ECON 12200 Introduction to Economics
Part 1: Introduction to Economics
• Definition of Economics
• Basic Economic Concepts : Scarcity, Choice and Opportunity Cost • Production Possibility Curve
• The Basic Economic Problems
• The Economic Systems
Definition of Economics
Economics is a study on how individuals and societies choose to use the scarce resources (land, labor, capital and entrepreneur) to satisfy their unlimited wants. In other words, economics is concerned with the use of limited resources to satisfy the unlimited wants of the societies.
The discipline of economics is divided into two main branches, microeconomics and macroeconomics. Microeconomics is the study of individual units in the economy (households, firms and industries). For example, demand for and supply of a particular good or service, output of a firm or industry, etc. Macroeconomics is the study of economy as an aggregate. For example, total or national output of a country, aggregate spending in the economy, inflation and unemployment rates in Malaysia, etc.
Basic Economic Concepts: Scarcity, Choice and Opportunity Cost
There are three basic economic concepts: scarcity, choice and opportunity cost.
Scarcity occurs when the society’s wants exceed the ability of the economy to meet those wants. The ability of an economy to produce goods and services depends on the availability of factors of production or also known as economic resources, which are limited or scarce. The factors of production are: • Land, which is natural resources that are used in crude form. These include, among other things, deposits of minerals and petroleum, timber and etc. • Labor, which refers to the services of human beings in the production process. • Capital, which is goods produced to produce other goods and services, such as tools and equipment, machines, factory building, and office space. • Entrepreneur, which is a person who undertakes the task to coordinate and make decisions relating to the use of factors of production in producing goods and services. He is faced with risks, and as a result, will enjoy profits and bear losses associated with his decision. All of the above resources are limited in supply. For example, a country has only a specified amount of fertile land for agriculture, labor, and capital. If all of these resources have been utilized, then there will be no more supply of these resources. Since the factors of production are scarce, there are not enough goods and services to satisfy the potential demand. Due to this fact, choices must then be made. Making a choice involves a sacrifice. Suppose someone has limited amount of money and chooses to buy some fish rather than say, milk. Then the opportunity cost of having fish can be measured as the amount of milk that would have been bought or the amount of fish forgone. Thus, opportunity cost of an item is therefore the alternative forgone in order to enjoy the item.
Production Possibility Curve (PPC)
PPC is a graph showing all combinations of two goods that can be produced when all resources are fully utilized. It can be used to illustrate the three basic economic concepts. Several assumptions must be made in order to construct the PPC:
1. Two Products - Only two products are produced, for example rice and butter
2. Efficiency - The economy is operating at full employment and achieving full production.
3. Fixed Amount of Resources - Thee supply of the factors of production is fixed in both quantity and quality.
4. Fixed Technology - The level of technology used remains unchanged.
Notes:
Point X – the production has not reached the maximum level. There is waste of resources or unemployment due to inefficiency.
Point Y – is not attainable because it lies outside the PPC. This point reflects the scarcity concept due to limited resources and fixed level of technology.
Movement from point A to B – we gain 4 tons of butter, but we sacrifice 1 ton of rice. The amount of rice sacrificed is therefore the opportunity cost involved. So, any movement along the PPC shows the concept of opportunity cost. Shifts Of PPC
The PPC can shift due to the following:
i. Change in the amount of resources
ii. improvement in technology
The Basic Economic Problems
Every society must confront and resolve four basic economic problems:
• What to produce?
Due to limited resources, we must decide the type of goods and services that we want to produce.
• How much to produce?
Once what good to produce has been decided, one must also decide the amount or quantity of that good to be produced.
• How to produce?
Then we must determine the techniques or method of production to be used, whether labor-intensive or capital-intensive.
• For whom to produce?
It means how the national product is distributed. In other words, who gets what is produced.
The Economic Systems
There are four main economic systems:
• Capitalistic system
• Centrally-planned or socialistic economic system
• Mixed economic system
• Islamic economic system
Capitalistic Economic System
This economic system is known as free-market system, free enterprise or laissez fair. All economic decisions are made by individuals in the society without or with limited government intervention. Examples of countries are Canada, France, the USA and etc.
Characteristics
• Private ownership of resources
• Freedom of enterprise and choice
• Maximizing income, profits and satisfaction are the driving forces of economic performance • Perfect Competition in market and industries
• Limited government intervention
Advantages of Capitalism (Merits)
• Lots of incentives to consumers, producers and owner of economic resources to use their resources efficiently. • Encourage people to be more innovative and involve in R & D to reduce cost of production. i.e. Japan - Robotics • High degree of efficiency in production of goods & services. ie High standard of living
Disadvantages of Capitalism (Demerits)
• It may widen the income gap between the rich and the poor • Unregulated market may result in high inflation and unemployment problems • Insufficient public goods and services, such as hospitals, schools and etc. • It may produce undesirable social effects known as social costs/external costs, for example pollution and haze. Centrally-Planned Economy (Socialism)
The centrally planned economy is an economy where all the economic decisions are made by government. The former USSR, Cuba and North Korea are examples of countries practicing this type of economic system.
Characteristics
• The central authority plans the allocation of resources and make economic decisions in the economy • Limited use of price mechanism to solve the fundamental economic problems
Advantages (Merits)
• Socialism promotes social justice, where income differences are reduced because goods and services are distributed not on the basis of ability to pay but they according to family needs, and individual roles in the government. • Socialism has resulted in advancement in technological and scientific achievement. For example, Russia & China are equally developed in space exploration and military, just like the US and France.
Disadvantages (Demerits)
• Not able to provide a high living standard for its people. • Lack of incentives to work hard as everybody is equally or not sufficiently rewarded. This results in economic inefficiency. • Consumers have no choice but to accept all the products and services made by the ‘central planning authority’
Mixed Economic System
Mixed economies have a mixture of both capitalism and socialism. Government and individuals play their role in the economy.
Characteristics
• There are both private and public ownership of resources. • Both sectors play a role to solve basic economic problems. The private sector is free to conduct and develop any business as long as it is legal. The government helps and encourages them in producing goods and services by providing the necessary infrastructure and facilities. • The fundamental economic problems are solved by using both the price mechanism and government economic plan.
Advantages (Merits)
• The cooperation between government and private sector has contributed to the growth of our economy. • Government will interfere in the economy for the benefits of everyone. For example, if price of a good increase tremendously, the government may step in to control prices. If there is a shortage of fish in the market, the government may allow imported fish from neighboring countries.
Islamic Economic System
It is study of man’s activities in line with the law of syariah to obtain, use and manage the economic resources for the betterment of oneself and others both materially and spiritually in order to achieve the blessing of Allah s.w.t.
According to Nejatullah siddiqi (1981), the main philosophic thrusts of Islamic Economic system are based on the following:
• the relationship between man and his Creator Allah s.w.t (HablumminaanAllah) • the relationship between man and his fellow men (Hablumminaanas)
• Definition of Economics
• Basic Economic Concepts : Scarcity, Choice and Opportunity Cost • Production Possibility Curve
• The Basic Economic Problems
• The Economic Systems
Definition of Economics
Economics is a study on how individuals and societies choose to use the scarce resources (land, labor, capital and entrepreneur) to satisfy their unlimited wants. In other words, economics is concerned with the use of limited resources to satisfy the unlimited wants of the societies.
The discipline of economics is divided into two main branches, microeconomics and macroeconomics. Microeconomics is the study of individual units in the economy (households, firms and industries). For example, demand for and supply of a particular good or service, output of a firm or industry, etc. Macroeconomics is the study of economy as an aggregate. For example, total or national output of a country, aggregate spending in the economy, inflation and unemployment rates in Malaysia, etc.
Basic Economic Concepts: Scarcity, Choice and Opportunity Cost
There are three basic economic concepts: scarcity, choice and opportunity cost.
Scarcity occurs when the society’s wants exceed the ability of the economy to meet those wants. The ability of an economy to produce goods and services depends on the availability of factors of production or also known as economic resources, which are limited or scarce. The factors of production are: • Land, which is natural resources that are used in crude form. These include, among other things, deposits of minerals and petroleum, timber and etc. • Labor, which refers to the services of human beings in the production process. • Capital, which is goods produced to produce other goods and services, such as tools and equipment, machines, factory building, and office space. • Entrepreneur, which is a person who undertakes the task to coordinate and make decisions relating to the use of factors of production in producing goods and services. He is faced with risks, and as a result, will enjoy profits and bear losses associated with his decision. All of the above resources are limited in supply. For example, a country has only a specified amount of fertile land for agriculture, labor, and capital. If all of these resources have been utilized, then there will be no more supply of these resources. Since the factors of production are scarce, there are not enough goods and services to satisfy the potential demand. Due to this fact, choices must then be made. Making a choice involves a sacrifice. Suppose someone has limited amount of money and chooses to buy some fish rather than say, milk. Then the opportunity cost of having fish can be measured as the amount of milk that would have been bought or the amount of fish forgone. Thus, opportunity cost of an item is therefore the alternative forgone in order to enjoy the item.
Production Possibility Curve (PPC)
PPC is a graph showing all combinations of two goods that can be produced when all resources are fully utilized. It can be used to illustrate the three basic economic concepts. Several assumptions must be made in order to construct the PPC:
1. Two Products - Only two products are produced, for example rice and butter
2. Efficiency - The economy is operating at full employment and achieving full production.
3. Fixed Amount of Resources - Thee supply of the factors of production is fixed in both quantity and quality.
4. Fixed Technology - The level of technology used remains unchanged.
Notes:
Point X – the production has not reached the maximum level. There is waste of resources or unemployment due to inefficiency.
Point Y – is not attainable because it lies outside the PPC. This point reflects the scarcity concept due to limited resources and fixed level of technology.
Movement from point A to B – we gain 4 tons of butter, but we sacrifice 1 ton of rice. The amount of rice sacrificed is therefore the opportunity cost involved. So, any movement along the PPC shows the concept of opportunity cost. Shifts Of PPC
The PPC can shift due to the following:
i. Change in the amount of resources
ii. improvement in technology
The Basic Economic Problems
Every society must confront and resolve four basic economic problems:
• What to produce?
Due to limited resources, we must decide the type of goods and services that we want to produce.
• How much to produce?
Once what good to produce has been decided, one must also decide the amount or quantity of that good to be produced.
• How to produce?
Then we must determine the techniques or method of production to be used, whether labor-intensive or capital-intensive.
• For whom to produce?
It means how the national product is distributed. In other words, who gets what is produced.
The Economic Systems
There are four main economic systems:
• Capitalistic system
• Centrally-planned or socialistic economic system
• Mixed economic system
• Islamic economic system
Capitalistic Economic System
This economic system is known as free-market system, free enterprise or laissez fair. All economic decisions are made by individuals in the society without or with limited government intervention. Examples of countries are Canada, France, the USA and etc.
Characteristics
• Private ownership of resources
• Freedom of enterprise and choice
• Maximizing income, profits and satisfaction are the driving forces of economic performance • Perfect Competition in market and industries
• Limited government intervention
Advantages of Capitalism (Merits)
• Lots of incentives to consumers, producers and owner of economic resources to use their resources efficiently. • Encourage people to be more innovative and involve in R & D to reduce cost of production. i.e. Japan - Robotics • High degree of efficiency in production of goods & services. ie High standard of living
Disadvantages of Capitalism (Demerits)
• It may widen the income gap between the rich and the poor • Unregulated market may result in high inflation and unemployment problems • Insufficient public goods and services, such as hospitals, schools and etc. • It may produce undesirable social effects known as social costs/external costs, for example pollution and haze. Centrally-Planned Economy (Socialism)
The centrally planned economy is an economy where all the economic decisions are made by government. The former USSR, Cuba and North Korea are examples of countries practicing this type of economic system.
Characteristics
• The central authority plans the allocation of resources and make economic decisions in the economy • Limited use of price mechanism to solve the fundamental economic problems
Advantages (Merits)
• Socialism promotes social justice, where income differences are reduced because goods and services are distributed not on the basis of ability to pay but they according to family needs, and individual roles in the government. • Socialism has resulted in advancement in technological and scientific achievement. For example, Russia & China are equally developed in space exploration and military, just like the US and France.
Disadvantages (Demerits)
• Not able to provide a high living standard for its people. • Lack of incentives to work hard as everybody is equally or not sufficiently rewarded. This results in economic inefficiency. • Consumers have no choice but to accept all the products and services made by the ‘central planning authority’
Mixed Economic System
Mixed economies have a mixture of both capitalism and socialism. Government and individuals play their role in the economy.
Characteristics
• There are both private and public ownership of resources. • Both sectors play a role to solve basic economic problems. The private sector is free to conduct and develop any business as long as it is legal. The government helps and encourages them in producing goods and services by providing the necessary infrastructure and facilities. • The fundamental economic problems are solved by using both the price mechanism and government economic plan.
Advantages (Merits)
• The cooperation between government and private sector has contributed to the growth of our economy. • Government will interfere in the economy for the benefits of everyone. For example, if price of a good increase tremendously, the government may step in to control prices. If there is a shortage of fish in the market, the government may allow imported fish from neighboring countries.
Islamic Economic System
It is study of man’s activities in line with the law of syariah to obtain, use and manage the economic resources for the betterment of oneself and others both materially and spiritually in order to achieve the blessing of Allah s.w.t.
According to Nejatullah siddiqi (1981), the main philosophic thrusts of Islamic Economic system are based on the following:
• the relationship between man and his Creator Allah s.w.t (HablumminaanAllah) • the relationship between man and his fellow men (Hablumminaanas)
• the relationship between man and the
nature and his surroundings • the meaning of his living in this world.
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