Chapter 1

CHAPTER 1: INTRODUCTION TO ECONOMICS
Learning Outcomes:
1. Students are able to define economics and differentiate between microeconomics and
macroeconomics.
2. Students are able to explain basic economic concepts and problems.
3. Students are able to explain the concepts of Production Possibility Curve.
4. Students are able to distinguish the economic systems.
DEFINITION OF ECONOMICS:
a) Conventional perspective
Economics is a social study of how societies choose to use the scarce resources
(limited resources) in order to satisfy their unlimited wants.
Note: Want is human desire which is very difficult to satisfy. Need is necessity which is
easy to satisfy. Example: A need is plain water and a want is Pepsi.
Scarce resources are referring to the limited factors production (FOP), which consists
of:
1. Land
Land includes any natural resource used to produce goods and services.
Examples of natural resources are water, oil, copper, natural gas, coal, and
forests. The income that resource owners earn in return for land resources is
called rent.
2. Labour
Labour is the effort (physical and mental) that people contribute to the production
of goods and services. The income earned by labour resources is called wages.
3. Capital
Capital refers to human made equipments in the production process such as
machineries, motor vehicles, factories, office buildings. The income earned by
owners of capital resources is interest.
4. Entrepreneur
An entrepreneur (innovators) is a person who combines the other factors of
production to develop new goods and services to bring to market. The payment
to entrepreneurship is profit.
b) Islamic perspective
Islamic economics is a social science which studies the economic problems of people
imbued with Islamic values that are based on the principles of Shari’ah.
 Elfee Rashid 2021/2022

DIVISION OF ECONOMICS
Microeconomics Macroeconomics
Microeconomics is a study of the behaviour Macroeconomics is the study of the

of individual / specific unit in an economy. behaviour and decision-making of an
economy as a whole.
Microeconomics studies the decision
making make by an individual household, Macroeconomics studies the entire economy
firm, government, consumer and producer. that focuses on aggregates.
Example: Individual income, price of Examples: National income, average/overall

specific good/service, individual demand price level (inflation), aggregate demand and
and supply. supply.
BASIC ECONOMIC CONCEPTS
1. Scarcity
Scarcity means the available resources are not enough to meet all wants. Scarcity is
forever problem faced by all nations. Due to scarcity people are forced to make choice.
Example: A student is requested to buy economics text book that cost RM80 and he is
also required to buy a football boots that cost RM150 to get selected in a faculty’s
soccer team. He is only has RM150 and he is not affordable to buy both.
2. Choice
Choice can be defined as an ability of consumers to make comparison (goods and
services to purchase) from a range of possible options. In order to make the best
choice, rational judgments (advantages and disadvantages) must be taken into
consideration.
Example: If the student chooses to buy football boots, he may fail economics and if he
chooses to buy the text book, he may not be able to join the team. He is also can
choose to buy second hand item for the text book and the boots.
3. Opportunity Cost
Once the best choice is made, the second best alternative must be forgone. Therefore,
opportunity cost is the second best alternative that needs to be let go/forgone.
Example: If the student bought the text book, the opportunity cost was the football
boots. If the student decided to buy second hand items the opportunity cost is the new
text book and boots.

PRODUCTION POSSIBILITY CURVE (PPC)
DEFINITION
The production possibility curve (PPC) is a curve illustrating the varying amounts of two
products that can be produced when both depend on the same limited resources.
Assumptions:
1. Only two goods.

Resources are used to produce only two goods,
2. Resources are fixed.

The quantities and qualities of the resources do not change,
3. Technology is constant.
The technology and production techniques do not change,
4. Resources are fully employed

The economic resources are fully employed and used in a technically efficient way.
Diagram 1: Production Possibility Curve

Table 1: Production Possibility Curve for Good X and Y.
POINTS ON PPC
All points in PPC (point A, B and C) are the most efficient due to full utilization and full
employment of resources. Point A, B and C is explaining the concept of choice. Since the
resources are limited, the economy has to choose to produce at point A, B or point C.
All points inside PPC are inefficient points. These points are attainable (example point X),
but they are not using the resources at the fullest (waste of resources).
All points outside PPC are unattainable (example point Z) due to the problem of scarcity
(limited resources). Point Z could be attained only if technology or/and resources increase.

SHAPE OF PPC AND TYPES OF OPPORTUNITY COST
A linear PPC shows that the opportunity cost is constant. To produce one more unit of good
B, constant unit of good A need to be forgone.
Good A
Good Good Opportunity

Alternative
B A Cost
A 0 20 -
B 1 15 5
C 2 10 5
D 3 5 5
E 4 0 5
Good B
A concave PPC shows that the opportunity cost is increasing. To produce one more unit of
good B, more and more units of good A need to be forgone
. Good A

Alternative
B A Cost
A 0 20 -
B 1 18 2
C 2 14 4
D 3 8 6
E 4 0 8
Good B
A convex PPC shows that the opportunity cost is decreasing. To produce one unit more of
good B, less and less unit of good A need to be forgone.
Good A

Alternative
B A Cost
A 0 20 -
B 1 12 8
C 2 6 6
D 3 2 4
E 4 0 2
Good B

FACTORS THAT INFLUENCE THE SHIFT OF PPC
SHIFT OUTWARDS SHIFT INWARDS
1. Discovers new resources 1. Natural disasters

Discoveries of key resources, such as If there is a natural disaster, such as
oil, increase an economy’s capacity to tsunami, or earthquake, an economy’s
produce more goods and services. PPF will shift inwards.
2. New technology 2. Economic recession

Investment in new technology The economy experiences a recession
increases potential output for all or depression. This will reduce output,
goods and services because new increase unemployment, and be
technology is certainly more efficient represented by an onward shift of the
than old technology. PPC.
3. Increases labour force 3. Decrease in labour force

Growth in the size of the working When workers migrate to other
population enables an economy to countries, there will be a reduction in
increase its potential output. population.
4. Economic growth 4. Reduces of resources

Economic growth is an increase in When there is depletion in a nation’s
what an economy can produce if it is resources, the economy will not be able
using all its scarce resources. to produce more goods and services.
Bread (‘000 units) Bread (‘000 units)
Butter (‘000 kg) Butter (‘000 kg)
RECORDING CLASS
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CHAPTER 1: INTRODUCTION TO ECONOMICS

 Elfee Rashid 2021/2022

Microeconomics is a study of the behaviour Macroeconomics is the study of the

Example: Individual income, price of Examples: National income, average/overall

BASIC ECONOMIC CONCEPTS

 Elfee Rashid 2021/2022

1. Only two goods.

2. Resources are fixed.

4. Resources are fully employed

Diagram 1: Production Possibility Curve

 Elfee Rashid 2021/2022

 Elfee Rashid 2021/2022

Good Good Opportunity

Good Good Opportunity

Good Good Opportunity

 Elfee Rashid 2021/2022

SHIFT OUTWARDS SHIFT INWARDS

1. Discovers new resources 1. Natural disasters

2. New technology 2. Economic recession

3. Increases labour force 3. Decrease in labour force

4. Economic growth 4. Reduces of resources

Bread (‘000 units) Bread (‘000 units)

Butter (‘000 kg) Butter (‘000 kg)

 Elfee Rashid 2021/2022

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