TOPIC 1

INTRODUCTION
TO ECONOMICS

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 Definition of Economics
Conventional Perspective:
A social science which studies how scarce
productive resources are allocated efficiently to
fulfill the unlimited wants

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 ECONOMIC BRANCHES

The study of economics are divided into

two important branches:

i) Microeconomics
ii) Macroeconomics

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 ECONOMIC BRANCHES
CONTD

Definition :
Microeconomics is the study of decision
making by individual parts of economy such
as household, firms and government.

Macroeconomics is the study of the

economy as a whole such as unemployment
rate, inflation and international trade.
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 ECONOMIC CONCEPTS
SCARCITY
CHOICE
OPPORTUNITY COST

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 SCARCITY
The resources available are limited,
therefore, the society has to make a
choice of how to use the resources.
Resources are limited but wants are
unlimited hence some wants need to
be forgone.

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 CHOICE

To choose among the best among the

alternative uses the resources can
provide. This involves forgone cost.

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 OPPORTUNITY COST

the opportunity cost the forgone

cost of not choosing the other
best alternatives.
4 BASIC ECONOMIC
PROBLEMS
WHAT TO PRODUCE?

HOW TO PRODUCE?

HOW MUCH TO PRODUCE?

FOR WHOM TO PRODUCE?

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 WHAT TO PRODUCE?
Since resources are scarce, the society has to
decide what to produce based on the needs.
Product which is most needed by the society
will have precedence over another.

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 HOW TO PRODUCE?

Method of producing the products whether

using capital intensive or labour intensive.
The method chosen on the basis of which
method is cheapest. Some will choose capital
intensive which means the usage of
machinery to product products and some will
choose labour intensive which means the
usage of labour/human capability to produce
product.

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 HOW MUCH TO PRODUCE?

Refers to the amount of goods to be produce.

It should be according to the market demand.
This is to avoid the problem of shortage and
surplus. The amount to be produce also
depend on the availability of resources.

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 FOR WHOM TO PRODUCE?
The distribution issues on who should get the
products, high or low income group. To be
sold locally or exports, etc.
 PRODUCTION POSSIBILITIES
CURVE (PPC)

PPC is a graphical illustration to explain the basic economic

concepts of scarcity, choices and opportunity cost.

Definition:
Various possible combination of goods and services produced
within a specified time with given technology and resources

Refer to text book page 7.

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 PRODUCTION POSSIBILITY
CURVE

Production Possibility Curve (PPC)

or Production Possibility Frontier
(PPF) is a curve shows the
maximum output of 2 goods or
services that society can produce
with existing resources and level
of technology
 4 ASSUMPTIONS BEFORE
CONSTRUCTING PPC:

1) Two products

2) Fixed resources

3) Fixed technology

4) Economy is at full employment - efficient

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 PPC
Production Television Bread
possibilities

A 15 0

B 14 1

C 12 2

D 9 3

E 5 4

F 0 5

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 PRODUCTION POSSIBILITIES
CURVE (PPC) (cont.)
Television The country produces two products television and bread

16 If it allocates all its resources to television, it

A will produce at Point A.
If it allocates all its resources to bread, it will
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produce at Point F.
12 C But this will violate the assumption that there
should be 2 product to be produce
10 D
8 If the country is at Point C on the
PPC, it can produce the combination
of 12 television and 2 bread.
6
Point D shows the production of 9
4 television and 3 bread

2
F
0 1 2 3 4 5 Bread
 PRODUCTION POSSIBILITIES
CURVE (PPC) (cont.)

Point outside the PPC

Television
(Point X) SCARCITY

16 X
A
Any point along the
14 B PPC CHOICES,
UNATTAINABLE
efficiency points.
12 C (A,B,C,D,E,F)

10 D
Movement
Movement from
from one
one
8 point to another
ATTAINABLE point to another
6 (point
(point C
C to
to D)
D)
Point inside the PPC OPPORTUNITY
OPPORTUNITY
(Point Y) Waste of E
COST
COST
4 resources and inefficiency
2 Y
F
0 1 2 3 4 5 Bread
 2 WAYS OF CALCULATING OPPORTUNITY
COST

Opportunity cost per unit Opportunity cost of a movement

from point to point

*The opportunity cost per unit

will influence the shape of PPC
whether it will be concave,
convex or straight line.
 EXERCISE 1 Formula =decreasing
increasing
increasing decreasing

Combination of Radios (R) Televisions Opp. cost of Opp. cost of radio

goods (unit) (TV) (unit) radio (point) (per unit)

A 0 10 - -

B 2 9 1 = 0.5

C 4 7

D 6 4

E 8 0

Increasing opp. cost

Concave PPC
The good which is decreasing will be
on the y-axis

Plot the PPC using the figure given

and concave PPC is attained. When
the opportunity cost per unit are
increasing the shape of PPC will be
concave

The good which is increasing

will be on the x-axis

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 This refers to the opportunity cost when we are
EXERCISE 2 producing more radio. To produce more radios how
much television need to be forgone.

Combination Radios (R) Televisions Opp. cost of Opp. cost of

of goods (unit) (TV) (unit) radio (point) radio
(per unit)
A 0 12 - -

B 2 10 2 2/2 = 1
C 4 8
D 6 6
E 8 4
F 10 2
g 12 0

Constant opp. cost

Straight line PPC
The good which is decreasing will be
on the y-axis

Plot the PPC using the figure given

and straight line PPC is attained.
When the opportunity cost per unit
are constant the shape of PPC will be
straight line

The good which is increasing

will be on the x-axis

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 EXERCISE 3
Combination Radios (R) Televisions Opp. cost of Opp. cost of
of goods (unit) (TV) (unit) radio (Total) radio
(per unit)
A 0 24 - -

B 2 18 6 6/2 =3

C 4 13

D 6 9

E 8 6

F 10 4

G 12 3

Decreasing opp. cost

 Convex PPC
The good which is decreasing will be
on the y-axis

Plot the PPC using the figure given

and convex PPC is attained. When the
opportunity cost per unit are
decreasing the shape of PPC will be
convex

The good which is increasing

will be on the x-axis

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 SHAPES OF PPC
Concave Shapes of PPC

SM
1. Concave
1. Concave

2. 2.
Convex Convex

3. Straight
3.line Straight line
It is influenced by the
opportunity cost per unit
It is influenced by the
B opportunity cost per
unit
Increasing opportunity cost
per unit
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 SHAPES OF PPC
Convex Straight line

SM SM

B
B
Decreasing opportunity cost per Constant opportunity cost
unit per unit
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 Point along the PPC

Point outside the PPC

Point inside the PPC

Movement from one point to

another

PPC enable us to culculate the

opportunity cost 29