CHAPTER 1

THE FUNDAMENTALS OF
ECONOMICS
BY: YENNY SULASTRI, S.E.,M.M
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WHY STUDY ECONOMICS?
 With a study of economics, we can be
fully informed about international
trade etc.
 Choosing your life’s occupation is the
most important economic decision
you will make, because your future
depends not only on your own
abilities but also on how economic
forces beyond your control affect 2

your wages.
DEFINITION OF ECONOMICS
The study of how society chooses to
allocate its scarce resources to the
production of goods and services in
order to satisfy unlimited wants.

The study of how societies use scarce

resources to produce valuable
commodities and distribute them
among different people.
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2 KEY IDEAS IN ECONOMICS:

- That goods are scarce

- That society must use its

resources efficiently
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 EFEKTIF VS EFISIEN
 Efektif: pencapaian tujuan/target dalam batas
waktu yang sudah ditetapkan tanpa sama sekali
memperdulikan biaya yang sudah dikeluarkan.

 Efisien: pencapaian target dengan menggunakan

input (biaya) yang sama untuk menghasilkan output
(hasil) yang lebih besar.

 Efektivitas adalah tingkatan sejauh mana tujuan

tercapai dan sejauh mana sasaran masalah dapat
diselesaikan. Berbeda dengan efisiensi, efektivitas
ditentukan tanpa mengacu pada biaya. Efektivitas =
“Doing the right thing” sedangkan Efisiensi = 5

“Doing the thing right”

 BASIC CONCEPTS:

 Scarcity - the fundamental

economic problem that human
wants exceed the availability of
time, goods, and resources.
• Choice – Because individuals
and society can never have
everything they desire, they
therefore are forced to make
choices
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MICROECONOMICS VS. MACROECONOMICS

 Microeconomics  Macroeconomics
The branch of The branch of
economics that economics that
studies the studies decision-
behavior and making for the
decision-making economy as a whole
by a single
individual,
household, firm,
industry, or level
of government 7
 MICROECONOMICS VS. MACROECONOMICS
 Microeconomics:
How individual prices are set,
studied the determination of prices of land,
labor and capital and inquired into the
strengths and weaknesses of the market
mechanism.

 Macroeconomics: How total investment and

consumption are determined, how central banks
manage money and interest rates, what causes
international financial crisis and why some 8

nations grow rapidly while others stagnate.

 3 FUNDAMENTAL QUESTIONS OF
ECONOMIC ORGANIZATION

 What: What commodities are produced and in what

quantities?

 How: How are goods produced? A society must

determine who will do the production, with what
resources, and what production techniques they
will use. Will factories be run by people or robots?
The HOW question requires society to decide the
resource mix used to produce goods.

 Whom: For whom are goods produced? It concerns

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the division of output among society’s citizens.
VIDEO WHAT, HOW, FOR WHOM

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POSITIVE ECONOMICS VS NORMATIVE ECONOMICS
 Positive economics: describes the facts of an
economy. Ex: why do doctors earn more than
janitors? Does free trade raise or lower the wages of
most Americans? What is the impact of computers
on productivity? analysis & empirical evidence.

 Normative economics: Involves ethical precepts and

norms of fairness. Should poor people be required
to work if they are to get government assistance?
Should the US break up Microsoft because it has
violated the antitrust laws? There are no right or
wrong answers to these questions because they
involve ethics and values rather than facts.
They can be resolved only by political debate and 11

decisions, not by economic analysis alone.

 MARKET, COMMAND AND MIXED ECONOMIES
 A Market Economy is one in which individuals
and private firms make the major decisions about
production and consumption. A system of prices, of
markets, of profits and losses, of incentives and
rewards determines what, how and for whom. Ex:
USA

Firm: produce the commodities that yield the highest

profits (the what) by the techniques of production that
are least costly (the how).

Consumption: determined by individuals’ decisions

about how to spend the wages and property incomes
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generated by their labor and property ownership (the
for whom).
 MARKET, COMMAND AND MIXED ECONOMIES
A Command Economy is one in which the
government makes all important decisions
about production and distribution : Uni
soviet where the government owns most of
the means of production (land and capital)
and it also owns and directs the operations of
enterprises in most industries; it decides how
the output of the society is to be divided
among different goods and services.

 Mixed Economy with elements of market

and command. Ex: Indonesia 13
VIDEO SISTEM EKONOMI

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 INPUTS & OUTPUTS
 Inputs: commodities or services that
are used to produce goods and services.
Ex: eggs, flour, heat, pizza oven, chef’s
skilled labor.

 Outputs: the various useful goods or

services that result from the production
process and are either consumed or
employed in further production. Ex:
Pizza.
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 FACTORS OF PRODUCTION
 Land: natural resources – represents the gift of
nature to our productive processes. It consists of the
land used for farming or for underpinning houses,
factories and roads; the energy resources that fuel
our cars and heat our homes; and the nonenergy
resources like copper and iron ore and sand.
clean air and drinkable water
 Labour: The mental and physical capacity of workers
to produce goods and services
 Capital: The physical plants, machinery, and
equipment used to produce other goods (Financial
capital - The money used to purchase capital)
 Entrepreneurs: The creative ability of individuals to
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seek profits by combining resources to produce
innovative products
 Labor
Land Capital

Entrepreneurship organizes
resources to produce goods
and services
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VIDEO FACTORS OF PRODUCTION

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PRODUCTION POSSIBILITIES
CURVE:
- A curve that shows the
maximum combinations
of two outputs that an
economy can produce,
given its available
resources and technology
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 PRODUCTION
POSSIBILITIES CURVE:
Ex: Defense Spending.
Countries must decide how much
of their limited resources goes to
their military and how much goes
into other activities (such as new
factories or education).

The more output that goes for

defense, the less there is available 20

for consumption and investment.

ALTERNATIVE PRODUCTION POSSIBILITIES

Possibilities Butter Guns

Millions of Pounds (thousands)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0

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 Production Possibilities Curve
A
Military Goods

Efficient

Unattainable

Inefficient

B
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Consumer Goods
 PROBLEMS
 As a student , you might have 10 hours to study
for upcoming tests in both economics and history.
If you study only history, you will get a high grade
there and do poorly in economics, and vice versa.
Treating the grades on the two tests as the
“output” of your studying, sketch out the PPF for
grades, given your limited time resources.
Alternatively, if the two student commodities are
“grades” and “fun”, how would you draw this PPF?
Where are you on this frontier? Where are your
lazy friends?

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 OPPORTUNITY COSTS
 Lifeis full of choices: Resources are
scarce, we must always consider how
to spend our limited incomes or time.

 Ina world of scarcity, choosing one

thing means giving up something
else. The opportunity cost of a
decision is the value of the good or
service forgone. 26
VIDEO OPPORTUNITY COSTS

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 EFFICIENCY
 Productive efficiency occurs when an
economy cannot produce more of one
good without producing less of
another good; this implies that the
economy is on its production-
possibility frontier.

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