Economic Principles & Issues (ECO2211)

Lecturer: Dr. Sukjeet Kaur Sandhu

sukjeetkaur.sandhu@newinti.edu.my

Faculty of Business, Communication & Law (FOBCAL)

INTI International University 1
January 2018 session
PREREQUISITE(S):
Non

LEARNING OUTCOMES:
Successful students will be able to:

1. Explain and apply microeconomic and macroeconomics

concepts, theories and its applications to business decision
making.
2. Evaluate the scope of micro and macroeconomics and its
application in relevant contexts.
3. Apply the economic concepts and theories particularly on
market structure.
4. Utilise basic numerical skills in the calculation of such economic
phenomena
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Economics is Fun and Interesting!

But will it be hard?

It Can Be Hard
But how you study can
make a difference !

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Basic Text:

Sloman, John and Garratt, D.,

Wride,A., (2015), Economics, 9th
edition, Pearson Education
Limited.
(Chapters: 1 to 7, 14 to 18 & 22)

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 Topic 1:
The Nature and Methods of
Economics

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Topic Outcomes:
By the end of this chapter, you should be able to:

To define economics and introduce the scarcity problem, which underline

economics.
To understand the relationship between scarcity and choice.
To define opportunity cost.
To Identify factors of production.
Explain what are the economic problems and basic economic concepts.
Differentiate between positive and normative economics.
The differentiate between macroeconomics and microeconomics.
To use the PPF model to illustrate and explain the basic problem of
scarcity.
To use CFD model to illustrate and explain the basic relationship in
economics
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 The Definition of Economics

Economics can be defined as the Social

Science concerned with the Problem of
administering or using Scarce Resources so as
to attain the greatest or maximum fulfillment
of society’s Unlimited Wants.

Scarcity is the excess of human wants

over what can actually be produced.
Because of scarcity, various choices have
to be made between alternatives.
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 Economics is the study of…
• Wealth
• Money
• Politics
• How to become rich?
• How to economize?

CHOICES
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9
Economics is a social science. It is a science because it consists of
an organised body of knowledge. Also, economists use a set
method of inquiry, called ‘the scientific method’, in order to
formulate theories and general laws. It is a social science, as it
deals with human behaviour in society.
Therefore, we can say that economics is a social science that deals
with:

1) The creation of wealth from scarce resources;

2) The production and distribution of goods and services for
consumption;
3) The behaviour, interaction and well-being of the groups
involved in the above activities;
4) The fact that there is a trade-off involved in production and in
consumption.
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Shirley Wilborne 11
The scope of economics

Economics recognises that resources are

scarce. The economy is the mechanism
through which these scarce resources are
organised for the production of goods and
services. These goods and services satisfy the
needs and wants of the different groups in
the economy. The three main groups in the
economy are households, firms and the
government.

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Needs and wants
Man has needs and wants. Needs are any goods and services that
are essential for life. Wants are goods and services that are desired
to improve the quality of life but are not essential. Basic clothing is
necessary for life and, as such, is a need. However, a fashion shirt is
not vital to life

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Limited Resources & Unlimited Wants and needs

Scarcity

Choices

Opportunity Cost
Benefit, profit, or value of something that must be given up to acquire or
achieve something else.

The true cost of something is what you give up to get it. This includes not
only the money spent in buying (or doing) the something
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 3 Economic Questions
Problems All Economies Face

Scarcity forces all countries

Scarcity leads to conflict
to answer these 3
questions

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 Household Firm Government

A household is one The government

A firm is also a
decision-making unit. In provides the
decision-making unit.
economics, two framework of rules
This is the unit that
assumptions are made and laws for
produces goods and
about households. First, households and firms
services. To produce
households consume to operate within; in
these goods and
goods and services some economies, the
services, firms buy
Second, households are government is also
factor of production
the owners of the involved in
from households.
factors of production. A production.
factor of production
(factor input) is any
resource used to
produce goods and
services.

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Microeconomics and Macroeconomics
The field of economics traditionally divided
into two broad subfields: Microeconomics &
Macroeconomics

Microeconomics:
The subarea of economics that focuses on
individual parts of the economy, such as
households or firms.

Macroeconomics:
The subarea of economics that focuses on the
economy as a whole by looking at aggregate
data for large groups of people, companies or
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products.
Microeconomics can be defined as the study of
individual choice, and how that choice is influenced
by economic forces. Microeconomics studies such
things as the pricing policies of firms, households
decisions on what to buy, and how markets allocate
resources among alternative ends.

Macroeconomics can be defined as the study of

inflation, unemployment, business cycles, and
growth primarily from the whole to the parts. It
focuses on aggregate relationships and
supplements that analysis with microeconomic
insights
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 Examples of microeconomic and macroeconomic concerns
Production Prices Income Employment
Microeconomics Production/Output Price of Individual Distribution of Employment by
in Individual Goods and Services Income and Wealth Individual
Industries and     Businesses &
Businesses Price of medical Wages in the auto Industries
  care industry Jobs in the steel
How much steel Price of gasoline Minimum wages industry
How many offices Food prices Executive salaries Number of
How many cars Apartment rents Poverty employees in a
firm

Macroeconomics National Aggregate Price National Income Employment and

Production/Output Level Total wages and Unemployment in
    salaries   the Economy
Total Industrial Consumer prices  
Output Producer Prices Total corporate Total number of
Gross Domestic Rate of Inflation profits jobs
Product Unemployment
Growth of Output rate

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 Method of Economics

Positive economics :
An approach to economics that seeks to understand
behavior and the operation of systems without making
judgments. It describes what exists and how it works.

Normative economics An approach to economics that

analyzes outcomes of economic behavior, evaluates
them as good or bad, and may prescribe courses of
action. Also called policy economics.

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Factors of Production / Economic Resources
To meet the wants and needs of its people, a society must produce
goods and services. The means to produce them are called
economic resources, or factors of production.

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 Economic models
Models simplify reality to improve
understanding of the world.

circular-flow
diagram
Two of the most basic
economic models are …
production
possibilities frontier

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The Circular Flow Diagram Model
Circular flow diagram presents a visual model of the
economy. In this model, the economy has two types of
decision makers: households and firms. Firms produce
goods and services using inputs, such as labor, land, and
capital (buildings and machines). These inputs are called
the factors of production. Households own the factors of
production and consume all the goods and services that
the firms produce.

circular-flow diagram:
a visual model of the economy that shows how
dollars flow through markets among households
and firms.
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Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought

Firms Households

Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income
profit
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The Production Possibilities Frontier (PPF) Model
Production possibilities frontier (PPF/PPC)

A graph that shows the combinations of output that

the economy can possibly produce given the available
factors of production and the available production
technology.

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 The Production Possibilities Frontier (PPF) Model

• Production Possibilities
Frontier
– Figure shows the PPF
for two goods: cola and
pizza.
– Any point on the
frontier such as E and
any point inside the PPF
such as Z are
attainable.
– Points outside the PPF
are unattainable.
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 Production Possibilities and Opportunity Cost

• Opportunity Cost
– As we move down along
the PPF, we produce
more pizzas, but the
quantity of cola we can
produce decreases.
– The opportunity cost of
a pizza is the cola
forgone.

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 The production possibilities frontier

Concepts
illustrated by
PPF

Opportunity Economic
Efficiency Trade-offs
Costs Growth

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The Production Possibilities Frontier
(PPF) Model
 Efficient levels of production:
Points on the production possibilities
frontier
 Inefficient levels of production:
Points inside production possibilities
frontier
 Trade-off:
The only way to produce more of one good
is to produce less of the other good
 Opportunity cost of producing one good:
Give up producing the other good

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Basic Economic 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.

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 Basic Economic Questions
MARKET ECONOMY
Economic decisions are made in the marketplace
according to the laws of supply and demand.

MIXED
ECONOMY Who
Who should
should
Combination What
What should
should How
How should
should itit share
share in
in
market and be
be produced?
produced? be
be produced?
produced? what
what is
is
command produced?
produced?
economy.

COMMAND ECONOMY
Government makes all key economic decisions.

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Faculty of Business, Communication & Law (FOBCAL)
INTI International University 33
January 2018 session