CHAPTER 1- INTRODUCTION TO ECONOMICS

SURIA RISMAWATI
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TOPICS
TOPIK MICROECONOMICS
CHAPTER 1: INTRODUCTION TO ECONOMICS
CHAPTER 2: DEMAND, SUPPLY AND MARKET EQUILIBRIUM
CHAPTER 3: ELASTICITY
CHAPTER 4: THEORY OF PRODUCTION
CHAPTER 5: COST OF PRODUCTION
CHAPTER 6: MARKET STRUCTURE

TOPIC MACROECONOMICS
CHAPTER 7: NATIONAL INCOME
CHAPTER 8: INFLATION AND UNEMPLOYMENT
CHAPTER 9: INTERNATIONAL TRADE
DEFINITION OF ECONOMICS

A study of how people use their limited

resources to try to fulfill unlimited wants
and involves alternatives or choices.
MICROECONOMICS VS MACROECONOMICS
MICROECONOMICS MACROECONOMICS

 The study of individual parts The study of the economic

system as a whole
of the economy

 such as national income,

 such as public choices, trade cycle, unemployment
business choices and rate, inflation and general
personal choices. price level.

 Closer into small units  Large units of economy

 Eg. What do I want for

 What is unemployment
rate in Malaysia?
breakfast?
SCARCITY CHOICE

BASIC ECONOMIC
CONCEPTS

OPPORTUNITY COST
 BASIC ECONOMIC CONCEPT

• Scarcity is defined as wants always exceed

limited resources to satisfy them.
SCARCITY

• When scarcity exists, choices are to be made.

CHOICE

• Opportunity cost is defined as the second best

alternative that has to be forgone for another
OPPORTUNITY choice which gives more satisfaction.
COST
 PRODUCTION POSSIBILITIES CURVE (PPC)

v Used to explain the basic economic concepts:

Scarcity, Choices and Opportunity cost.

DEFINITION:
The PPC shows the various possible combinations
of goods and services
produced within a specified time period
with all its resources fully and
efficiently employed.
 PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)
Assumptions:

1. Full employment/full capacity

2. The amount of resources available are fixed.
3. The state of technology does not change
throughout the production.
PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)
Combination Nike (‘000 units) Adidas(‘000 units)
Adidas
(‘000 units) A 0 15
B 1 14
16 C 2 12
A
B D 3 9
14
E 4 0
12 C

10 D
8

4
2
E
0 1 2 3 4 Nike (‘000 units)
PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)
Adidas
(‘000 units)
UNATAINABLE AND
16 Z SCARCITY
A
14 B

12 C

10 EFFICIENCY (Full
Y D employment)
8 ATTAINABLE BUT
WASTE OF RESOURCES
(INEFFICIENCY)
6
E
4
2
F
0 1 2 3 4 5 Nike (‘000 units)
CALCULATE OPPORTUNITY COST
OPPORTUNITY COST PER UNIT
Combina Nike Adidas Opportunity
tion (‘000 (‘000 cost of Nike
Adidas units) units)
(‘000 units) A 0 15 -
B 1 14
16
A C 2 12
B
14 D 3 9

12 C E 4 0

10 D
8

4
2
E
0 1 2 3 4 Nike(‘000 units)
OPPORTUNITY COST
Opportunity cost of producing 4000 units Nike = 15,000 – 0
Adidas (Producing A to E) = 15,000 units Adidas
(‘000 units)
Opportunity cost of producing 15,000 units Adidas
(Producing E to A)
A = 4,000 – 0
100 B
= 4,000 units Nike
80 C

60
D
40

20

E
0 20 40 60 80 Automobile (thousand units)
Factors that Influence the Shift of PPC
1. Economic Growth

When the country enjoys When the country is struck by natural

economic growth, the PPC shift disasters, economic growth will decline
to the right and the PPC will shift to the left.

Adidas Adidas

Nike Nike
Factors that Influence the Shift of PPC
2. Population

Increase in population, Decrease in population,

PPC shift to the right PPC shift to the left

Adidas Adidas

Nike Nike
Factors that Influence the Shift of PPC
3. Resources or factor of production – Labor, capital

Increase of resources Decrease in resources such as

such as labour, PPC labour, PPC shift to the left
shift to the right
Adidas Adidas

Nike Nike
Factors that Influence the Shift of PPC
4. Improvements in Technology

Technology increases the production Technology increases the production

of Nike, PPC will shift to the right as of Adidas, PPC will shift to the right
shown in the figure as shown in the figure

Adidas Adidas

Nike Nike
Shape of PPC & Type of Opportunity cost
PPC IS CONCAVE
Adidas
Increasing Opportunity Cost
16
Opp. Cost
14 of Nike
-
12
1
10
2
8 3
6 4

4
2

Nike
0 1 2 3 4 5
Shape of PPC & Type of Opportunity cost

Adidas PPC IS CONVEX

16 Decreasing Opportunity Cost

14
Opp. Cost
12 of Nike
-
10
4
8 3
6 2

4 1

Nike
0 1 2 3 4 5
Shape of PPC & Type of Opportunity cost

Adidas
PPC IS LINEAR
16
Constant Opportunity Cost
14
Opp. Cost
12 of Nike
-
10
4
8
4
6 4
4 4
2
Nike
0 1 2 3 4 5
 BASIC ECONOMIC PROBLEMS

1. WHAT TO PRODUCE & HOW MUCH TO PRODUCE ?

v Refers to the type of goods and services –Based on the consumer demand
v Determine the quantity to produce - –Based on the consumer demand

2. HOW TO PRODUCE?
v Refers to the cheapest and efficient method of production

3. FOR WHOM TO PRODUCE?

v Refers to the distribution of income
 ECONOMIC SYSTEM

CAPITALISM SOCIALISM MIXED ISLAMIC

ECONOMY ECONOMY
An economy An economic An economy in A system in which
system where system where all which both the the questions of
individual makes the economic public and private what, how and for
all the main decisions are sectors play a role whom to produce
economic made by the to solve basic are decided for by
decisions without government or a economic public and private
any government central authority problems sectors according
intervention. to Islamic
principles.
US, UK, Canada Rusia, North Malaysia, Arab Saudi,
Korea Indonesia Brunei
 Characteristics
CAPITALISM SOCIALISM MIXED ISLAMIC
ECONOMY ECONOMY
1.Private ownership of 1.Public ownership of 1.Public and private 1. Private and public
resources resources ownership of resources ownership by God

2. Freedom of 2. Central planning 2. Price mechanism 2. Price mechanism

enterprise and choice authority and economic plans in and limited
making decisions government
3. Consumers’ 3. Price mechanism of intervention
sovereignty lesser importance 3. Government helps to
control income 3. Distribution of
4. Highly Competition 4. Central control and disparity wealth based on the
among producer ownership needs of consumers, not
4. Government wealth creation.
5. Government intervention in the
intervention is very economy 4. Prohibition of
limited interest (riba)
5.Co-operation
6. Price mechanism is between the
very importance government, public
and business sectors

6. Government control
of monopolies