BASIC ECONOMIC CONCEPT

BASIC ECONOMIC PROBLEMS

 “You can’t always get what you want!”

we live in a world of SCARCITY:

with limited resources, we cannot produce all
goods and services that people wish to have.

Wants always exceed the resources to satisfy

them

Effective use the limited resources and choices

made to satisfy people’s wants
CONCEPT MAP

Unlimited human wants Relative limited resources

Scarcity

Choices Opportunity cost

BASIC ECONOMIC CONCEPT -
FUNDAMENTALS
 The three important fundamentals are as follows:

Ends refers as unlimited Scarce refers to the unlimited

human wants. We want many wants although the means to
things in life and one want satisfied the wants are
has been satisfied, it would limited. Limited resources
create another need. restricted.

Alternatives refers to choices which may

be made and involves opportunity cost.
Scarce resources can be put various uses.
SCARCITY &
WANTS
SCARCITY

Wants always exceed limited resources to satisfy clients

/ society

 Isa universal problem faced by poor and rich

nations to fulfill their needs.
 No scarcity, no economics.

 Wants are unlimited but the world has limited

amount of resources.
SCARCITY IS DIFFERENT FROM
SHORTAGE
SCARCITY SHORTAGE

 Embodies the economic  Temporary situation

truism that economic  It occurs when the supply
resources are limited of goods and services
 It is an economic runs low resulting from a
phenomenon which is greater demand on the
permanent in nature part of the consumer.
UNLIMITED WANTS

What are the things that you would like to have?

Think about seriously… the list is almost

endless…

It is natural for you to want something more

than you have…

If you do not want something more than you

have, you are probably dead
DIFFERENCE BETWEEN WANTS AND NEEDS

A need is something you

have to have, something
you can't do without it.

A want is something you

would like to have. It is not
absolutely necessary, but it
would be a good thing to
have.
RESOURCES
RESOURCES
 Resources used to produce goods / services to
satisfy human wants
 A resource is considered scarce when its
availability is not enough to meet its demand
 Limited supply
 Limited capabilities of technology or human
skill
 Sometimes the insufficiencies are a result of
poor planning and execution
RESOURCES
 The resources that businesses use to produce goods and
services are called factors of production.
 Factors of production refers to those goods and services
which assist the production process.
 Factors of production are grouped into four categories :

Land

Labour Capital Entrepreneurship

FACTORS OF PRODUCTION - LAND
 The “Gifts of Nature”
 Use to produce goods and services.
 In economics, land is what in everyday language we call
natural resources. It includes land in the everyday sense,
minerals and water.
 Our land surface and water resources are renewable, and
some of our mineral resources can be recycled.
 Land is the means of supporting human beings, plants and
animals.
 Thus, land is the source of all matter and the starting point
of all production.
 FACTORS OF PRODUCTION -
LABOUR
 The work time and work effort that people devote to
producing goods and services is called labour.
 Labour includes the physical and mental efforts of all
the people who work on farms and construction sites
and in factories, shops and offices.
 The quality of labour depends on human capital, which
is the knowledge and skill that people obtain from
education, on the job training and work experience.
 All activities are undertaken by man in exchange for
monetary reward.
 FACTOR OF PRODUCTION -
CAPITAL
 Capital refers to that part of man-made wealth, which is used
to produce further wealth.
 The tools, instruments, machines, buildings, and other
construction that businesses now use to produce goods and
services are called capital.
 Capital is basically all wealth other than land, which is used
to produce more wealth.
 Goods can be grouped as capital goods and consumer goods.
FACTOR OF PRODUCTION - CAPITAL

CONSUMER GOODS
CAPITAL GOODS
Goods are considered to be
Goods used in the production of
finished products for consumer’s
other goods or services
consumption

In production of shirts, sewing machines are

capital goods and the shirts are consumer
goods
 FACTOR OF
PRODUCTION -
ENTREPRENEURSHIP
 Refers to the combining of the three factors of
production.
 The human resources that organize labor, land, and
capital is called entrepreneurship.
 Entrepreneurs come up with new ideas about what and
how to produce, make business decisions, and bear the
risks that arise from these decisions.
 An entrepreneur is a person who combines the different
factors of production, and initiates the process of
production and also bears the risk.
FACTOR OF PRODUCTION -
ENTREPRENEURSHIP
 An entrepreneur must be person who possesses
 Intelligence
 Ability and capability to make quick decision
 Complete knowledge about the business
 Innovative
 Inspires confidence
 Has knowledge of the latest developments in his area of
business

Entrepreneur makes decisions to co-

ordinate and organize labour, land
and capital
 THE CIRCULAR FLOW OF GOODS AND INCOME
Goods and services

RM
Consumer
expenditure

Wages, rent
interest, profit.
RM

Services of factors of production (labour, land, capital, entrepreneurship)

CHOICE/ALTERNATIVE
~ OPPORTUNITY COST
CHOICE
In a free market economy,
CHOICE, is at the very heart of
the system

CONSUMER/HOUSEHOLD BUSINESS
…in deciding what to
…must choose among a
produce and how to
variety of goods and
produce it, must choose
services, not of all which
among the available
can be bought, given a
resources – land, labor,
limited budget, between
capital, and
spending now or saving
entrepreneurship.
for later; and between
hours of work and hour
of leisure
 ! !!
I T Y
R C
A
SC
SCARCITY OF RESOURCES FORCES
US TO MAKE A CHOICE!

Scarcity =
this OR that
not this AND that

Choosing one over the other course of action would cost

you to give up the next best alternative
 When an economic choice is made, an
economic problem is solved.
 The solving of an economic problem gives
rise to a benefit (what is gained) and a cost
(what is given up).
 The best valued alternative that is given
up represents opportunity cost.
WHAT IS THE DIFFERENCE BETWEEN A TRADE
OFF AND AN OPPORTUNITY COST?

TRADE OFF OPPORTUNITY COST

 A trade off is an exchange  An opportunity cost is the

for one thing in return for value of the next highest
another. valued alternative or the
foregone cost.
 The cost of passing up the
next best choice when
making a decision

TRADE OFF
 A trade off is an exchange
for one thing in return for
another.
You have many choices on
how to spend your Saturday
night as listed:
Go out with friends.
Barbeque with family.
Dating.
Studying.

All of these choices, except the one you choose are the
choices of possible trade offs.
For example, you choose to go dating.
Any one of these choices could be a trade off.
In economics, we are concerned which one is the trade
off and what is its opportunity cost
 You have many choices on
TRADE OFF how to spend your Saturday
night as listed:
 A trade off is an exchange
for one thing in return for
another. Go out with friends.
Barbeque with family.
Dating.
Studying.

If you were given a second choice, which one would you

choose?
Let’ say your second choice is to go out with friends, then this
is the trade off of dating.
This trade off has a cost. The question is, what is the cost?
We call the cost of the You have many choices on
trade off an how to spend your Saturday
night as listed:
OPPORTUNITY COST

 An opportunity cost is the Go out with friends.

value of the next highest Barbeque with family.
valued alternative or the
foregone cost. Dating.
 The cost of passing up the next Studying.
best choice when making a
decision
In this example, the You have many choices on
trade off of dating is how to spend your Saturday
going out with friends. night as listed:

Your opportunity cost of

Go out with friends.
dating could be
excitement you are Barbeque with family.
missing going out with Dating.
friends Studying.

The true cost for

you to go out
dating, The money you are
going to spend on
your date + your
opportunity cost
Cost of the TRADEOFF is called
OPPORTUNITY COST

Choosing the action or things that will give

more extra or marginal benefits

Always thinking of the OPPORTUNITY

COST OF THE DECISION!
 The highest-valued alternative that we give
OPPORTUNITY COST up to get something.

You are given 3 options to spend your weekend

 Option 1 going to a concert and pays RM 200 for a ticket
 Option 2 working in Aeon as a salesman earning RM 80 per
day
 Option 3 working as a tutor earning RM100 per class

You choose to go for concert,

Opportunity cost
= Option 3 (highest-valued option)

Full cost of attending the concert

= price of ticket + income forgone
(highest-valued option forgone)
= RM200 + RM100 = RM300
Amy spent two hours to watch movie in cinema.
She can use the time to go tutoring a student at
RM10 per hour or did her artwork that can earn
RM50. If the price of the cinema ticket is RM13,
what is the opportunity cost and full cost of her
choice of going to the cinema?

A. RM13 B. RM10 C. RM50 D RM63

BASIC ECONOMIC
PROBLEMS
BASIC ECONOMIC PROBLEMS

Choices made by any society to decide on what to

produce, how to produce and for whom to produce

With limited resources, society has to decide

how to allocate limited resources efficiently to
produce goods and services to satisfy the needs
of people.
BASIC ECONOMIC PROBLEMS
3 fundamental economic questions need to be answered:

1. What to produce
 Need to make decision of what to produce due to the limited
economic resources
 Must choose the type and quantity of goods and services that it
will produce.
2. How to produce
 To find cheapest method of production
 Alternative techniques of producing goods and services
3. For whom to produce
 Refers to distribution
 Distribution of economic benefits depends on the distribution of
income
BASIC ECONOMIC PROBLEMS
Three basic questions:

 What goods and services are produced?

 How are goods and services produced?
 For whom are goods and services produced?
WHAT GOODS AND SERVICES ARE
PRODUCED?
 The object that people value and produce to satisfy wants are
called goods and services.
 Goods are physical objects such as golf balls. Services are
tasks performed for people such as a haircuts.
 Examples:
 Should
more clinics built than schools?
 How many cars should be produced?
 HOW ARE GOODS AND
SERVICES PRODUCED?
 The range of jobs that you might do keeps changing. Every
year, as business adopt new production technology,
changes occurs. Today, information technology businesses
that are producing new products, creating new jobs and
destroying old ones.
 Examples:
 Should factories use more human power or robotics to produce
goods?
 Should cars be produced by automatic machines or assembly
line workers?
FOR WHOM ARE GOODS AND
SERVICES PRODUCED?
 Who gets the goods and services that are produced
depends on the incomes that people earn.

 The movie star who earns a few million dollars a year

buys a large quantity of goods and services. A homeless
unemployed person has few options and a small quantity
of goods and services.
FOR WHOM ARE GOODS AND
SERVICES PRODUCED?
 To earn an income, people sell the services of
the factors of production they own :
1. Land earns rent
2. Labour earns wages
3. Capital earns interest
4. Entrepreneurship earns profit
Understand these concepts, know these
concepts, and own these concepts.

= Brunelle and Reff =