. iii) For whom to produce? (1) Production prioritizes national objectives and societal goals (e.g., military strength, economic self-sufficiency).

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 15 (2) Consumers receive what is produced rather than influencing production decisions. (3) Government will serve basic needs first and luxury goods later. c) Economic Decisions in Mixed Economy i) What to produce? (1) Mixed economies produce a blend of market forces and government intervention: private production in some sectors, government programs in others. (2) There should be a balance between consumer preferences and social welfare goals. (3) The public sectors provide public goods at affordable price and private sectors produce variety of goods and services to maximize their profits. ii) How to produce? (1) There will be a mixture between private and public ownership of enterprises: government regulations and subsidies influence production methods in some sectors. (2) Technological advancements driven by market competition, with potential government funding for research and development. (3) The producer will choose the most efficient and cost-effective method. (4) Government will enact laws to combat inefficiencies from negative externalities. iii) For whom to produce? (1) The production in mixed economies depend on the society’s needs and income distribution. (2) Consumers drive production in some sectors, while government programs address income inequality and provide public goods and services like healthcare and education. (3) The system focuses on achieving socially desirable outcomes alongside economic efficiency. d) Economic Decisions in Islamic Economy i) What to produce? (1) Islamic economies follow through the principles of Shari’ah, which are laid out in the Qur’an and Hadith (Sunnah). (2) The economy produces only permissible (halal) goods and services. (3) The production of goods and services is based on classification of goods and services in Islam. ii) How to produce? (1) The system chooses the most efficient and cost-effective method. (2) For instance: producer will not produce goods which are not permissible (haram) in Islam and bring harm to society and environment. iii) For whom to produce?

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 16 (1) The needs of the poor should become priority by producing basic goods at cheaper prices. (2) At the same time, the economy does not ignore the rights of rich people. (3) Islamic economies produce basic/essential goods for the society, then only produce luxury goods. ECONOMIC DECISIONS IN 4 ECONOMIC SYSTEMS Islamic Economy What to produce? •permissible (halal) goods & services •classification of goods & services in Islam How to produce? •the most efficient and cost effective method For whom to produce? •necessity goods & services becomes priority Mixed Economy What to produce? •determined by market demand and supply. •balance between consumer preferences and social welfare goal How to produce? •the most efficient and cost-effective method •government law enforcement due to externalities For whom to produce? •Depend on the society’s needs and income distribution Socialism What to produce? •Government control • less emphasis on consumer goods or individual preferences How to produce? •Government decides on methods of production For whom to produce? •Government will serve goods & services for basic needs first •prioritizes national objectives and societal goals Capitalism What to produce? •depends on consumers’ demand •consumer’s sovereignty How to produce? • the cheapest method of production •objective: achieve efficiency & maximize profit For whom to produce? •depends on the society’s purchasing power •more goods & services for higher income people

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 17 ADVANTAGES OF ECONOMIC SYSTEMS 11) Advantages of economic systems: a) Advantages of Capitalism i) There is freedom of choice. (1) Consumers have the freedom to choose what they want to buy, while producers can choose what and how to produce goods and services. (2) The variety of products and services are available online or in stores in many capitalist economies reflects the power of consumer choice and individual initiative. ii) People have right to own properties or wealth. (1) Both consumers and producers can buy land and own properties. (2) The government will not confiscate properties owned by individuals. (3) Silicon Valley in the US exemplifies private ownership, where numerous tech companies like Apple and Google are owned and operated by private individuals and organizations. (4) There is incentive for people to work harder because the allocation of wealth depends on the individual’s income. The harder people work, the more they will receive. iii) There is mobility of labor. •1) Freedom of choice. •2) Right to own wealth. •3) Mobility of labour. •4) Quality goods and services produced due to competition. Capitalism •1) Equal distribution of income. •2) Low unemployment. •3) Goods and services for society’s benefit. •4) Price stability. Socialism •1) Stable, flexible & organized economic activities. •2) Social safety net. •3) High living standards. •4) Preserve the environment. Mixed Economy

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 18 (1) There are two types of labor mobility: (a) Geographical mobility of labor allows workers to move from one place to another. (b) Occupational mobility of labor allows a worker to switch from one occupation to another or from one form of employment to another. iv) Competition leads to the production of quality goods and services. (1) The presence of competition encourages research and development (R&D). (2) Through science and technology, invention and innovation are possible. (3) Therefore, there will be efficient use of resources and economies of scale. (4) Economic growth can be achieved. (5) The constant competition between smartphone manufacturers like Apple and Samsung pushes them to innovate and develop new features, benefiting consumers with improved technology and competitive prices. b) Advantages of Socialism i) There will be a creation of equal distribution of income among society. (1) Centralized planning and redistribution mechanisms can lead to lower levels of income inequality compared to some capitalist. (2) Inequalities of income and wealth can be minimized as the ownership of property is decided by the state. (3) National income is more evenly distributed. ii) There is a lower level of unemployment compared to other economic systems. (1) As a result of equal distribution of income and reduced inequality, unemployment problems will be minimized. (2) The state ensures that labor is directed to industries where labor is needed. iii) Goods and services for society’s benefit. (1) The government provides public goods for the benefit of society which depend on the needs of society. (2) Government directs nation’s resources to produce desirable goods and services. (3) Governments can direct resources toward specific goals, such as infrastructure development or poverty reduction. iv) Price stability: (1) Prices of goods and services are controlled by the state. (2) Government control over production and distribution can help stabilize prices and prevent inflation. (3) Government provides predictability for consumers and businesses. c) Advantages of Mixed Economy i) The economic activities are more stable, flexible and organized. (1) Mixed Economy is a balanced approach, more stable, flexible and organized. (2) There is a variety of goods and services produced by private sectors and the government provides public goods at affordable prices.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 19 (3) Mixed economies can adjust to changing circumstances and economic needs by balancing market forces with government intervention. ii) Mixed Economy serves as a social safety net. (1) Public programs and regulations can provide essential services like healthcare and education and protect vulnerable populations. iii) Potential for high living standards among citizens. (1) Balancing economic efficiency with social welfare can lead to high living standards for most citizens. (2) There would be a narrow gap between the rich and the poor. iv) Environment can be preserved. (1) Mixed economies can incorporate environmental regulations and sustainability goals to minimize negative externalities. (2) Air, environmental and noise pollution as well as industry wastes, are curbed when the government controls the existence of monopolies. (3) The social costs are minimized. 12) Disadvantages of economic systems DISADVANTAGES OF ECONOMIC SYSTEMS a) Disadvantages of Capitalism i) Capitalism can create income inequality. (1) As a result of non-intervention policy by the government, the rich with skills and scarce resources are able to exploit more resources and services. (2) Unregulated markets can lead to wealth concentration and create income inequality. 1) Income inequality 2) Market Failure 3) Ignore human welfare 4) Negative externalities Capitalism 1) Limited freedom of choice 2) Lack of Incentives 3) Lack of innovation 4) Bureaucratic inefficiencies Socialism 1) Complex & Inconsistent 2) Inefficient bureaucracy 3) Dependency on Government Mixed Economy

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 20 (3) The wide gap results in pyramid-shape distribution where the minority is rich while the majority of people in the societies are poor. (4) As a result, it can create social tensions and instability. ii) Market failure is established. (1) Unregulated markets can lead to monopolies, exploitation of resources, unemployment and economic crises. (2) Bigger and more efficient firms will enjoy the advantages of economies of scale. (3) Bigger firms that enjoy economies of scale (mass production) will force out smaller firms from the industry and establish monopoly power. (4) Thus, price may increase. (5) If the supply of labor is greater than the demand for labor, unemployment would increase. (6) Then, there would be high unemployment rate in those countries. (7) As producers are motivated by profits, they may use more economic resources to produce luxury goods for the rich. (8) In turn, the situation will result in overproduction of certain goods and underproduction of necessity goods for the poor. (9) Misallocation of resources will occur. iii) Human welfare is ignored and lead to social cost. (1) Public goods will never be provided by the private sector. (2) Merit goods such as education and healthcare may not be provided adequately, resulting in higher prices of the merit goods. (3) As such, the poor cannot afford them. (4) Income inequality can lead to social unrest, crime, and decreased overall wellbeing. (5) Certain industries may prioritize profit over workers’ health and safety, leading to accidents, injuries, and occupational diseases. iv) The problems of or negative externalities arise. (1) Environmental damage is due to firm focuses on profit and prioritize shortterm gains over environmental sustainability. (2) Unsustainable resource extraction practices can lead to the depletion of natural resources like minerals, forests, and freshwater. (3) Production processes in many industries, like fossil fuel extraction or manufacturing, can pollute air, water, and soil. (4) Environmental damage causing respiratory illnesses, waterborne diseases, and ecosystem degradation. b) Disadvantages of Socialism i) Consumers have limited freedom of choice. (1) There will be limited choice of goods and services. (2) Government control over production restricts economic choices.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 21 (3) The government may produce goods that are not required by the public. (4) Lack of diversity in goods and services can reduce consumer satisfaction and well-being. (5) Shortages and poor quality goods are common due to lack of market response. ii) Workers have lack of incentives. (1) Without the potential for personal gain through entrepreneurship or innovation, there may be less motivation for individuals to work hard or take risks. (2) Workers may have no incentive to work hard because they receive almost an equal income. iii) Central planning can lead to a lack of innovation. (1) Limited competition reduces creativity and efficient resource allocation. (2) Limited competition can lead to inefficient production, low-quality goods, and a lack of incentive for research and development. (3) Absence of competition may result in inferior technology and fewer foreign direct investment. iv) People may face bureaucratic inefficiencies (1) Centralized decision-making can result in bureaucratic inefficiencies. (2) Centralized decision-making can be slow, inflexible, and prone to corruption. (3) The government may struggle to accurately assess and respond to the complex and dynamic needs of the economy. (4) It may hinder economic efficiency and responsiveness to any changing market conditions. c) Disadvantages of Mixed Economies i) Complexity and inconsistency of implementing effective regulation. (1) In a mixed economy, the government may limit company sizes to reduce monopoly. (2) It is hard to find the right balance between government intervention and market freedom. (3) The challenge lies in finding the right balance, and inconsistent policies may lead to uncertainty for businesses and individuals. ii) Dependency on Government (1) A mixed economy is run by a social democratic government. (2) Citizens in mixed economies may become dependent on government assistance, leading to a reduced sense of personal responsibility and initiative. (3) More government intervention in the economy requires a greater investment by the government, which largely comes from tax revenues. iii) Inefficient bureaucracy (1) Public programs can be slow, costly, and prone to inefficiency. (2) Excessive regulation can cause inefficient markets.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 22 (3) Government intervention can create complex bureaucracies, leading to delays, inefficiencies, and potential for corruption. (4) Navigating regulations and accessing public services can be a hassle for businesses and individuals. (5) Government control has a potential for political corruption, which can lead to special interests influencing policy for personal gain. (6) Special interests in industries like healthcare or finance can seek to influence government policies in their favor, distorting market mechanisms and benefiting select groups at the expense of the public good. 1.8 PRODUCTION POSSIBILITIES CURVE (PPC) 1) The concept of scarcity, choice and opportunity cost can be illustrated through a production possibilities curve (PPC). 2) Production possibilities curve (PPC) shows the alternative combinations of two goods which can be produced with the existing resources and the current level of technology. 3) There are four assumptions of PPC: a) The economy is producing only two goods in a nation. For examples: radio and television, pizza and robots. b) There is fixed (constant) current level of technology. c) The quantity and quality of the factors of production are fixed and limited. d) The economy is operating at full employment (employing all its available resources efficiently; there will be no waste of resources and unemployment). 1.7.1 SHAPES OF PRODUCTION POSSIBILITIES CURVE 1) Production possibilities curve can be presented in three shapes. It can be a concave, convex or linear curve. 2) The Production Possibilities curve that is concave to the origin shows the principle of increasing opportunity cost. a) Law of increasing opportunity cost states that as more of a particular good is produced, its marginal opportunity costs increase. b) This means that in order to get one more unit of a good, more units of another good would have to be sacrificed.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 23 c) From graph, in order to increase more units of Good X, more units of Good Y would have to be sacrificed. Increasing Opportunity Cost 3) PPF can also be convex to the origin (below), which implies a diminishing or decreasing opportunity cost. a) This shows that to obtain one more unit of a good, fewer units of another good would have to be sacrificed. b) From graph, in order to increase more units of Good X, less units of Good Y would have to be sacrificed. Decreasing opportunity cost Constant opportunity cost 4) PPF can also be linear or a straight line (above curve), implying a constant opportunity cost.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 24 a) This indicates that as more units of a good is produced, the same number of units (or constant amount) of another good would have to be sacrificed. b) From graph, in order to increase more units of Good X, the same amount of Good Y would have to be sacrificed. c) Society are indifferent toward Good X and Good Y’s production, meaning both goods are desirable to them. 1.7.2 KEY CONCEPTS OF PRODUCTION POSSIBILITIES CURVE 1) Scarcity a) PPC emphasizes the fact that resources are limited, and therefore, choices must be made to allocate them. 2) Trade-offs a) PPC visually depicts the trade-offs that must be made when allocating resources. b) Producing more of one good requires sacrificing some of the other. 3) Opportunity Cost a) The value of the next best alternative forgone when a choice is made. b) The opportunity cost of producing more of one good is the amount of the other good that must be given up. 4) Efficiency a) Points on PPC represent efficient production, meaning that all available resources are being used in the most productive way possible. This indicates that resources are fully utilized. b) Points inside the curve represent inefficient production and underutilized. c) Meanwhile, points outside the curve are simply unattainable. 4) The curve formed by joining points A to F represent production possibilities curve (PPC). 5) From figure 1.2, PPC shows a combination of television and radio that a society can produce by using all its available resources. 6) All points (A to F) on the curve show the attainable and efficient combinations between two goods, television and radio. 7) At Point A, the economy allocates all its resources to produce only televisions (20 units) and no radio (0 unit).

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 25 8) At point B, the economy produces a combination of 18 units of televisions and 1 unit of radio given available resources. 9) Point C indicates the combination of 15 units of televisions and 2 units of radio that are produced by the economy. 10) At point D, the economy produces a combination of 10 units of televisions and 3 units of radio given available resources. 11) Point E indicates the combination of 6 units of televisions and 4 units of radio that are produced by the economy. 12) Point F shows that the economy will produce entirely 5 units of radio and zero television by utilizing all its resources. 13) Point Y, which is located inside the PPC, indicates that there are unemployed resources in the economy. At point Y, though attainable, it reflects unemployed, wasted and inefficient allocation of resources. The economy should employ all its resources and produce more of both televisions and radios. 14) However, at Point Z, which is situated outside PPC, shows unattainable production, known as scarcity. The economy does not have enough resources to produce at point Z. Production possibility & opportunity cost of obtaining extra unit of radios 15) Total opportunity cost a) Total opportunity cost can be determined by calculating the number of goods sacrificed. b) From the table, the opportunity cost to increase the production of radio from none to 1 unit is to forgo 2 units of televisions (20 -18). c) If we move from C to D, total opportunity cost to increase production from 2 units to 3 units of radios, we need to let go of 4 units of televisions (15 – 11). d) Likewise, if we move from A to D, total opportunity cost to obtain 3 units of radios, we need to let go of 9 units of televisions (20 – 11). 16) Opportunity cost (per unit) a) The opportunity cost (per unit) can be measured by dividing the number of goods forgone by the number of goods increased.

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 26 b) From the table, per unit opportunity cost to increase the production of radio from none to 1 unit is to forgo 2 units of televisions (2 / 1 = 2 units). c) If we move from C to D, per unit opportunity cost of producing radios is 4 units of televisions, where 4 units of televisions are divided by 1 unit of radio (4 / 1 = 4 units). d) Likewise, if we move from A to D, per unit opportunity cost of producing 3 units of radios is to forgo 3 units of televisions (9 / 3 = 3 units). 1.7.3 FACTORS THAT INFLUENCE THE SHIFT OF THE PRODUCTION POSSIBILITIES CURVE 1) Production Possibilities Frontier can shift either outward (right) or inward (left). 2) There four factors that shift the PPF: a) Inputs or resources b) Technology c) Economic condition (growth or recession) d) Population 3) When one of the above factors increases, namely increase in inputs or resources, improved in the level of technology, increase in economic growth or increase in population, PPF tends to shift to the right (outward). PPC shifts outward a) For instance, when there is an increase in economic growth: i) this means the economy are able to produce more goods and services. ii) Economic growth causes PPC to shift to the right (outward). 4) Contrastingly, when one of the above factors declines, namely, decrease in inputs or resources, inferior level of technology, economic downturn or recession and decrease in population, PPF tends to shift to the left (inward). a) For example, when a natural disaster occurs, such as flood in the nation: i) it will cause production will stop for a while. ii) the situation will make it difficult to obtain more resources. iii) the economy will produce less goods and services. iv) Thus, natural disaster will shift PPC to the left (inward).

A231 PET3013 PRINCIPLES OF ECONOMICS EMILDA HASHIM 27 PPC shifts inward 5) There will also be cases where only the production of one good change while another good remains unchanged. 6) If the improvement in technology occurs only in the production of good Y, PPC will shift outward toward good Y, while good X remain unchanged. PPC shifts outward toward good Y 7) On the other hand, if there is a problem in technology that occurs only in the production of good X, PPC will shift inward toward good X, while good Y remains unchanged. PPC shifts inward toward good X