INTRODUCTION

Chapter 1

UKEA1063
Content

 Introduction to Economics
 The Scopes of Economics
 Production Possibilities Frontiers
 Economic System
Introduction: Economics Defined

“Economics is a study of how people use their limited

resources to try to fulfil unlimited wants and involves
alternatives or choices”
~Case and Fair
Introduction: Basic Economic Concepts

Scarcity Choice Opportunity Cost

Scarcity: “ We cannot have all the things we want”

• the condition in which human wants are greater than limited
resources available to satisfy those wants.
• Human wants: goods, services and condition of life that
individual desire
• Resources: time, income, input of production
• Economic resources: inputs, or the means of producing the
goods and services we want.
Introduction: Basic Economic Concepts

Scarcity Choice Opportunity Cost

• Economists have classified the economic resources into
1. Land: all natural resources
2. Labour: the physical actions and mental activities that people
contribute to the production process
3. Capital: produced goods that can be used as inputs for further
production
4. Entrepreneurship: particular talent that some people have for
(1)organizing the resources (2)seek new business opportunity
and (3) developing new ways of doing things
Introduction: Basic Economic Concepts

Scarcity Choice Opportunity Cost

• People have to make choices because of scarcity

• Must decide what we will have and what we must forgo from the
available alternatives.
• Choice made are rational self- interest
• Decision made at the margin (marginalism):- comparing the
marginal benefits and marginal costs
• Decide when MB > MC
• Forgo when MC > MB
Introduction: Basic Economic Concepts

Scarcity Choice Opportunity Cost

Opportunity cost: “Every choice has a cost”
• The best alternative that we forgo, or give up, when we make a
choice or decision
• E.g. You can spend Saturday night studying for your next economics
test and having fun with your friends. you face a trade-off between
studying and hanging out with your friend
- The opportunity cost of _________________ is
_______________
• The higher the opportunity cost of doing something, the less likely it
will be done.
The Scope of Economics: Macroeconomics and Microeconomics

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.
• Example:
1. How does a consumer determine how much of a good he or she will
buy?
2. What level of output does a firm produce?
The Scope of Economics: Macroeconomics and Microeconomics

Macroeconomics:-
• The branch of economics that examines the economic behavior of
aggregates income, market and so on – on a national scale. /
Looks at the economy as a whole
• Examples:
1. Why some countries are poor and others rich? (Economic growth)
2. What cause unemployment or inflation? How to fix it?
3. Are trade balance bad for economy?
The Scope of Economics: Positive VS Normative Economics

Positive economics:-
 An approach to economics that seeks to understand behavior
and the operation of system without making judgements.
 Focus on facts and cause- effect relationship
 Example:
1. Singapore is Malaysia’s trading partner
2. A decrease in tax will increase the consumption.
3. What would happen if government abolished the income tax?
The Scope of Economics: Positive VS Normative Economics

Normative economics:-
 An approach to economics that analyze outcomes of economic
behavior, evaluates them as good or bad and may prescribe
courses of action
 Involves value judgement and opinion
 Example:
1. Should the government subsidize the cost of higher education?
2. Government should impose lower tax on necessity goods.
3. I hope unemployment comes down soon.
The Production Possibilities Frontier

Production Possibilities Frontier (PPF)

 Framework used to analyze economic activities
 PPF:- a graph shows various combinations of output that the
economy can possibly produce given the available factors of
production and the available production technology
 Assumption: (1) The economy is producing only two goods. (2)
The resources available is fixed (3) current technology level is
fixed
The Production Possibilities Frontier

 The table lists some combinations of the quantities of pizza and

cola that can be produced in a month given the resources
available.
The Production Possibilities Frontier

PPF illustrate various economic concept:

1. Scarcity: points outside the frontier
are unattainable.
2. Productive efficiency: produce
maximum output (points on the PPF)
3. Productive inefficiency/
unemployment: producing less than
maximum (points inside the PPF)
The Production Possibilities Frontier

4. Opportunity Cost: produce more unit

of one pizza only by reducing
production of consumer goods. (point
movements along the PPF)
 From point A to point B:
Opportunity cost of 1 unit of pizza =
unit
of cola
 The Production Possibilities Frontier
Points of PPF Opportunity cost of 1 pizza
A to B
1 Cola(s)
B to C
Cola(s)
C to D
Cola(s)
D to E
Cola(s)
E to F
Cola(s)
• The opportunity cost of pizza increases as the quantity of pizza produced increased.
• Increasing opportunity cost: Concave shape of PPF
• Constant opportunity cost: Straight line PPF
The Production Possibilities Frontier

 PPF represents choices available within the constraints

 In the long run, technology may improve/ resources may
increase. When that happens, we have growth
 Economic growth:- an increase in the total output of an
economy.
(a) (b)
Economic System

 Three basic economic questions:

1. What to produce?
2. How to produce?
3. For Whom to produce?
 Economic System: the way in which society decide to answer key
economic question – in particular questions relate to production
and trade.
 Socialism (Command Economies)
 Capitalism ( Laissez-Faire Economies)
 Mixed System (Mixed Economies)
Economic System

Command Economies
 Basic economic questions are answered by a central
government
 Main characteristics are the presence of total or heavy control of
the economy by the government and thus, the absence of
competition.
Economic System

Laissez- Faire Economies

 Basic economic questions are answered by a private sector/
market
 Lack of government involvement in the economy:- Individuals
and firms pursue their own self-interest without any central
direction or regulation
 Consumer sovereignty
 Free Enterprise
 The basic coordinating mechanism is price
Economic System

Mixed Economies
 Most activities take place in the private sector in this system, but
government plays a substantial and regulatory role.
 There is several of selective government interventions in the
economy to “fix” the weaknesses of the laissez-faire system but
free competition still exist.
Q&A