MMB 4163

BUSINESS ECONOMICS

Learning Unit 1:
Introduction to Economics

Tan Chiang Ching

School of Business and Management
University of Technology Sarawak (UTS)
96000 Sibu, Sarawak
LEARNING OUTCOME

▪ Define the meaning of economics

▪ Explain the concept of scarcity, choice and trade-offs (opportunity
costs)
▪ Explain the basic economic problem of scarce resources and unlimited
wants
▪ Identify the different economic system.

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What is Economics?

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What is Economics?
▪ Basically, there are wide definitions of economics as a social science.

▪ Economics is one of the oldest disciplines among the humanities and is

categorised as a social sciences.
▪ Economics examines and analyses the economic activity of people in
order to satisfy their needs and desires.
▪ Human being wants are the starting point of economic activities and
provide the basis for economics. (Vengedasalam & Madhavan)

▪ Economics as a study of how scarce resources are allocated among

alternative uses. (David N. Hyman)
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Introduction to Economics

▪ Economy covers a wide spectrum of areas in social life. It is a theory

that affects the lives of individuals and society as a whole.

▪ Every area – education, religion, housing, health, transportation,

defence and others, has aspects that can be discussed through the
economics point of view.

▪ Economy is commonly defined as a research on how a society utilises

limited resources to satisfy their unlimited wants. The basic question
of economy arises from the problem of resource scarcity.

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The Scope of Economics

Microeconomics and Macroeconomics

▪ Microeconomics: The branch of economics that examines the

functioning of individual industries and the behavior of individual
decision-making units—that is, firms and households.

▪ Macroeconomics: The branch of economics that examines the

economic behavior of aggregates—income, employment, output,
and so on—on a national scale.

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The Scope of Economics

Microeconomics and Macroeconomics

▪ Microeconomics looks at the individual unit—the household, the

firm, the industry. It sees and examines the “trees.”

▪ Macroeconomics looks at the whole, the aggregate. It sees and

analyzes the “forest.”

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TABLE 1.1 Examples of Microeconomic and Macroeconomic Concerns

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What is Business Economics?

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Business Economics

▪ The business of turning land, labour and capital into a product or

service sold to customers. This is carried out by organizations that
set themselves clear aims.

▪ One way to classify business is by looking at who owns the business

and what its primary aim is.
1. Private sector business: Profit.
2. Public sector organization: Perhaps to maximize opportunities to
access products and services like roads, education and health
care.
3. Third sector organisation: To meet the needs of its beneficiaries.

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Business Economics

▪ Business can be classified in other ways such as according to size

and the types of products and services they produce.

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The Economic Problem
Scarcity and Choice

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Scarcity, Choice & Trade-Offs

▪ On the surface, economic issues seem quite different from one

another.

▪ But the fundamental concern is choice in a world of scarcity.

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Scarcity, Choice & Trade-Offs

Scarcity

▪ Problems of scarcity emerges when our material needs exceed the

ability to fulfil then due to limited resources.

▪ Economics is a research on how individuals and society choose to

utilise limited resources to fulfil their unlimited material needs in the
best or most optimum manner.

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Scarcity, Choice & Trade-Offs

Problems of scarcity can be resolved by:

▪ Fully utilising all resources

▪ Upgrading the capacity of resources and technology
▪ Upgrading the administration efficiency for production and
distribution
▪ Redistributing goods or income among the members of the society

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Scarcity, Choice & Trade-Offs

Choice

▪ Individuals and society need to make choices among various

alternatives

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Three Basic Economics Questions

▪ Individuals’ choices determine three key features of society:

▪ What gets produced?
▪ How is it produced?
▪ Who gets what is produced?

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 FIGURE 1 The Three Basic Questions

Every society has some system or process that transforms its scarce resources into useful goods
and services.
In doing so, it must decide what gets produced, how it is produced, and to whom it is distributed.
The primary resources that must be allocated are land, labor, and capital.
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Basic Economic Questions & Economic System

What should be produced?

▪ What determines the quantities of products or goods.
Eg: house we build, health-care services we produce

How it should be produced?

▪ Usage of machines make us better off or worse off?

For whom should it be produced?

▪ Depends on the income that people earn and the prices they pay for the
goods and services they buy

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Scarcity, Choice & Trade-Offs

▪ Because resources are scare individuals (and society) face trade-offs.

▪ Trade-offs create opportunity costs, one of the most important

concepts in economics. Whenever you make a trade-off, the thing that
you do not choose is your opportunity cost.

▪ Opportunity cost is the best alternative that we give up, or forgo, when
we make a choice or decision.

▪ Everything has opportunity costs. If you just bought something, you

could have always chosen to buy something else instead. If you just
chose to spend your time in a particular way, you could have always
done something else. "Something else" is your opportunity cost.
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Economics & Business Decision
Making

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The Economics As The Science (Or Art) Of Decision Making

▪ Scarce resources (demand > supply)

▪ Unlimited wants and needs

▪ The need to make rational decisions between competing choices

Choices have to be made which involve costs & benefits

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The Effect of Human Decision Making on Business

▪ Individual make many decisions every day on purchases.

▪ The combined decisions of these individuals sends messages to
businesses that will affect business behaviour.

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Business Decision Making

Businesses will make their own decisions on

▪ How to react or influence consumer demand

▪ How best to organise production to meet demand now and in the

future.

▪ How much to take account of stakeholder interests:

▪ Stakeholders includes suppliers, employees and the government.

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Conclusion

▪ Decisions are made by both consumers and producers.

▪ Collective individual decisions on what to buy sends messages to

producers.

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Economic System

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Systems of Resource Allocation

▪ The problem of scarcity, we need to make choices. The choices that are
made and which can realistically be made are determined by the
economic system of a particular country.
▪ Economists have recognized three distinct types of economic system:
▪ Free market
▪ Command economy
▪ Mixed economy

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Laissez-Faire Economies: The Free Market

▪ In a market economy, decisions on how resources are to be allocated are

usually taken by millions of households and thousands of firms – the
exact number will, of course, depend on the size of economy. The key
point is that they interact as buyers and sellers in the market for goods
and services.

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Laissez-Faire Economies: The Free Market

Main characteristics of free market system:

▪ Private ownership
▪ Self-interests
▪ Without government intervention
▪ Price system

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Laissez-Faire Economies: The Free Market

• Determine by
WHAT to produce consumer’s
preferences

• Determine by
Free HOW to produce producers seeking
Market profits

• Determined by
For WHOM to produce purchasing power

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Centrally-Planned Economy (Command Economies)

▪ In this type of economy, the government has a central role in all

decisions that are made and, unlike the market economy, the emphasis
is on centralisation.
▪ All the economic and social activities of the people are controlled and
regulated by the particular body.

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Centrally-Planned Economy (Command Economies)

Main characteristics:
1. Property ownership by the government
E.g.: land, natural resources and public facilities such as transportation,
industrial communication and bank system are owned by the
government.

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Centrally-Planned Economy (Command Economies)

Main characteristics:
2. Limited freedom
Producer do not have the freedom in choosing goods and services to
be produced because the use of resources controlled by the
government has been determined.

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Centrally-Planned Economy (Command Economies)

Main characteristics:
▪ All economic plans are determined by the government to ensure mutual
well-being

▪ Planning will determine what will be produced by the economy, how

production will be carried out and ensuring equality of distribution.

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Centrally-Planned Economy (Command Economies)

• Determine by
WHAT to produce government
preferences

• Determine by
Command HOW to produce government and their
Economy employees

• Determined by
For WHOM to produce government
preferences

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Mixed Economy System

▪ The mixed economy is undoubtedly the characteristic form of economic

organisation within the global economy.
▪ It involves both private and public sectors in the process of resource
allocation.
▪ Consequently, decisions on most important economic issues involve
some form of planning (by private as well as public enterprises) and
interaction between government, businesses and labour through the
market mechanism.

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Mixed Economy System

▪ Level of mixtures varies depending on the level of government

intervention in the economic system.

▪ The purpose of government intervention in economic system is to patch

up weakness of the free market system. The government applies
directive rules such as collecting tax and providing subsidies.

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Mixed Economy System

• Determine by consumer
WHAT to produce preferences and partly by
government

• Determine partly by
Mixed HOW to produce producers seeking profits
and partly by government
Economy
• Determined partly by
For WHOM to produce purchasing power and partly
by government preferences

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Thank You

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