CHAPTER 1

INTRODUCTION
TO
ECONOMICS

1
 Most economists agree that
economics is:
• a social-science that studies of how individuals
and societies use scarce resources to satisfy
unlimited wants.

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***Resources in the definition of economics
refers to factors of production or inputs

a) LAND
 Productive inputs provided by nature (natural
resources)
 Ex: forest, gold, tin, petroleum, water, lake
etc.
 The value of land dependant on quality and
location

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b) LABOR or WORKERS
 Mental or physical effort contributed by people
in producing goods and services
 Workers may be skilled or unskilled
 Ex: lawyer, teacher, mechanics, lifeguards etc.

c) CAPITAL
 Consist of assets such as money, machinery,
equipment, transportation (trucks & lories),
warehouses, factory/plant
 Capital can be moved from one location to
another, and can be increased or decreased
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d) ENTREPRENEURS
 A person who has an ability and capability to
organize production and bear risks.
 An entrepreneur manages a firm and functions
as a leader , planner, and coordinator of firm’s
activities.
 They must have special talents –intelligence,
hardworking, innovative, highly motivated and
creative.

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 DIVISION OF ECONOMICS
Economics

Microeconomics Macroeconomics

The words :

• “Micro” means small and

• “Macro” means large
- meaning that comes from the Greek
words. 6
MICROECONOMICS

• Is the branch of economics that studies the decision

making made by particular units in economy
• such as the decision made by the households, firms,
industries, government and etc.
• Examples of this studies are demand and supply of
goods by particular units in economy,
-Specific production of good and services from
particular industry
-The determination of individual income, individual
prices and etc.
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MACROECONOMICS
• A study of decision making for the economy as a whole
• This include studies of the overall level of economic
activity and also focuses on general issues faced by a
nation
• Example; the determination of national income,
economic growth, inflation or general prices,
unemployment, import, export and etc.

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 STUDY QUESTIONS
Indicate whether each of the statement is microeconomics or
Macroeconomics

1. Toyota had increased the production of new hybrid car since May
2009.
2. The number of workers in the cement industry has increased
tremendously over the last five years.
3. The unemployment rate in China had decreased since the
implementation of open economy.
4. It is anticipated that demand for cars will rise since the government
had raise the income of civil servant.
5. The inflation rate of Malaysia is 2.9% in year 2009.
6. The import of rice from Thailand and Vietnam has increased as the
domestic consumption rises.
 Basic Economic Concepts
1. SCARCITY

 Limited or shortage
• Problems of scarcity occur when resources are
limited compared to human desires are unlimited
• Eg: Ali has RM200000 and he would like to open
two new businesses (a restaurant and a
bookstore).
• However, Ali can only open one businesses
because his capital is not enough to support two
businesses.
• In this case, the capital is a scarcity.
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2. CHOICE

• Comparison between alternatives

• Everyone cannot have what he or she wants, so
they have to choose from the available
alternatives.
• Eg: Ali can make a choice either to open a
restaurant or a bookstore.
• Consumers needs to make choices in order to
maximize satisfaction while producers to
maximize profits.
• When a choice is made, opportunity cost will
exist
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3. OPPORTUNITY COST

• Opportunity cost is the second best alternative must

be forgone for another choice which give more
satisfaction

• Eg: If Ali chooses the bookstore, then the restaurant

is the opportunity cost because it is the second best
alternative which he has to forgo.

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 Production Possibility Curve (PPC)
• A curve that shows various combinations of two goods
which can be produced using limited resources and
technology
• PPC can be used to explain problems of scarcity,
choice and opportunity cost.

Assumptions:-
1. Two goods are produced in a country
2. Fixed resources
3. Fixed technology
4. Full employment/full efficiency 13
Assume a county named Balaya produced 2 products
(Food and Cloth)

Table 1: Various Combination

Production Food Cloth
Possibilities (‘000 units) (‘000’ units)
A 15 0
B 14 1
C 12 2
D 9 3
E 5 4
F 0 5
Food (‘000’ units)
16 Z
*unattainable
15
A
B
*cannot be achieved
14
C
12

Y
*Attainable but inefficient
D
10 *wastage
*unemployment *efficient
*full employment

E
4

0 1 2 3 4 5
Cloth (‘000’units)
 INTERPRETATION OF PPC

1. PPC is downward sloping and inverse relationship

between foods and cloth
• The points A to F indicate maximum production
when all resources have been used efficiently (full
employment).
• So, any points along the curve are efficient
production

2. Any points outside the curve:

• The productions cannot be achieved due to
scarcity (unattainable or unachievable to
achieved)
3. Any points inside the curve:
• The productions are attainable to achieved but
inefficient
• The problem of wastage and unemployment
exist.
 **PPC also can be used to explain 3
Food (‘000’ units) concepts of economics

16
15
A
* Scarcity
B
14
C
12 *Choice

*Opportunity cost

D
10

E
4

0 1 2 3 4 5
Cloth (‘000’units)
1.Scarcity
• Any points outside the curve
• When the amount of resources are not enough
to used. Therefore, the economy cannot
achieve production
• eg: If Balaya wants to produce 16000 foods
and 5000 clothes
2. Choice
• Any points along the curve
• There are various possible combination which
will maximize satisfaction
• eg: Balaya can choose to produce more foods
or clothes
3. Opportunity cost
• Any points along the curve
• the amount of goods or services that must be
forgone to increase the production of another
goods
• Eg: If Balaya decide to produce more foods,
Jaya has to get less clothes.
 SHAPE OF THE PPC
The shape of PPC depends on the opportunity cost
Apple

Linear 1. When O/C is

CONSTANT, the shape
of PPC is LINEAR.

Lemon
 2. When O/C is
INCREASES, the shape of
Apple

Concave PPC is CONCAVE.

Lemon

amaniUITMCK
STUDY QUESTION

1. a) Without scale, sketch the production possibility curve and label the
three concepts of economics on the diagram:

b) Label the following points on the same diagram.

* point X=unemployment
* point Y=efficiency
* point Z=wastage of resources
* point Q=full employment
* point R=inefficiency
* point S=unattainable

c) State 4 assumptions of PPC:

d) State 4 factors of production:

 BASIC ECONOMIC PROBLEMS/
QUESTIONS

1. What to produce?
-What goods and services (G&S) will be produce?
• It depends on market demand of goods and services
• In this case, the producer must ensure the sufficient production
of every type of goods to fulfill the wants of the economy as a
whole.
• However, due to limited resources not all goods demanded can
be produced.
• Therefore, government intervention is needed to ensure the
production of essential goods for society.
2. How much to produce?
- How much the G&S be produced?
• To overcome this problem, a producer must identify the quantity
of demand in the market.
• If there is a high demand for a particular good, the producer will
increase the production of the good.
• If there is a low demand, the producer must decrease the
production.
• therefore., the producer must make accurate decisions about
the quantity of the goods to be produced to avoid oversupply or
undersupply in the market.
3. How to produce
• The determination of techniques to be used to produce output.
• In a market economy, rational producers will use the efficient
technique & the cheapest method of production
• Production techniques are divided into labor intensive and
capital intensive techniques.
• If the cost of labor is less than capital, the producer will select
labor intensive. However, if the cost of capital is less than labor,
the producer will select capital intensive.
4. For whom to produce
• Generally, the producer will consider the consumers who are
willing to pay for the product produced
• This means that, people with a higher income will be able to
afford more goods while people with a lower income can afford
fewer goods.
• Therefore, to ensure that society as a whole can afford goods
that are produced, the government should introduce a fair
distribution system.