CHAPTER 1 : INTRODUCTION

1. DEFINITION OF ECONOMICS
2. SCOPE OF MACRO & MICRO
3. BASIC ECONOMICS CONCEPTS
4. BASIC ECONOMIC PROBLEMS
5. ECONOMIC SYSTEM
 DEFINITION OF ECONOMICS
• Study of how society chooses to allocate its scarce
resources to the production of g & s in order to satisfy
unlimited wants – Irvin B. Tucker
• Science which studies human behaviour as a relationship
between ends & scarce means which have alternative
uses – L. Robbins
• Study of man in everyday business life – Alfred Marshal
• Social-science study as it deals with human behaviour
in making the decision on how people use scarce
resources in fulfilling their unlimited wants - Economist
 DEFINITION OF ECONOMICS

2 problems in economy
a) Productive resources which to produce g & s are
limited
b) Human wants for g & s are unlimited

Economy has to decide how to use these resources

efficiently in order to attain the max possible
satisfaction for the members
 DIFFERENCES :
CONVENTIONAL VS ISLAMIC

Conventional Islamic
Eco obj – to reach max Tends to reach the same
o/put with the use of obj as conventional but
scarce resources constrained by the islamic
ethical philosophy

Consumer – max Through 4 concept ie

satisfaction tauhid, rububiyyah,
khalifah, tazkiyah
Producer – max π
 DIFFERENCES :
MICRO VS MACROECONOMICS

Microeconomics Macroeconomics
Part of economics that Studies the economy as a
studies indv units or whole or deals with the
economic elements in the aggregate
process of DM
Seeks to understand the
ie focus on small big picture rather than the
economic units detailed of indv choice

↑ in price of sugar National income

Production of canned Economic growth
pineapples
Inflation
 BASIC ECONOMIC CONCEPTS
a) Scarcity – the condition in which human wants are
forever greater than the available ss of time, goods &
resources

b) Choice – since factor of prodn are limited, choices

must then be made between various g & s to satisfy
the potential dd – max utility (consumer) & max π
(producer)

c) Opportunity Cost (OC)

– the best alternative sacrificed for a chosen
alternative
– real cost forgone for choosing the next
best alternative
 BASIC ECONOMIC CONCEPTS
Scarce – resources
Resources – basic inputs to produce g & s
– factors of prodn
– 4 categories ie land , labour (L), capital
(K), entrepreneur

i) Land – any natural resources provided by nature

eg :
categories : renewable & nonrenewable
characteristics : immobile & limited in ss
 BASIC ECONOMIC CONCEPTS

ii) Labor – mental & physical capacity of workers to

produce g & s
eg :
characteristics : greater mobility than land but
less mobile than capital
measured by : Σ of people, skills, quality
differ between nation

iii) Capital – physical plants, machinery, equipment

used to produce other goods
money ? Capital or not
 BASIC ECONOMIC CONCEPTS

iv) Entrepreneur
- skill & creative ability of indv to seek profits
by combining resources to produce
innovative products
- a motivated person who seeks π by
undertaking such risky actvt as starting new
bus, creating new product or inventing new
ways of accomplish tasks
 BASIC ECONOMIC PROBLEMS
i) What to produce
- know that resources are scarce in relative to human
wants
- economy must choose among diff alternative
combinations of g & s
eg : more good x, less good y
ii) How much & how to produce
- how – choose the best efficient methods
eg : K intensive @ L intensive
- how much – determine the quantities needed by
society at particular time
iii) For whom to produce
- society must have a method to decide who will be rich
& famous ( poor & unknown) – target consumer
 PRODN POSSIBILITIES CURVE

• To measure OC

• Curve showing the combination of max amount

goods produced by fully utilizing the limited
resources

• Various possible combination of 2 goods that the

economy can produce in a given period of time
with its available amount of resources & a certain
level of technology

• Ceteris paribus – other variables remain constant

 ASSUMPTIONS PPC
i) Fixed resources
- qt & Q off all resources i/puts remain unchanged BUT
resources from prodn of 1 o/put to another are allowed
to shift
- no of L are fixed BUT can be transferred to produce
fewer consumer goods & more capital good

ii) Fully employed resources

- economy operates with all of its factors of prodn fully
employed & producing the greatest o/put possible w/out
waste or mismanagement

iii) Technology unchanged

- body of knowledge applied to how goods are produce
 TYPES OF PPC MODEL
a) Straight line PPF (extreme case)
- constant OC

b) Bowed outward PPF (general case)

- increasing OC
- more good y produce, more good x foregone
• Any movement along curve mean more of one product
is producing only by producing less of the other product
• Efficient - all points along PPC are max possible
combination of goods
• Unattainable - society prefer more goods but economy
cannot reach the no because of limited no of resources
& techno
• Inefficient – wasteful of resources / unemployment
 FACTOR THAT INFLUENCE THE
GROWTH OF PPC
• Econ growth – ability to produce greater levels of
o/put
– PPC will shift outward

• Sources of econ growth

a) Changes in resources / factors of prodn
b) Techno progress ie dvlpmt of new & better ways
i) Advancement in both product (3 types)
ii) Advancement in one product only (2 types)
 ECONOMIC SYSTEM
• System or method through which an economy is
operated to organize prodn & provide answer to 3
basic economic problems

• How particular society distributes its resources to

produce g & s demanded by a population

• 4 types of economic systems

i) Capitalist
ii) Socialist
iii) Mixed
iv) Islamic
 CAPITALIST
(Laissez Faire)
• Free market with limited or no govt intervention
• Private ownership of choice / enterprise
• Free market forces & the importance of P mechanism
• π oriented / max π
• High degree of competition
• DM is decentralized

Advantages Disadvantages
Promote competition Failure in provide public good

Encourage techno growth Economic instability

Emphasize indv welfare Income inequality

Satisfaction Monopoly

Efficient External effect

 SOCIALIST
(Centrally Planned Economy)
• Centralized economic planning
• No private enterprise
• Public interest
• Social / public ownership

Advantages Disadvantages

Efficient in prodn Making wrong DM

Low cost Lack of motivation & insentive

Promote economic stability No improvement in techno

No distribution effect
 MIXED
(Capitalist + Socialist)
• Coexistance of the public & private sector
• Can improve income, L forces allocation
• Govt regulation & control of private sector
• Eg : Malaysia
• Characteristics
* free to own wealth but levied with T
* free to make decision but when necessary govt will intervene
* Y is based on effort
 ISLAMIC
• Based on Quran & Sunnah
• Concept of Khalifah, Ukhuwwah, Tazkiyah
• Fair competition – balance between private* public ownership
• Emphasize more on moral
• Limited freedom – avoid forbidden actvt
• Need govt intervention ie govt & private work together to
achieve al-Falah
 NOTES TO PONDER – CHARACTERISTICS
Capitalist Socialist Mixed Islamic
Ownership of Private Public Both Both
resources
Freedom of Free to trade, I, Central Co-operation Limited – avoid
enterprise organize planning forbidden actvt

Consumers’ Based on
sovereignty consumers’
taste &
preference
Competition Highly Welfare Govt control Motive – to
competitive – income achieve al-falah
profit motive disparity
Govt Limited On certain cases
intervention only

Price system Totally based Fixed by the Both, P

on dd & ss govt mechanism &
govt intv
 NOTES TO PONDER –
HOW TO SOLVE BASIC ECONOMIC
PROBLEM

Capitalist Socialist Mixed Islamic

What to consumers govt decide consumer dd consumer dd
produce dd
How much Cost cost effective cost effective cost effective
effective
How to P mechanism govt decide P mechanism P mechanism
produce

For whom level of Y citizen level of Y level of Y

to produce