Principle of Economics

INTRODUCTION TO ECONOMICS

PowerPoint Slides
by Ambigah Sandran

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Learning Objectives
Student will be exposed to:
Economics, microeconomics and
macroeconomics.
Basic economic concepts: scarcity, choices and
opportunity cost.
Basic economic problems.
Production possibilities curve and concepts.
Three types of economic systems.

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Learning Outcomes
At the end of the lesson, students should be able
to:
Define economics and distinguish between
microeconomics and macroeconomics.
Describe basic economic concepts: scarcity,
choices and opportunity cost.
Use the production possibilities curve to explain
the basic economic concepts and problems.
Explain and differentiates the three types of
economic systems.

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Introduction
Economics is one of the oldest discipline among the
humanities and is categorized as a social science.
Economics analyses and examine the economic
activity of people to satisfy their needs and desires.
An economic activity refers to an activity that helps the
people to achieve economic gains, which is values in
term of money.

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Introduction
Human beings have certain basic needs, for
example, food, the need for shelter and clothing.
But human being never satisfied and there will
be no end to his wants.
So, economics deals with economic problems of
individuals, firms, societies and countries.

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Definition of Economics
Basically, there are wide definitions of
economics as social science.
Economics is a field of social science that
studies the behaviour of individuals and
society in the distribution and allocation of
limited factors of production to maximize the
production of the goods and services to satisfy
mans unlimited wants and demands.

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Definition of Economics
Economics as a science of wealth:
- according to Adam Smith, F A Walker and J
B Say economics is a field of science that
examines wealth.
Economics as a science of material welfare:
- Alfred Marshall, Lord Beveridge, Canna, and
Pigou defined economics as a social science
that studies how man uses accumulated
wealth to advance material welfare.

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Definition of Economics
Economics as a science of scarcity and
choice:
- Keynes defined economics as a field of
social science that studies of the causes
of economic instability and methods to
achieve economic stabilibity and growth.
- Benham defined economics as a branch
of social science that examines the
determinants of size, distribution and
stability of national income.
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 Economics

Microeconomics Macroeconomics

Means Means
small large

The study of
individual parts of the The study of the economic
economy such as system as a whole such as the
public choices, national income, the trade cycle,
business choices and the unemployment rate, inflation
personal choices. and general price levels.

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Basic Economic Concepts
Economics is the science which studies
human behaviour as a relationship
between ends and scarce means which
have alternative uses.

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 Scarce:
the wants which are
unlimited although the
means is to satisfy
these wants are
limited.

Basic
Economic
Concepts Alternatives:
Ends: the choices which
may be made and
unlimited human involves opportunity
wants cost.

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Scarcity
Scarcity means wants always exceeds limited
resources to satisfy societys unlimited wants.
Thus, economists have classified the factors of production
into four groups namely:
Labour
The services contributed by people in the production
process that involve both mental and physical effort.
Examples are lecturers, construction workers, doctors
and others.

Land
All natural resources such as land, air, water, forest and
others.

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Scarcity
Capital
Human made resources which are in the production
process to produce other goods and services.
Examples are machinery, raw material, buildings, tools
and so on.

Entrepreneur
Human ability and capability to combine land, labour
and capital to develop production of goods and
services.

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 Entrepreneur

Land

Capital Labour

Factors of Production (Resources)

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Choice
When there is scarcity, choices have to be made.
Choice involves decision making. It can include judging the
merits of multiple options and selecting one or more of
them.
Simple choices might include what to eat for dinner or what
to wear on a Monday morning.

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Opportunity Cost

Opportunity cost is the cost of one choice in terms of the

best forgone alternative.
Opportunity cost define as the second best alternative that
has to be forgone for another choice which gives more
satisfaction.

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Example

Fadhil has RM10 and he would like to buy

two things: a book and a pen which cost
RM10 each (unlimited wants but limited
resources).
Fadhil has to choose either to purchase a
book or a pen which would satisfy his needs
(choices).
If Fadhil chooses the book, then the pen is
the opportunity cost because it is the
second best alternative which he has to
forgo.
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 Production Possibilities Frontier
(PPF)

PPF refers to a curve that shows the maximum

output level of all combinations of two
goods that can be produce in an economy.

PPF explain the basic economic concept of

scarcity
choices
Production
opportunity cost Possibilities Frontier
(PPF)
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 Production Possibilities Frontier
(PPF)

ASSUMPTIONS:

a) economic resources are fixed in terms of quantity and

quality
b) technological level does not change
c) economy has reached full employment
d) economy is producing only two types of goods
Production Possibilities Frontier
(PPF)
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 Table 1: Combination of Possible Production
(Concave)

Combination point Rubber (kg) Palm oil (kg)

a 21 0
b 19.5 1
c 18 2
d 15 3
e 11 4
f 6 5
g 0 6
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Figure 1: Diagram Production Possibilities Frontier
(concave)

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 Table 2: Combination of Possible Production
(Convex)

Combination point Grapes (kg) Strawberries(kg)

a 19 0
b 15 2
c 10 10
d 7 30
e 0 50

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Figure 2: Diagram Production Possibilities Frontier
(convex)

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 Table 3: Combination of Possible Production
(linear)

Combination point Grapes (kg) Strawberries(kg)

a 15 0
b 12 3
c 9 6
d 6 9
e 3 12
f 0 15

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Figure 3: Diagram Production Possibilities Frontier
(linear)

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 Figure 4: PPF and Economic Problems
Rubber (kg)

1. Limited resources
a h
2. Choices of output
to produce
i 3. Opportunity cost

g
Palm oil (kg)
0
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Economics
Growth Population

Improvement in
Technology

Factors that Influence

the Shift of PPC
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 Figure 5:
Production Possibilities Economic Growth

0 X
B B

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 Figure 6:
Production Possibilities Economic Disaster

0 X
D D

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 Figure 7:
Production Possibilities Increase in Population

0 X
G G

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 Figure 8:
Production PossibilitiesDecrease in Population

0 X
J J

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Changes in the Level of Technology
a) Technology for X and Y at the same percentages.

b) Technology for X only.

c) Technology for Y only.

d) Technology for X > for Y.

e) Technology for Y > for X.

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Figure 9: Production Possibilities Curve
Changes in the Level of Technology
Y
a) Technology (X and Y) :
output max by X and Y at
C same rate

0 X
B D

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Figure 10: Production Possibilities Curve
Changes in the Level of Technology
b) Technology for X only : output X
Y
while

0 X
B D 34

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Figure 11: Production Possibilities Curve
Changes in the Level of Technology

Y c) Technology for Y only :

output Y while
C

0 X
B
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Figure 12: Production Possibilities Curve
Changes in the Level of Technology

d) Technology for X more than for Y:

Y
output for X > output of Y

C
A

0 X
B D 36

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Figure 13: Production Possibilities Curve
Changes in the Level of Technology

Y e) Technology for Y more than for X:

output for Y > output of X
C

0 X
B D by Ambigah Sandran 37
 What to
produce

For
How to whom to
produce Basic produce
Economic
Problems

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Economic problems
What to produce
Depend on resource available
Depend on economy condition
E.g. (1) Capitalism: price mechanism.
(2) Socialist: Central Planning Authority.

Question: should more hospital be built than school?

Examples:
Basic needs: food, Clothing, shelter
Wants: Luxury items
Services: Education, Health Care, Defense, etc

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Economic problems
How to Produce
Cheapest method of production.
Alternative techniques.
E.g. (1) farmers: traditional or machine for harvest?
(2) factory: labor or capital incentive?

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Economic problems
For Whom to Produce
refers to distribution.
distribution of economic benefits is depend
on income distribution
E.g. who will drive latest model of imported car?

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 Socialism

Capitalism Mixed
economy

Economic
Systems

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Economic System
Is a way in which an economy is
organized to answer the basic
economic questions (problems)

1. What to produce
2. How to produce
3. For whom to produce

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Economic System: CAPITALISM

Individuals make all the main economic decision

without any government intervention.
Buyer & seller meet = transactions.
Price system.
characterized economic freedom where individual
can be buyer, seller, employee or employer.

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 Free
Market

Liberal
Market Laissez
Economy faire
Capitalism
also known
as

Free Market
enterprise Economy

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 the situation in
an economy
where the Capitalism
desires and Characteristics
needs of
consumers
control the
output of
producers
Private
Ownership Freedom of
Of the Enterprise
Resources

Consumers
Government Price
Sovereignty Competition
Intervention System
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 Capitalism

Merits / Demerits /
advantages Disadvantages
Production according to the Inequality of distribution of
needs of consumers wealth and income
Economic freedom Inflation and high
unemployment rate
Efficient utilization of resources
Lack of social welfare
Variety of consumer goods
Unnecessary variety &
Enhanced trade, business,
wasteful competition
research & development (R & D)
Misallocation of resources
Automatic incentive
Social costs
Flexible
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 Economic Decision in Capitalism
1. What to Produce
produce higher profits G & S which demanded
2. How to Produce
use more one method depend on relative price of
resources
price will rise = discourage the usage (scarcity)
3. For Whom to Produce
according to price system obtained by anyone who are
affordable
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Economic System: SOCIALISM

All the economic decision by government / central

authority

No private property

Also known as command economy and a planned

system

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 Central
control
and
ownership

Price
Public
Characteristics mechanism
ownership
socialism of lesser
of resources
importance

Central
planning
Authority
(CPA)
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 SOCIALISM
Merits /
advantages
Production according to basic
needs
Equal distribution of income and
wealth
Better allocation of resources
No serious unemployment /
recession/ inflation
Rapid economic development
Social welfare
Demerits /
Disadvantages
Lack of incentive & initiative
by individuals
Loss of economic freedom &
consumer sovereignty
Absence of competition
Waste of economic resource
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 Economic decision in socialism system
1. What to produce:
- central planning authorities decide ( statistic detailed collected)
2. How to produce
- techniques decide by CPA for different production
3. For whom to produce:
- CPA : decide the distribution for national product
- necessary things are fixed at the prices, luxury goods at higher
price
- purpose : reduce inequalities in distribution of income

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 Economic System: MIXED ECONOMY

combination of both capitalism and socialism to solve

basic economic problems

private + public = mixed economy = real world

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 Characteristics of
Mixed Economy Private
Public & private Mechanism &
ownership of economics plans
resources - economy
Decision

Government
intervention in
economy Co-operation
between the
Government government ,
helps public & business Government
to control sectors control of
income
monopolist
disparity
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Summary
Economics is a study of how people use
their limited resources to satisfy their
unlimited needs and desires.
Microeconomics analyzes the specific
economic units in detail such as
households, firms and government.
Macroeconomics analyzes the aggregate
behaviour of the entire economy such as
inflation, unemployment and national
income.

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Summary
Scarcity can be defined as human wants
are always greater than the available
resources.
Factors of production are the basic
resources used in production process in
order to produce economic goods and
services.

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Summary
Opportunity cost is defined as second best
alternative that has to forgo for another
choice which gives more satisfaction.
Production possibilities curve shows the
various possible combinations of goods
and services produced within a specified
time period with given technology and
resources.

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Summary
The question of what to produce depends
on the types of goods and services to
produce and the quantities.
The question of how to produce goods
and services depends on the cheapest
method of production.

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Summary
The question of for whom to produce depends on the
distribution of income.
Economic system is a way in which an economy is
organized to answer basic economic questions.
A market economy is an economic system were
individuals without government intervention take al the
main economics decisions.

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Summary
Planned economy is an economic system where
all the economic decisions are by the
government or central authority.
Mixed economy is an economic system which
has a mixture of capitalism and socialism
systems to solve basic economic problems.

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Key terms:
Term Definition
Economic An activity that helps people make economic
activity gains.

Economics A study of how people use their limited

resources to fulfil unlimited wants.

Microeconomics Studies individual economic units.

Macroeconomics Studies the aggregate behaviour of the entire

economy.

Scarcity Wants always exceeds limited resources to

satisfy society.
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 Key terms:
Term Definition
Opportunity cost Second best alternative that has to be
forgone for another choice which gives more
satisfaction.
Basic economic Choices made by any society to decide on
problems what to produce, how to produce and for
whom to produce.
Production Various possible combinations of goods and
possibilities curve services produced within a specific time with
given technology and resources.

Economic growth Expansion of production possibilities.

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Key terms:
Term Definition
Economic A way in which an economy is organized to
system answer basic economic questions.

Capitalism An economic system where individuals and

sellers make economic decisions using a
price system.
Price system Buyers and sellers meet and make
transactions through market price.

Socialism An economic system where all the

economic decisions are made by the
government or central authority.

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Key terms:
Term Definition
Mixed economy An economic system which combines both
capitalism and socialism systems.

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