CHAPTER 1

INTRODUCTION TO
ECONOMICS

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 LEARNING OUTCOMES

At the end of the chapter, you should be able to:

 Interpret the definition of economics and distinguish

between microeconomics and macroeconomics.
 Describe the three economic concept; scarcity, choice
and opportunity cost.
 Discuss and illustrate the production possibility curve
(PPC).
 Describe the three economic problems.
 Differentiate the four types of economic systems.

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 INTRODUCTION

 Economics is the most important aspect in human life.

 The desire of human beings is unlimited and they will try
as hard as possible to fulfill their demand to maximize
satisfactions.
 However, economics faces limited resources or factors
of production.
 Economics study how people fulfill their unlimited desire
with the limited resources.

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 DEFINITION OF ECONOMICS

 Economics is defined as ‘a social science that studies

how people and society organize scarce and limited
resources to satisfy unlimited human wants’
 FOP are resources or inputs used to produce goods
and services.
(1) Land
─ Includes all natural resources which are derived from
the earth and land itself
─ Examples: timber, oil, coal, soil and water
─ ‘Rent’ is the return to land

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 DEFINITION OF ECONOMICS (cont.)

(2) Labour
─Labour or workers are defined as people who contribute
their energy mentally and physically to earn wages or
salaries.
─Labour can be categorized into:
(a)Skilled labour
(b)Semi-skilled labour
(c)Unskilled labour
─‘Wages/salaries’ are the returns to labour

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 DEFINITION OF ECONOMICS (cont.)

(3) Capital
─Capital refers to the stock of goods created by society to
help them in the production of goods and services.
─In other words, it is man-made goods used to produce
other goods and services.
─For example, machinery, tools and equipment, building,
factories and so on.
─Interest is the return to capital.

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 DEFINITION OF ECONOMICS (cont.)

(4) Entrepreneur
─Refers to a person who has the ability of planning, organizing,
directing and controlling.
─Entrepreneur is a person who organizes the other FOP to produce
goods and services.
─The difference between a labour and an entrepreneur is that,
entrepreneur takes risk in setting up his own business.
─On the other hand, labour works for an entrepreneur and does not
take risks.
─‘Profit’ is the return to the entrepreneur.
FOPs are limited and society will try to use them efficiently to produce
goods and services which later satisfy their unlimited wants.

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 DEFINITION OF ECONOMICS (cont.)

 The unlimited wants :

(1) Goods
 Can be seen and touched
 E.g.: books, cars and computers

(2) Services
 Intangible things
 E.g.: transportation, education, etc.

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 DEFINITION OF ECONOMICS (cont.)

Limited resources vs unlimited wants

Society must make a choice on how

to use the FOP to minimize
wastage

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 BASIC ECONOMICS CONCEPTS

The Basic Economic Concept

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 BASIC ECONOMIC CONCEPTS

 SCARCITY
– One of the important concepts in economics is
scarcity.
– Scarcity is defined as wants always exceed limited
resources to satisfy them.
– Scarcity is a universal problem faced by poor as well
as rich nations in order to fulfil their needs.

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 BASIC ECONOMIC CONCEPTS
(cont.)
 CHOICE
– When scarcity exists, choices are to be made.

 OPPORTUNITY COST
– Opportunity cost is defined as the second best
alternative that has to be forgone for another choice
which gives more satisfaction.

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 BASIC ECONOMIC PROBLEMS

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 BASIC ECONOMIC PROBLEMS
(cont.)

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 BASIC ECONOMIC PROBLEMS
(cont.)

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 BASIC ECONOMIC PROBLEMS
(cont.)

Economic Decisions in the Capitalist Economic System

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 BASIC ECONOMIC PROBLEMS
(cont.)

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 BASIC ECONOMIC PROBLEMS
(cont.)
Economic Decisions in the Socialist Economic System

What/How/How much/For whom to produce?

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 BASIC ECONOMIC PROBLEMS
(cont.)
The Mixed Economy System

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 BASIC ECONOMIC PROBLEMS
(cont.)
Economic Decisions in the Mixed Economic System

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 BASIC ECONOMIC PROBLEMS
(cont.)
The Islamic Economy System

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 BASIC ECONOMIC PROBLEMS
(cont.)
Economic Decisions in the Islamic Economic System

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 PRODUCTION POSSIBILITIES CURVE
(PPC)
 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:
(1) Only two goods are produced in a nation.
(2) There is fixed level of technology.
(3) Fixed and limited FOP
(4) Full level of employment (the FOP are used
efficientlyno waste of resources and unemployment).

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 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)

 Point A implies
that Japan will
allocate all its
resources to
produce only TV
and non radio.
 Point F shows that
Japan will produce
radio entirely and
zero TV by utilize
 At point B, Japan produces combination of all its resources.
18 units TV and 1 units of radio given
available resources.
 Point C indicates the combination of
15 units of TV and 2 units of radio
produce by Japan.
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 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)

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 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)

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 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)

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 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)

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 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)
Factors that Influence the Shift of the Production Possibilities Curve

Shift OutwardsIncrease in PPC

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 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)

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 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)
Factors That Influence The Shift Of The Production Possibilities Curve

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 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)
Factors That Influence The Shift Of The Production Possibilities Curve

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