CHAPTER 1:

INTRODUCTION TO
ECONOMICS

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1.1
1.2
1.3
1.4

Definition of economics
Economic concepts
Production Possibilities Curve (PPC)
Basic economic problems

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Economics

Microeconomics
study of individual

economic unit.

Study of how people

use their limited
resources to fulfill
unlimited wants and
need.

Macroeconomics
studies the aggregate behavior

of the entire economy

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ex: unemployment, inflation,

1.1 DEFINITION OF ECONOMICS

A study of how people use their
limited resources to fulfill unlimited
wants and need.

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Microeconomics

Microeconomics studies economic activities

and decision making of a single individual
like a seller, buyer or consumer, household,
firm or producer, and government.

The focus is on small economic units, such as

economic decisions of particular groups of
consumers and businesses.

Example: What do I want for breakfast?

Where should I go for holiday? How many
labourers should we employ? Shall we use
more machines or labour? A government
faces questions like: shall we allocate a
budget for schools or clinics?
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Macroeconomics

Macroeconomics studies the

behaviour of the entire economy.

aggregate

The study of the economic system as a

whole such as the national income, economic
growth, inflation, the unemployment rate
and general price levels.

For example: what is the unemployment rate

in Malaysia? What cause a high inflation?

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MICROECONOMICS
MICROECONOMICS

MACROECONOMICS
MACROECONOMICS

Studies individual
income

Studies national
income

Analyze demand and

supply of labour

Deals with households

and firms decision

Analyzes total
employment in the
economy

Studies individual
prices

Deals with aggregate

decisions

Analyzes demand and

supply of goods

Studies overall price

level

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Analyzes aggregate

1.2 ECONOMIC CONCEPTS

Scarcity

The condition in which resources or factors of production

available are not enough to meet all wants.

Choice

A comparison of alternatives: compare costs and benefits for

each alternative.

Opportunity Cost

Opportunity cost is defined as the second best alternative

that has to be forgone for another choice which gives more
satisfaction.

Eg: Dini has RM 5 and she would like to buy two things: a
book and a pen which cost RM 5 each (unlimited wants but
limited resources). Dini has to choose either to purchase a
book or a pen which would satisfy her needs (choices). If
Dini chooses the book, then the pen is the opportunity
cost because it is the second best alternative which she has
to forgo.
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FACTORS OF PRODUCTION
Land

Natural resources provided by nature such as minerals,

oil, forests, water, air and etc.

Labor

Human effort in producing goods and services.

Capital

Stocks that can be used in the production process such

as office buildings, equipment , raw material and
machine.

Entrepreneur
A person who organizes the other factors of production
and who decides what goods to produce and what
quantity of the factors of production use. He is also
responsible for minimising cost and maximising
profits.
BACK

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PPC can be defined as a curve that shows the

various possible combinations of two goods that
can be produced with the given fixed resources
and stated technology.

PPC is important to explain the basic economic

concepts of scarcity, choices and oppportunity
cost.

Assumptions:
1. Only two goods
2. Fixed resources
3. Full utilization of resources (Full employment)
4. Fixed technology
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EXAMPLE
Production
Alternative

Food (unit)

Clothes (unit)

A
B
C
D
E

0
2
4
6
7

10
9
7
4
0

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PPC can explain the economic concepts:

a)

Any point located on PPC - Full employment

Points A-E show the full employment condition.
These are the efficient points. Resources are
fully employed.

b) Any point located inside PPC

Unemployment/ Attainable/Wasteful
Point
F
shows
the
unemployment
condition(attainable). It is an inefficient point.
The resources used is said to be wasteful and
goods produced is under capacity.
c) Any point located outside PPC Scarcity
/Unattainable
Point G shows the scarcity condition. The amount
of goods produced cannot be obtained due
scarcity in resources as well as constantamaniUITMCK
in

d)

Any point along the PPC - Choices

It is represents by any point along the PPC such
as point A,B,C,D and E.
Eg: The movement from B to C shows that the
economy choose to produce more food.

e)

Opportunity cost
It is represents by the movement from one
point to another such as point C to D.
Eg: How many clothes must forgo if it wants an
additional of food? In order to obtain additional 2
units of food, we has to forgo 3 units of clothes.
The opportunity cost of producing an additional 2
units of food is 3 units of clothes.
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Two types of PPC Model

a) Straight line PPC/ Linear PPC
-constant Opportunity cost
a)

Concave PPC/ Bowed Outward PPC

-increasing Opportunity cost
-more good y produce, more good x forgone

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A) Constant /Linear Opportunity Cost

Clothes

Explanation:
Straight line

Linear

Additional production of

clothes, equal number of food

need to be sacrificed
Food

Figure 1.1 (a) : Constant Opportunity Cost

Eg:
Combinatio
ns of goods

Food
(units)

Clothes
(units)

Opportuni
ty cost of
food

2C

2C

2C

2C
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Clothes

B) Concave PPC/ Bowed Outward PPC

Explanation:
Concave to origin

Concave

Due to the principle of Increasing

Opportunity Cost
To obtain one more unit of food,

more units of clothes have to be

sacrificed
Food

Figure 1.1 (b): Increasing Opportunity Cost

Eg:
Combinatio
ns of goods

Food
(units)

Clothes
(units)

Opportuni
ty cost of
food

10

1C

2C

3C

10

4C
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1.

ECONOMIC GROWTH
The ability of an economy to produce greater levels of output,
represented by an outward shift of its production possibilities
curves.

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i) Advancement technology for single

product only

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ii) Advancement in technology for both

products

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iii) Advancement in technology in both

products but unequal

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3.

POPULATION
- An increase in population will result in
an
increase in production

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On the other hand, if workers migrate to

other
countries , there will be a reduction
in population

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1.4 BASIC ECONOMIC PROBLEMS

1.

What to produce

Refers to type @ kind of product to

produce
Decisions must be made about what to
produce due to limited resources

2.

How much to produce

Refers to quantity of goods @ services to

be produced
Depends on the demand from consumers
or the population of the country and
resources available in the economy amaniUITMCK

3.

4.

How to produce

Refers to technique @ method of

producing a product
It can be capital intensive @ labor
intensive or both
Capital intensive means less number of
labor used in the production process
Labor intensive means more labor used in
the production process

For whom to produce

Means who finally gets to enjoy the

commodities produced
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The following table shows the production possibilities combination of

Country A that produces two products: Radios and TVs.
Combinations

Radio (million)

TV (million)

20

18

10

15

15

a) Based on theE table above draw the

curve for
20 production possibility
0
Country A
b) Calculate the opportunity cost
i) of producing 5 million of Radios
ii) of producing 15 million of Radios
iii) when the production of Radios increases from 10 million to 20 million
c) Country A wishes to produce 25 million Radios and 30 million uints of
TVs
i)What is the implication?
ii) Suggest two (2 ways) in which this production combination can be
achieved.

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THANK YOU

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