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7/28/2019 CHAP 1 Basic Concepts.ppt
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CHAPTER 1
INTRODUCTION TO ECONOMICS
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CHAPTER 1 : INTRODUCTION
1. ECONOMICS (CONVENTIONAL)
2. DIFFERENCE BETWEEN MACRO & MICRO
3. OTHER DEFINITION
SCARCITY, CHOICE, OC
BASIC PROBLEMWHAT, HOW, FOR WHOM
PPC & ITS FACTORS
4. ECONOMICS SYSTEM
CAPITALIST
SOCIALIST
MIXED
ISLAMIC
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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 lifeAlfred Marshal
Social-science study as it deals with human behaviour in
making the decision on how people use scarce resources in
fulfilling theirunlimited wants - Economist
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CONVENTIONAL
2 problems in economyi. 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
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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 indvchoice
in price of sugar
Production of canned pineapples
National income
Economic growth
Inflation
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ECONOMIC CONCEPTS
i) Scarcitythe condition in which human wants are forever
greater than the available ss of time, goods & resources
ii) Choicesince factor of prodn are limited, choices must
then be made between various g & s to satisfy the potential
ddmax utility (consumer) & max (producer)
iii) Opportunity Cost (OC)
the best alternative sacrificed for a chosen alternative
real cost forgone for choosing the next bestalternative
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FACTORS OF PRODUCTION
Resourcesbasic inputs to produce g & s
- factors of prodn
- 4 categories
(land, labour, capital, entrepreneurship)
i) Landany natural resources provided by natureeg :
categories : renewable & nonrenewable
characteristics : immobile & limited in ss
ii) Capitalphysical plants, machinery, equipment used to
produce other goods
money ? Capital or not
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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, qualitydiffer between nation .
iv) Entrepreneurship
- skill & creative ability of indv to seek profits bycombining 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
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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
- howchoose the best efficient methods
eg : K intensive @ L intensive
- how muchdetermine the quantities needed by society atparticular time
iii) For whom to produce
- target consumer
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NOTES TO PONDERBasic 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
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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 of2 goods that the
economy can produce in a given period of time with
its available amount of resources & a certain level of
technology
- Ceteris paribusother variables remain constant
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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 producefewer 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/outwaste or mismanagement
iii) Technology unchanged
- body of knowledge applied to how goods are produce
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PRODN POSSIBILITIES CURVE / FONTIER
(PPC)
Types of PPC Model
i) Straight line PPF (extreme case)
- constant OC
ii) Bowedoutward 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)
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PRODN POSSIBILITIES CURVE / FONTIER
(PPC)
y
gun
xbutter
- inefficient
- wasteful
- unemployment
- unattainable
PPC ie efficient
(full employment &
optimal use of resources
0
ygun
x
butter
- inefficient
- wasteful
- unemployment
- unattainable
PPC ie efficient
(full employment &
optimal use of resources
0
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y
gun
x
butter0
6
8
10
4 8 12
PRODN POSSIBILITIES CURVE / FONTIER
(PPC)y
gun
x
butter0
15
20
12 16
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
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FACTOR THAT INFLUENCE THE GROWTH
OF PPC
Econ growthability to produce greater levels of o/putPPC
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
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i) Increase in resources / factors of prodn
y
gun
x
butter0
y0
y1
x0 x1
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a) Advancement in both product
y
gun
x
butter0
y0
y1
x0 x1
y
gun
x
butter0
y0
y1
x0 x1
y
gun
xbutter
0
y0
y1
x0 x1
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b) Advancement in one product only
y
gun
x
butter0
y0
x0 x1
y
gun
x
butter0
y0
y1
x0
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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 Totalfrom point to point
Per unit
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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) Mixediv) Islamic
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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
Advantage Disadvantage
Promote competition Failure in provide public good
Encourage techno growth Economic instabilityEmphasize indv welfare Income inequality
Satisfaction Monopoly
Efficient External effect
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SOCIALIST (Centrally Planned Economy)
- Centralized economic planning
- No private enterprise
- Public interest
- Social / public ownership
- Eg : Cuba
Advantage Disadvantage
Efficient in prodn Making wrong DM
Low cost Lack of motivation & insentive
Promote economic stability No improvement in technoNo distribution effect Less I from abroad
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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 willintervene
* Y is based on effort
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NOTES TO PONDERCHARACTERISTICS
Capitalist Socialist Mixed Islamic
Ownership ofresources
Private Public Both Both
Freedom of
enterprise
Free to trade, I,
organize
Central
planning
Co-operation Limitedavoid
forbidden actvt
Consumers
sovereignty
Based on
consumers
taste &
preference
Competition Highly
competitiveprofit motive
Welfare Govt control
income disparity
Motiveto
achieve al-falah
Govt
intervention
Limited On certain cases
only
Price system Totally based on
dd & ss
Fixed by the
govt
Both, P
mechanism &ovt intv
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NOTES TO PONDER
HOW TO SOLVE BASIC ECONOMIC PROBLEM
Capitalist Socialist Mixed Islamic
What to
produce
consumers dd govt decide consumer dd consumer dd
How much Cost effective cost effective cost effective cost effective
How to
produce
P mechanism govt decide P mechanism P mechanism
For whom to
produce
level of Y citizen level of Y level of Y
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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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