CHAP 1 Basic Concepts.ppt

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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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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(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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(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


(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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CHAP 1 Basic Concepts.ppt