Chapter 1 I Introduction to Economics

CHAPTER 1
INTRODUCTION TO ECONOMICS

MDM NORAZLINA HANIM SHAMSUDIN

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At the end of the chapter, you should be able to:

• Interpret the definition of economics and distinguish between
microeconomics and macroeconomics.

• Describe the three economic concept; scarcity, choice and opportunity
cost.

• Discuss and illustrate the production possibility curve (PPC).
• Describe the three economic problems.
• Differentiate the three types of economic systems.

DEFINITION OF ECONOMICS

Economics is a study of how
people use their limited resources
to try to fulfil unlimited wants and

involves alternatives or choices.

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FACTOR OF PRODUCTION

Factor of production are resources or inputs
used to produce goods and services.

Land

• Includes all natural resources which are derived
from the earth and land itself

• Examples: timber, oil, coal, soil and water
• ‘Rent’ is the return to land

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SLIDESMANIA.CO FACTOR OF PRODUCTION

Labour

• Labour or workers are defined as people who
contribute their energy mentally and physically to
earn wages or salaries.

• Labour can be categorized into:
i) Skilled labour
ii) Semi-skilled labour

iii) Unskilled labour
• Wages/salaries’ are the returns to labour

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Capital

• Capital refers to the stock of goods created by
society to help them in the production of
goods and services.

• In other words, it is man-made goods used to
produce other goods and services.

• For example, machinery, tools and
equipment, building, factories and so on.

• Interest is the return to capital.

FACTOR OF PRODUCTION

Entreprenuer

• Refers to a person who has the ability of planning,
organizing, directing and controlling.

• Entrepreneur is a person who organizes the other
resources to produce goods and services.

• ‘Profit’ is the return to the entrepreneur.

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BASIC ECONOMIC CONCEPTS

OPPORTUNITY COST

– Opportunity cost is defined as the
second best alternative that has to be
forgone for another choice which gives

Opportunity more satisfaction.

Cost

SLIDESMANIA.CO Choices Scarcity

CHOICE

– When scarcity exists,
choices are to be
made.

PRODUCTION POSSIBILITY CURVE

(PPC)

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SLIDESMANIA.CO PRODUCTION POSSIBILITY CURVE (PPC)

A production possibilities curve shows the alternative combinations of two goods which
can be produced with the existing resources and the current level of technology.

• Assumptions:
(1) Only two goods are produced in a nation.
(2) There is fixed level of technology.
(3) Fixed and limited resources
(4) Full level of employment (the PPC are used efficiently ⎯ no waste of resources and
unemployment).

EXAMPLE

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PRODUCTION POSSIBILITY CURVE (PPC)

Sewing Machine

16 A B UNATTAINABLE point
14
12 Y Z Point outside the PPC (Point Z)

10 ➔ SCARCITY

6 C

SLIDESMANIA.CO 0 Any point along the PPC (Point A,B,C,D,E,F) ➔
2 D CHOICES, EFFICIENCY, FULL-EMPLOYMENT

Movement from one point to another (point C to D)
➔ OPPORTUNITY COST

E

ATTAINABLE
F Point inside the PPC (Point Y)
4 6 8 10 Butter ➔ Waste of resources and inefficiency

PRODUCTION POSSIBILITY CURVE (PPC)

CALCULATION OF OPPORTUNITY COST

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SLIDESMANIA.CO OPPORTUNITY COST

Opportunity cost :
second best alternative that have to
be forgone to maximise utility
(satisfaction)

A to B =

B to C =

C to D =

D to E =

E to F =

OPPORTUNITY COST

Opportunity cost :
A to B =
B to C =

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PRODUCTION POSSIBILITY CURVE (PPC)

SHIFT OF PRODUCTION POSSIBILITY CURVE

Factors That Influence The Shift Of The PPC

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SHIFT OF PPC

PPC1 Shift Outward / Rightward

PPC0 • Increase in number of resources
• Increase in economic growth
• Increase population
• Advanced technology

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SHIFT OF PPC

PPC1 PPC0 Shift Inward / Leftward
PPC0 PPC1
• Decrease in number of resources
SLIDESMANIA.CO • Decrease in economic growth (recession)
• Decrease in population
• Out-dated technology

SHIFT OF PPC

PPC1

PPC0 PPC0
PPC1

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PRODUCTION POSSIBILITY CURVE (PPC)

RELATIONSHIP BETWEEN SHAPE OF PPC
AND

TYPES OF OPPORTUNITY COST

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SHAPE OF PPC

SLIDESMANIA.CO Opportunity Cost :

A to B = 1 unit of Good Y
B to C = 2 units of Good Y
C to D = 3 units of Good Y
D to E = 4 units of Good Y

Conclusion

Shape of PPC : Concave PPC
Types of opportunity cost : Increasing

SHAPE OF PPC

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A to B = 4 units of Good Y
B to C = 3 units of Good Y
C to D = 2 units of Good Y
D to E = 1 unit of Good Y

Conclusion

Shape of PPC : Convex PPC
Types of opportunity cost : Decreasing

SHAPE OF PPC

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A to B = 3 units of Good Y
B to C = 3 units of Good Y
C to D = 3 units of Good Y

Conclusion

Shape of PPC : Linear PPC
Types of opportunity cost : Constant

BASIC ECONOMIC PROBLEMS

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What to produce Basic How much to produce
BaEsiccoEncoonmomicic
• Refers to the type of product to • Refers to the quantity of goods
produce. PPrroobblelemms s and services to be produced.

SLIDESMANIA.CO • Decision must be made about • It depends on the demand from
what to produce with the limited consumers.
resources available.
• Societies must decide what to
• E.g.: whether to produce radio or produce and how much to
TV produce to ensure that scarce
resources are utilized properly and
• Refers to the technique or method efficiently.
of production: could be either
labour intensive or capital • Refers to the group of people
intensive. in the society who will buy the
goods and services.
• It involves the cheapest method of
production to minimize cost of • It depends on the society’s
production and maximize profit. income level.

How to produce For whom to produce

ECONOMIC SYSTEM

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Capitalist Economic System
Socialist Economic System

Mixed Economic System
Islamic Economic System

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CAPITALIST ECONOMIC SYSTEM

Free market economy / free enterprise / laissez-faire

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(a) Freedom of choice (a) Wide disparity between
(a) The resources are owned by (b) People have right to own the rich and the poor
private sectors. (b) Misallocation of
wealth. resources
(b) No government intervention in (c) The harder people work, the (c) Human welfare is
making economic decisions. ignored
more they will receive. (d) Social cost and negative
(c) Individual firms are free to make (d) There is mobility of labour.
the economic decisions. (e) Competition leads to the externalities

(d) Price mechanism is used as an production of quality goods
indicator. and services.

(e) Producer objective – maximize
profit. Consumer objective –
maximize satisfaction

SOCIALIST ECONOMIC SYSTEM

Common economy / central planning

SLIDESMANIA.CO Characteristics Advantages Disadvantages

(a) Government makes all (a) Equal distribution of income (a) Consumers have no
economic decisions among society freedom of choice
(b) Workers have no incentive
(b) Government owns all resources (b) Low unemployment problems to work hard because they
and allocated through central (c) Government provides public receive almost an equal income.
planning according to society’s (c) Absence of competition will
need. goods and services for society’s result in fewer FDI
benefit. (d) Technology inferior
(c) Society’s have no right to make (d) Inequality of income and wealth (e) Price system does not
decisions. are minimized. operate and it is hard to
(e) Government directs nations estimate the demand for
(d) Equal distribution of income resources to produce desirable
goods and services. goods

SLIDESMANIA.CO MIXED ECONOMIC SYSTEM

Mixture between capitalist and socialist economic system

Characteristics
• Resources are owned by both the government and the private sectors
• Government will provide public goods and merit goods which private sectors are unwilling to produce.
• Individuals and firms are free to own wealth and need to pay tax to the government.
• Individuals and firms can make economic decisions.

Advantages

• There is a variety of goods and services produced by
private sectors and the government provides public
goods at affordable prices.

• The economic activities are more stable and
organized.

• There would be a narrow gap between the rich and the
poor.

• The social costs are minimized.

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