Introduction to Economics

INTRODUCTION TO ECONOMICS

  • Tan Chiang Ching School of Business and Management, University of Technology Sarawak (UTS)
  • Course Code: MBC3563 Economics 1

Learning Outcomes

  • Define the meaning of economics.
  • Clarify the scope of economic studies.
  • Explain the concepts of scarcity, choice, and opportunity cost.
  • Utilize the production possibilities curve to explain the basic economic concepts.
  • Explain the various economic systems.

What is Economics?

  • Economics is among the oldest disciplines within the humanities and is classified under social sciences.
  • It examines and analyzes economic activities undertaken by people to satisfy their needs and desires, as noted by Vengedasalam & Madhavan.
  • Additionally, economics is defined as a science focusing on human behavior regarding the relationship between ends and scarce means that have alternative uses. As defined by Robbins, Case, and Fair, economics studies how to effectively utilize scarce resources provided by nature and previous generations to fulfill unlimited wants.

Definition of Economy

  • Economies are commonly defined as studies investigating how a society uses limited resources to fulfill unlimited wants.
  • The core question arises from the issue of resource scarcity.

Why Study Economics?

  • Learning to think critically and analytically.
  • Understanding societal functions and interactions.
  • Grasping global affairs' vast array of implications.
  • Becoming an informed voter and participant in democracy.

The Scope of Economics

Microeconomics and Macroeconomics

  • Microeconomics: This branch examines the functioning of individual industries and the decision-making behavior of individual units, such as firms and households.
  • Macroeconomics: This branch analyzes the economic behavior of aggregates (e.g., income, employment, total output) on a national scale.

Distinctions between Microeconomics and Macroeconomics

  • Microeconomics: Focuses on individual units and decisions—akin to observing “trees.”
  • Macroeconomics: Concentrates on collective phenomena—equivalent to examining the “forest.”

Examples of Economic Concerns

Table 1.1: Microeconomic and Macroeconomic Concerns

  • Microeconomics:
    • Production: How much steel, office goods, and cars are produced?
    • Prices: Prices of individual industries like medical care, gasoline, and food.
    • Income Distribution: Wages in specific industries (e.g., auto), minimum wage, executive salaries, and poverty metrics.
  • Macroeconomics:
    • National Production: Total industrial output measured by Gross Domestic Product (GDP).
    • Employment: Jobs within individual sectors versus total employment metrics including unemployment rates.

Other Specific Fields of Economics

  • Industrial organization
  • Econometrics
  • Financial economics
  • Labour economics
  • International economics
  • Developmental economics

Scarcity, Choice & Opportunity Cost

  • Economic issues, while varied, fundamentally revolve around choice in the context of scarcity.
  • Individual choices determine three crucial questions:
    • What gets produced?
    • How is it produced?
    • Who receives what is produced?

Basic Economic Questions

  • What should be produced?: Decisions determining quantities of products (e.g., housing, health care).
  • How should it be produced?: Assessing the impact of machinery.
  • For whom should it be produced?: Based on income levels and product pricing.

Understanding Scarcity

  • Scarcity arises when material needs exceed the ability to fulfill those needs due to limited resources.
  • Economics investigates how individuals and societies can optimize the use of limited resources to satisfy endless material needs.

Resolving Scarcity Problems

  • Utilize all resources fully.
  • Enhance resource capacity and technology.
  • Improve administrative efficiency in production and distribution.
  • Redistribute goods or income within society.

Choice & Opportunity Cost

  • Individuals and society must make decisions among alternatives.
  • Opportunity Cost: Defined as the best alternative that is surrendered when making a choice.

Production Possibility Frontier (PPF)

  • The concepts of scarcity and choice are depicted via the Production Possibility Curve (PPC) or Production Possibility Frontier (PPF).
  • PPF: A graph illustrating all combinations of goods and services that can be produced if society's resources are used efficiently.
  • It clearly defines the concept of opportunity cost since each choice's production alters the outputs of other goods.

Understanding the PPF

  • The economy can produce at all points within the PPF, including points on the frontier which indicate efficiency.
  • Points inside the PPF suggest resources are underutilized (e.g., point D).

PPF Characteristics

  • A negative slope indicates that increasing the production of one good necessitates a reduction in another's production.
  • As choices are made, opportunity costs arise, represented by the curve's negative gradient.

Opportunity Costs in the PPF

Table 2: Opportunity Cost Calculations

  • Point A to B: Opportunity cost of bushels of corn per bushels of wheat = rac650−700200−100=−0.50rac{650 - 700}{200 - 100} = -0.50
  • Point B to C: rac510−650380−200=−0.78rac{510 - 650}{380 - 200} = -0.78
  • Point C to D: rac400−510500−380=−0.92rac{400 - 510}{500 - 380} = -0.92
  • Point D to E: rac300−400550−500=−2.00rac{300 - 400}{550 - 500} = -2.00
  • Note: The negative sign denotes the negative slope of the PPF, affirming a trade-off.

Shifting the PPF

Figures Illustrating PPF Shifts

  • Figure 3(a): PPF Shift Inward
  • Figure 3(b): PPF Shift Outward
  • Figure 3(c): PPF Pivot Outward from “Industrial Product”-axis
  • Figure 3(d): PPF Pivot Outward from “Agricultural Product”-axis

Implications of PPF Shifts

  • The PPF shifts when economic growth occurs, often via increases in resource quantity/quality or technological advancements.
  • Technological upgrades or resource increases lead to significant production enhancements, as depicted in the figures.

Economic Systems

Types of Economic Systems

  • Capitalism: Also known as Free Market Economy or Laissez-Faire.
  • Socialism: Also referred to as Planned System or Command Economy.
  • Mixed Economy: Combines elements of both capitalism and socialism.
  • Islamic Economy: Blends aspects of both capitalism and socialism, adhering to Syariah principles.

Capitalism Economy Characteristics

  • Emphasis on private ownership of resources.
  • Freedom of enterprise and choice is prevalent.
  • Consumer preferences drive markets (Consumer Sovereignty).
  • Competitive market structure.
  • Some level of government intervention.
  • Utilization of a price system driven by market mechanisms.

Socialism Economy Characteristics

  • Public ownership of all resources.
  • Central planning authorities control economic processes.
  • The price mechanism plays a diminutive role as compared to planning.
  • Encompasses central control and ownership mechanisms.

Mixed Economy Characteristics

  • Incorporates both public and private ownership models.
  • Utilizes a combination of price mechanisms and economic planning for decision-making.
  • Government intervenes to mitigate income disparities.
  • Cooperation among government, public sectors, and businesses.

Islamic Economy Characteristics

  • Both public and private ownership of resources, acknowledging the sovereignty of God regarding ownership.
  • Combines price mechanisms with government interventions.
  • Focuses on equitable wealth distribution.
  • Prohibits interest (riba) as per Syariah laws.
  • Promotes freedom of economic enterprise under ethical guidelines.

CONCLUSION

  • Thank you for your attention.