CHAPTER 1 INTRODUCTION TO ECONOMICS

CHAPTER 1 : INTRODUCTION 1. ECONOMICS (CONVENTIONAL) 2. DIFFERENCE BETWEEN MACRO & MICRO 3. OTHER DEFINITION SCARCITY, CHOICE, OC BASIC PROBLEM WHAT, HOW, FOR WHOM PPC & ITS FACTORS 4. ECONOMICS SYSTEM CAPITALIST SOCIALIST MIXED ISLAMIC

DEFINITION OF ECONOMICS CONVENTIONAL

Study of how society chooses to allocate its scarce resources to the production of g & s in order to satisfy unlimited wants Irvin B. Tucker Science which studies human behaviour as a relationship between ends & scarce means which have alternative uses L. Robbins Study of man in everyday business life Alfred Marshal

Social-science study as it deals with human behaviour in making the decision on how people use scarce resources in fulfilling their unlimited wants - Economist

CONVENTIONAL 2 problems in economy i. Productive resources which to produce g & s are limited ii. Human wants for g & s are unlimited Economy has to decide how to use these resources efficiently in order to attain the max possible satisfaction for the members

DIFFERENCES : MICRO VS MACROECONOMICS

Microeconomics

Macroeconomics

Part of economics that studies indv units or economic elements in the process of DM ie focus on small economic units

Studies the economy as a whole or deals with the aggregate Seeks to understand the big picture rather than the detailed of indv choice

in price of sugar Production of canned pineapples

National income Economic growth Inflation

ECONOMIC CONCEPTS
i) Scarcity the condition in which human wants are forever greater than the available ss of time, goods & resources

ii) Choice since factor of prodn are limited, choices must then be made between various g & s to satisfy the potential dd max utility (consumer) & max (producer) iii) Opportunity Cost (OC) the best alternative sacrificed for a chosen alternative real cost forgone for choosing the next best alternative

FACTORS OF PRODUCTION
Resources basic inputs to produce g & s - factors of prodn - 4 categories (land, labour, capital, entrepreneurship) i) Land any natural resources provided by nature eg : categories : renewable & nonrenewable characteristics : immobile & limited in ss ii) Capital physical plants, machinery, equipment used to produce other goods money ? Capital or not

FACTORS OF PRODUCTION
iii) Labour mental & physical capacity of workers to produce g&s eg : skilled, semi, unskilled L characteristics : greater mobility than land but less mobile than capital measured by : of people, skills, quality differ between nation . iv) Entrepreneurship - skill & creative ability of indv to seek profits by combining resources to produce innovative products - a motivated person who seeks by undertaking such risky actvt as starting new bus, creating new product or inventing new ways of accomplish tasks

3 BASIC ECONOMIC PROBLEM

i) What to produce - types of g&s to produce - know that resources are scarce in relative to human wants - economy must choose among diff alternative combinations of g & s eg : more good x, less good y ii) How much & how to produce - how choose the best efficient methods eg : K intensive @ L intensive - how much determine the quantities needed by society at particular time iii) For whom to produce - target consumer

NOTES TO PONDER Basic econ

Factors of prodn Land Labor Capital Entreprenuer

Basic econ problems

What to produce How & how much to produce For whom to produce

Basic econ concepts

Scarcity Choices OC

Islamic concept

Tauhid Rububiyah Khalifah Tazkiyah

Islamic philosophic foundation

Hablum minal lah Hablum minan nas R/ship between man & nature meaning of life

PRODN POSSIBILITIES CURVE / FONTIER (PPC)

To measure OC Curve showing the combination of max amount goods produced by fully utilizing the limited resources Various possible combination of 2 goods that the economy can produce in a given period of time with its available amount of resources & a certain level of technology Ceteris paribus other variables remain constant

PRODN POSSIBILITIES CURVE / FONTIER

3 basic assumptions i) Fixed resources - qt & Q off all resources i/puts remain unchanged BUT resources from prodn of 1 o/put to another are allowed to shift - no of L are fixed BUT can be transferred to produce fewer consumer goods & more capital good

ii) Fully employed resources - economy operates with all of its factors of prodn fully employed & producing the greatest o/put possible w/out waste or mismanagement
iii) Technology unchanged - body of knowledge applied to how goods are produce

PRODN POSSIBILITIES CURVE / FONTIER (PPC)

Types of PPC Model i) Straight line PPF (extreme case) - constant OC ii) Bowed outward PPF (general case) - increasing OC - more good y produce, more good x foregone How to calculate OC i) Total - From point to point - The number of goods forgone ii) Per unit - (The number of goods forgone / the number of goods increased)

PRODN POSSIBILITIES CURVE / FONTIER (PPC)

y gun

- unattainable

y gun - unattainable - inefficient - wasteful - unemployment PPC ie efficient (full employment & optimal use of resources x butter

0 - inefficient - wasteful - unemployment PPC ie efficient (full employment & optimal use of resources x butter

PRODN POSSIBILITIES CURVE / FONTIER (PPC)

y gun y gun 20 15

10
8 6

12

x butter

12

16

x butter

Explanation - All points along PPC are max possible combination of goods - Society prefer more goods but economy cannot reach the no because of limited no of resources & techno - Any movement along curve mean more of one product is producing only by producing less of the other product

FACTOR THAT INFLUENCE THE GROWTH OF PPC

Econ growth ability to produce greater levels of o/put PPC will shift outward Sources of econ growth i) Increase in resources / factors of prodn ii) Techno progress ie development of new & better ways a) Advancement in both product
x=y x>y x<y

b) Advancement in one product only

x only y only

i) Increase in resources / factors of prodn

y gun y1 y0

x0

x1

x butter

a) Advancement in both product

y gun y1 y0 y gun

y1 y0

x0

x1

x butter

x0

x1

x butter

y gun y1 y0

x0 x1

x butter

b) Advancement in one product only

y gun y1

y0

y gun

0 y0

x0

x butter

x0

x1

x butter

NOTES TO PONDER - PPC

Assumptions Fixed resources FE Technology unchanged

Type

Straight line Bowed outward

Factors PPC shift

Econ growth Increase in resources / population Advancement in techno

Calculation of OC

Total from point to point Per unit

ECONOMICS SYSTEM System or method through which an economy is operated top organize prodn & provide answer to 3 basic economic problems How particular society distributes its resources to produce g & s demanded by a population 4 types of economic systems i) Capitalist ii) Socialist iii) Mixed iv) Islamic

CAPITALIST (Laissez Faire)

Free market with limited or not govt intervention Private ownership of choice / enterprise Free market forces & the importance of P mechanism oriented / max High degree of competition DM is decentralized Eg : US
Disadvantage Failure in provide public good

Advantage Promote competition

Encourage techno growth Emphasize indv welfare Satisfaction Efficient

Economic instability Income inequality Monopoly External effect

SOCIALIST (Centrally Planned Economy)

Centralized economic planning No private enterprise Public interest Social / public ownership Eg : Cuba
Advantage Efficient in prodn Low cost Promote economic stability No distribution effect Disadvantage Making wrong DM Lack of motivation & insentive No improvement in techno Less I from abroad

MIXED (Capitalist + Socialist)

Coexistance of the public & private sector Can improve income, L forces allocation Govt regulation & control of private sector Eg : Malaysia Characteristics * free to own wealth but levied with T * free to make decision but when necessary govt will intervene * Y is based on effort

NOTES TO PONDER CHARACTERISTICS

Capitalist Ownership of resources Freedom of enterprise Consumers sovereignty
Private Free to trade, I, organize Based on consumers taste & preference Highly competitive profit motive Welfare Govt control income disparity Motive to achieve al-falah

Socialist
Public Central planning Both

Mixed

Islamic
Both Limited avoid forbidden actvt

Co-operation

Competition

Govt intervention
Price system

Limited

On certain cases only

Fixed by the govt Both, P mechanism & govt intv

Totally based on dd & ss

NOTES TO PONDER HOW TO SOLVE BASIC ECONOMIC PROBLEM

Capitalist What to produce How much How to produce Socialist Mixed consumer dd cost effective P mechanism Islamic consumer dd cost effective P mechanism consumers dd govt decide Cost effective cost effective P mechanism govt decide

For whom to level of Y produce

citizen

level of Y

level of Y

INPUT MARKETS AND OUTPUT MARKETS: THE CIRCULAR FLOW

Goods and services flow clockwise. Firms provide goods and services; households supply labor services.

Payments (usually money) flow in the opposite direction (counterclockwise) as the flow of labor services, goods, and services.

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