Chapter ONE

Introduction to
Economics

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Learning Outcomes
1. Students are able to define economics
2. Students are able to distinguish between
microeconomics and macroeconomics
3. Students are able to discuss basic economic
concepts and problems
4. Students are able to explain production
possibility curve

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 What is Economics?
• Economics is a social study of how people in
a society make use of scarce resources in
order to satisfy their unlimited wants.

• Scarce resources consist of :

i. Land
ii. Labour
iii. Capital
iv. Entrepreneur

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 What is Economics?
Economic
Economists study Study of how
s
the choices we people use their
make and also limited resources
the consequences to fulfill unlimited
of these choices wants and need.

Microeconomics Macroeconomics
study of individual economic studies the aggregate behavior
unit. of the entire economy
ex: household, firm and ex: unemployment, inflation, GDP,
government choice. international trade, etc
 Branch of Economics
Microeconomics.
The study of decision making Macroeconomics.
made by individual unit of The study of economy as a
economy. whole.
The scope of study is small The scope of study is bigger
and the issue is very specific. and the issue is wider.
Example: Example:
The issue of price for a The problems of inflation and
particular product in a unemployment faced by each
particular place. nation in the world.
The issue of workers in a The issue of poverty in the
particular industry in a third countries.
particular country.

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Examples of MICROECONOMICS Study
• issues like the demand and supply of cars in the
market in Malaysia,
• the production of canned pineapples by the farmers
in Johor;
• the increase in price of sugar after a shortage of sugar
cane production in Perlis,
• the increase in price of cloths after the government
announcement of 10% bonuses to the public servants.
Thus, all issues here focuses on the study of a
particular specific individuals or elements towards
its behaviour and factors concern.
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 Examples of
Macroeconomics issues:
• national income, economic growth,
inflation, unemployment, government
deficit budget, monetary policy, balance of
payment, international trade and etc.
• It focuses on viewing at the general structure of the
aggregate components of elements in the economy
as a whole.
• For example, the effect of aggregate expenditure on
general prices and national income in the economy
as a whole. 7
 Factors of Production
All gift of nature All human Human made There is special
Land

Labour

Capital

Entrepreneur
that is useable in physical and tools used in the human
production mental talents production resources, which
process such as that can be used process. All uses land, labour
land, forests, in producing manufactured and capital to
mineral and oil goods and aids (tools, produce goods
deposits, and services. equipment, and services.
water. machinery) to The
production used entrepreneurs
to produce goods make decision,
and services. innovate and
bear risk.

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Basic Economics Scarcity
Concepts

Choices

Opportunity Cost

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 Scarcity
• Defined as the situation in which human wants are always greater than
available supply of resources.
• Goods and services are limited because resources require to produce
are limited compare to vast (big) human wants.
• Scarcity is forever problem faced by everyone in the world.
• Due to the scarce resources, people are forced to make choice in order
to fulfill their satisfaction.

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 Choices
• Defined as making comparison among the
alternatives.
• In order to make a choice, people have to
consider the costs and benefits of each
alternatives.
• It is very important to choose the best
alternative to overcome wastage.
• To choose one alternative is to give up another.
• Because of scarcity, people have to make choices
and to sacrifice the other choices.
• We cannot have it all.

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 Opportunity Cost
• Since we cannot have everything that we
desire due to scarcity, there will be
something that we have to forgo.
• Opportunity cost is something that you need
to let go in order to get something else. In
other words, it is the cost of not choosing
the next best alternatives.
• This is what can be called the second best
alternative forgone once choice is made.

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Individual
Choice

Opportunity
Cost

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Firm
Opportunit
Choice
y Cost

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Government
Choice

Opportunit
y Cost

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 If your best choice is;
to buy a book
then,
the opportunity cost of deciding to buy
a book is the magazine
(the second best alternative choice that
has to be forgone/sacrifice).

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 Opportunity Cost
can be analysed and measured
using the
• Production Possibilities Curve (PPC)
@
• Production Possibilities Frontier (PPF)

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Basic
Economic
Problems
 Learning outcome
At the end of the topic, you will be
able to;

⪢ Explain the basic economic

problem

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 Big concept!
Since there are limited resources, a nation or society has to decide on how
to allocate its limited resources efficiently to produce goods and services
that satisfy the needs of people. To do this, four basic economic questions
need to be answered.

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 WHAT TO
PRODUCE?
⪢ Every society must choose the type of goods and
services to be produced.
⪢ Decision about what to produce with available limited
resources must be made.
⪢ E.g.: whether to produce more computers than
radios, whether to plant more palm oil trees than
rubber trees or whether to build more clinics than
schools and etc.

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 HOW MUCH TO
PRODUCE?
⪢ Refers to the quantity of goods and services to be
produced.
⪢ It depends on the demand from consumers.
⪢ Societies must decide what to produce and how
much to produce to ensure that scarce resources
are utilized properly and efficiently.

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 HOW TO PRODUCE?
⪢ Refers to the technique or method of production:
Who will produce the goods and services using
what resources and technology?
⪢ The method of production could be either labour
intensive or capital intensive.
⪢ It involves the cheapest method of production to
minimize possible COP and maximize profit.

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 FOR WHOM TO
PRODUCE?
⪢ Refers to the group of people in
the society who will buy the
goods and services.
⪢ It depends on the society’s
income level.
⪢ E.g: producing basic plain
shawls for lower income people
while shawls with exclusive
design or Swarovski are for
higher income people.

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 TO THINK

What are the economic

problems faced by our
neighborhood
countries?
Are we facing similar
economic problems?
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 PRODUCTION POSSIBILTY CURVE (PPC)
1. Definition
2. Assumptions
3. Diagram+basic economic concepts
4. Shape of PPC
5. Factors influence PPC to shift

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Production Possibility Curve

DEFINITION
PPC is a curve that shows the various
maximum combinations of two goods that
the economy can produce given a limited
amount of resources and at certain level of
technology.

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 Assumptions
In constructing this model we must assume four
factors, they are:
i. Only two goods can be produced.
ii. The resources available is fixed in quantity and
quality.
iii. The technology used is fixed.
iv. Full employment of resources and productive
efficiency.

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 PPC schedule
Combination Chairs Desks Opportunity Cost
A 0 20 -
B 5 18 2
C 10 14 4
D 15 8 6
E 20 0 8

• Opportunity cost is calculated by looking at the column of product that we need to let go
when we decide to produce other product.
(in the example above we decide to produce chairs and let go desks)
• Then we compare the number of new product produced with the old number of product
produced for each combination.
(combination A and B the difference is 2, B and C the difference is 4 and so on)
• The difference is the opportunity cost.

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 PPC Curve
Desks

20

18

14

8
PPC
Chairs
0 5 10 15 20

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TO THINK

Using PPC, explain the

concepts of scarcity, choices
and opportunity cost.

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Points in PPC
Point outside the curve

Good Point Z represents unattainable

X combination (cannot be produced)
because of limited resources.
A Z
This combination explains the concept
B of scarcity.

Limited resources and a fixed technology

W make any combination lying outside the
curve cannot be produced.
Good
Y

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Points in PPC
Point along the PPC curve

Good Point A, B and C represent the most

efficient points and these combination can
X
be produced (attainable) using our limited
A resources.
Z
B These combinations explain the concept
of choices. We have to make choice among
various possible combinations of two
C goods to give more satisfaction.
W
These points also explain the concept of
Good opportunity cost. We cannot increase both
Y outputs at the same time. If we want to
have more of a good, we have to sacrifice
the other good.
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Points in PPC
Point inside the curve
Good
Point W represents inefficient
X combination but attainable (can be
produced) using our limited resources.
A Z
B But this combination indicates that full
employment and productive efficiency
are not being realized.

W We will face the problems of

unemployment, waste of resources
Good and inefficiency.
Y

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 Types and shapes of PPC
• To product one more • To produce one • To produce one
unit of good Y, we more unit of good Y, more unit of good Y,
need to let go we need to let go we need to let go less
constant number of more and more unit and less unit of good
good X. of good X. X.
• The shape of PPC is • The shape of PPC is • The shape of PPC is
linear. concave. convex.

Constant Increasing Decreasing

opportunity opportunity opportunity
cost cost cost

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 Good X
Shapes of PPC
Linear PPC – Constant
Opportunity Cost

Good X
Good Y
Convex PPC – Decreasing
Opportunity Cost

Good X

Concave PPC – Increasing Good Y

Opportunity Cost

Good Y
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 Opportunity Cost Per Unit
(REM155 NO NEED TO KNOW THE CALCULATION)

• Formula:
O/C per unit = Number of good forgone
Number of good produce
• Example:
Combination Chairs Desks Opportunity Cost
Per Unit
A 0 20 -
B 5 18 2/5 = 0.4 units
C 10 14 4/5 = 0.8 units
D 15 8 6/5 = 1.2 units

*A to B; to produce 1 unit of chair we let go 0.4 units of desk.

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 Factors that
Influence the Shift
of PPC

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 1. Changes in Economic Situation
• Economic is growing due to increase in
the number of population, updated Good
technology used and increase in the X
number of input supplied.
• Economic growth means expansion in
the amount of output in the economy,
therefore it shifts the PPC curve for both
productions to the right.
• Economic downturn means there is a
recession, production of an economy
will be less and therefore the PPC shift Good
to the left. Y

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 2. Changes in Population
Good
X
• Increase in population means
amount of output in the economy
will increase, as a result PPC will
shift to the right.
• Decrease in population amount of
output in the economy will
decrease, and therefore the PPC
shift to the left. Good
Y

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3. Advancement in technology
Good
• New found of technology is being X
used in the production.
• It shifts the PPC curve for both
productions outward.
• Eg: The discovery of a new kind of
seedling that can increase the yield
of Good X. Good
Y

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 Outdated technology
Good
• If old (outdated) technology is X
used, less output can be produced
by the economy which will shift
the PPC to the left.
• Eg: An outdated technology used in
the production of Good Y.
Good
Y

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 4. CHANGE in Resources
Good
X
i. Increase in resources
• Quantity of resources supply
has increased due to several
factors.
• It shifts the PPC curve outward.
Good
Y

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 Good
ii. Decrease in resources X
• Decrease in resources supply
means less output can be
produced by the economy,
which will shift the PPC to the
left.
• Decrease resources in the Good
production of Good X. Y

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 Good
X
iii. Movement of Resources
• The movement of resources
from producing Good X to
Good Y.

Good
Y

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 Tutorial

EXERCISE

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