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CHAPTER 1: PRINCIPLE OF ECONOMICS

1.1 Introduction 1.2 Economics Defined 1.3 The Scope of Economics 1.4 Scarcity, Choices & Opportunity cost 1.5 Basic Economic Problems 1.6 Production Possibility Frontier (PPF) 1.6 Economic System CHAPTER OUTLINE

1.1 INTRODUCTION ,[object Object],[object Object],[object Object],[object Object],[object Object]

1.2 ECONOMIC DEFINED Economics: a) K.E. Case and R. C. Fair view that economics is a study of how people use their limited resources to try to fulfill unlimited wants and involves alternatives or choices. b) David N. Hyman defined economics as a study of how scarce resources are allocated among alternative uses c) Economics is a science that studies human behavior as a relationship between ends and scarce , which have alternative uses, according to L. Robbins

1.3 THE SCOPE OF ECONOMICS ,[object Object],[object Object]

Scarcity : The core problem Choice Opportunity cost Danny has RM5 and he would like to buy two things; a book and a pen which cost RM5 each (unlimited wants and limited resources). Danny has to choose either to purchase book or a pen which would satisfy his needs (choices) . If Danny choose the book, then the pen is the opportunity cost . 1.4 SCARCITY, CHOICES AND OPPORTUNITY COST

Scarcity ,[object Object],[object Object],[object Object]

Choice ,[object Object],[object Object]

Opportunity cost ,[object Object],[object Object],[object Object]

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],1.5 BASIC ECONOMIC PROBLEMS

1.6 PRODUCTION POSSIBILITIES FRONTIER (PPF) ,[object Object],The economy can produce at any combination on or inside the curve (C and H). Point outside the curve is not attainable (F).

Assumptions for PPF ,[object Object],[object Object],[object Object]

Production Possibilities: Inside , On , or Outside the Frontier ,[object Object],[object Object],[object Object]

[object Object],Butter (thousand kg) Sewing machines (thousands units) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Attainable Unattainable 0 1 2 3 4 5 ,[object Object],[object Object],[object Object],[object Object]

[object Object],[object Object],Calculating the Opportunity Cost

Table 1.2: Opportunity Cost (per bushels of extra wheat per year) ,[object Object],[object Object],End Point on PPF Opportunity cost (bushels of corn) A to B (700 – 650) / (200 – 100) = 0.50 B to C (650 – 510) / (380 – 200) = 0.78 C to D (510 – 400) / (500 – 380) = 0.92 D to E (400 – 300) / (550 – 500) = 2.00

Shifts in the Economy’s Production Possibilities Frontier

[object Object],[object Object],[object Object],[object Object],The Shape of PPF

Increasing Opportunity Cost (PPF is concave) ,[object Object],INCREASING OPPORTUNITY COST : Q to R = [(11 – 10)/(6 – 5)] = 1 T to V = [(8 – 5) /(10 – 9)] = 3

[object Object],[object Object],Computer - As we move along the production possibility curve with increasing computer, constant unit of food must be forgone 0 5 10 15 20 30 20 15 10 5 PPF A B Food C D CONSTANT OPPORTUNITY COST : A to B = [(20 – 15)/(10 – 5)] = 1 C to D = [(10 – 5) /(20 – 150)] = 1

[object Object],[object Object],Computer -As we move along the production possibility curve with increasing computer, less and less food must be forgone 0 PPF 15 10 7 2 10 30 B A Food C DECREASING OPPORTUNITY COST : A to B = [(15 – 10)/(10 – 2)] = 0.625 C to C = [(10 – 7) /(30 – 10)] = 0.15

1.7 ECONOMIC SYSTEMS Free Market Economy Mixed Economy Planned Economy ECONOMIC SYSTEMS

Economic Systems Free Market Economy Planned Economy Mixed Economy ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Figure 1 illustrated the Production Possibility Frontier (PPF) for the allocation of resources in Malaysian banking sector. Assumed that the Malaysian banking sector only consist of two types of banking product/services that are the conventional banking and Islamic banking. Example of PPF analysis

Example of PPF analysis End Point on PPF Opportunity cost (Ringgit of conventional outputs per one Ringgit of Islamic banking output) (i) A to B (ii) B to C (iii) C to D

Scenario A : Malaysian is currently producing at Point B. The government is encouraging the development of Islamic banking , thus, advising all the banks in Malaysia to divert more resources to Islamic banking from conventional banking. If all the banks follow the government’s advice, sketch a PPF diagram to illustrate this scenario. Mark a possible new production combination (point) as “E”. Give your explanation.

Scenario B : The government successfully invites foreign Islamic banks to invest in Malaysia by opening branches here. What happen to the PPF? Mark a new possible production point as “F”. Give your explanation.

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