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CHAPTER 1
INTRODUCTION TO ECONOMICS Table of content In the end of this chapter, you 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. DEFINITION ECONOMICS Economics is defined as ‘a social science that studies how people and society organize scarce and limited resources to satisfy unlimited human wants.’ WHAT IS ECONOMICS ? Limited resources vs Unlimited wants.
Society must make a choice on
how to use the FOP to minimize wastage. BRANCH OF ECONOMICS
MICROECONOMICS MACROECONOMICS Microeconomics focuses on Macroeconomic looks at the the individual parts of the economy as a whole. economy. o Economy-wide phenomena, o How households and firms including inflation, make decisions and how unemployment, and economic they interact in specific growth. markets. ECONOMIC RESOURCES
❑ Sometimes called factors of production.
❑ Used in the production of goods and services. ❑ Classified as land, labor, capital, and entrepreneur. FACTORS OF PRODUCTION 1. LAND: 2. LABOUR: ❑ Labour refers to any human effort ❑ Land refer to all free gifts of nature and ( physically and mentally) which is includes it only land itself, but also all the directed to the production of goods or mineral in and on the land (like oil, coal and services. iron), sea and everything in sea. ❑ Payment for used labour is WAGE or ❑ Payment for used land is RENT. SALARY.
3. CAPITAL: 4. ENTREPRENEUR:
❑ Capital refer to those man-made resources
❑ Entrepreneur refers to the person who that are used to produce goods or services.. ❑ Ex: tools & equipment, plant, building, combine all factor of production to machinery. produce goods and services. ❑ They also bear risk to get PROFIT. ❑ Payment for used capital is INTEREST. BASIC ECONOMIC CONCEPTS Choice
Choice is necessary because
we cannot fulfill all wants and must choose from the CHOICE available alternatives. Scarcity The condition in which our wants (for goods) are greater than the SCARCITY limited resources. We wants goods, but there are just Opportunity cost not enough resources available to provide us with all the goods we wants. The second best alternative OPPORTUNIT forgone after making choice. To get more goods available, Y COST some of goods must be sacrifice. Exercise questions ❑ QUESTION 1 Differentiate between microeconomics and macroeconomics. (5 points)
❑ QUESTION 2 Differentiate between scarcity and opportunity choice. (5 points) BASIC ECONOMIC PROBLEMS How much to What to produce? For whom to produce? produce ?
Refers to the type of product to Refer to the technique or method
Refer to the quantity of goods and produce. of production; who will be services to be produced. producing the goods and services Decision must be made about using resources or technology? Its depends on the demand from what to produce with the limited consumers. resources available. The method of production could be either labour intensive or Societies must decide what to capital intensive. Ex: whether to produce produce and how much to produce smartphone or TV. to ensure that scare resources are It involves the cheapest method to utilized efficiently. maximize profit. PRODUCTION POSSIBILITIES CURVE A production possibilities curve shows the alternative combinations of two goods which can be produced with the existing resources and the current level of technology.
Assumptions: ❑ Only two goods are produced in a nation. ❑ Fixed technology. ❑ Fixed resources ❑ Full level of employment (the FOP are used efficiently (no waste of resources and unemployment). PRODUCTION POSSIBILITIES CURVE Defence Goods (million)
Z 150 A B UNATTAINABLE Point outside the PPC (Point Z) 🡺 SCARCITY C 120 Y D Point along the PPC 🡺 90 CHOICES ATTAINABLE
60 Point inside the PPC (Point Movement from one point
E to another (point C to Y) 🡺 Waste of resources D) 🡺 OPPORTUNITY 30 and inefficiency COST F Consumer Goods (million) 0 10 20 30 40 50 PRODUCTION POSSIBILITIES CURVE Defence Goods (million) North Korea If it allocates its all resources to produces two defence goods, it will produce at products—defence Point A A goods and If it allocates its all resources to 150 B consumer goods consumer goods, it will produce at Point F C 120 If North Korea is at point C on the D PPC, it can produce the 90 combination of 120 million defence goods and 20 million units of E consumer goods 60 Point D shows production of 90 30 million defence goods and 30 million units of consumer goods F Consumer Goods (million) 0 10 20 30 40 50 SHAPE OF PRODUCTION POSSIBILITIES CURVE
(1) CONCAVE (2) CONVEX (3) LINEAR
The opportunity cost The opportunity cost is The opportunity cost
is increasing. decreasing. is constant. FACTORS THAT INFLUENCE THE SHIFT OF THE PPC Outward shift in PPC
Increase in the level of
1 technology.
Increase in economic 2 growth.
3 Increase population. FACTORS THAT INFLUENCE THE SHIFT OF THE PPC Inward shift in PPC
1 Recession.
Decline in economic 2 growth.
Natural disaster/ war/
3 disease. FACTOR THAT INFLUENCE SHIFT IN PPC
The PPC shifts outward due to The PPC shifts inward due to Increase in economic growth. decline in economic growth. FACTOR THAT INFLUENCE SHIFT IN PPC
The PPC shifts outward for Good The PPC shifts inward for Good X. Y. EXERCISE •The table below shows the combination buying Durian and mangosteen using income available in Mantin.
