Principle of Economics Chapter 1

Chapter 1: Principle of Economics

• The study of economics is about how people use limited resources to meet unlimited wants.
• Economics involves choices and trade-offs.
• Scarcity exists because wants are greater than available resources.
• Factors of production include land, labor, capital, and entrepreneurship.
• Economists study how societies make choices about what to produce, how to produce it, and for whom.
• The scope of economics includes microeconomics and macroeconomics.
• Microeconomics studies individual markets and firms.
• Macroeconomics examines the economy as a whole (e.g., inflation, unemployment, national output).
• Opportunity cost is the value of the next best alternative forgone when a choice is made.
• The production possibility frontier (PPF) shows the combinations of goods that can be produced given available resources and technology.
• Points on the PPF represent efficient use of resources.
• Points inside the PPF represent inefficient use of resources.
• Points outside the PPF are not attainable given current resources.
• The shape of the PPF depends on the opportunity cost:
  • Constant opportunity cost leads to a straight-line PPF.
  • Increasing opportunity cost leads to a bowed-out (concave) PPF.
• Economic systems include free market, planned, and mixed economies.
• Free market economies rely on prices and markets to allocate resources.
• Planned economies have centralized control over resources.
• Mixed economies combine elements of both market and planned economies.

Chapter Outline

• The chapter covers the reasons for studying economics, the definition of economics, the scope of economics, scarcity and opportunity cost, basic economic problems, production possibility frontier (PPF), and economic systems.

1.1 Why Study Economics?

• To understand society and global affairs.
• To develop a way of thinking.
• To be an informed voter.

1.2 Economics Defined

• Economics is the study of how people use scarce resources to satisfy unlimited wants.
• It involves the allocation of scarce resources among alternative uses.
• Economic decisions are influenced by human behavior.

1.3 The Scope of Economics

• Microeconomics: Examining individual units (households, firms, industries) and the relationships between them.
• Microeconomics focuses on how resources are allocated in specific markets.
• Macroeconomics: Examining the economy as a whole.
• Macroeconomics studies aggregate behavior (national output, inflation, unemployment).

1.4 Scarcity, Choices & Opportunity Cost

• Human wants exceed available resources.
• Scarcity forces choices, and every choice has an opportunity cost.
• Opportunity cost is the value of the best alternative that is forgone.

1.5 Basic Economic Problems

• What to produce?
• How to produce?
• For whom to produce?
• There are limited resources.

1.6 Production Possibility Frontier (PPF)

• The PPF shows all attainable combinations of goods and services.
• The PPF is a curve or frontier.
• Points on the PPF are efficient and represent the maximum possible production.
• Points inside the PPF indicate inefficiency.
• Points outside the PPF are unattainable.

1.7 Economic System

• Types: Free market, planned, and mixed.
• Free market: Private ownership, price mechanism, consumer choice.
• Planned economies: Centrally planned, government control.
• Mixed economies: Combine elements of both.

1.4 Scarcity, Choices & Opportunity Cost (Example)

• Alex has RM25 and wants a book and a pen (each RM25).
  • Scarcity: limited resources.
  • Choice: book or pen.
  • Opportunity Cost: if Alex buys the book, he forgoes the pen.

1.6 Production Possibility Frontier (PPF) (cont...)

• The PPF shows the maximum output combinations.
• Points on the curve are efficient, within the curve are inefficient, and beyond the curve are infeasible.
• The slope of the PPF shows the opportunity cost.

Calculating Opportunity Cost

• Opportunity cost is calculated by dividing the opportunity cost of a change by the resulting change in output.
• The rate at which one good must be sacrificed to produce more of the other.
  • Increasing opportunity cost: bowed-out curve.
  • Constant opportunity cost: straight line.

1.6 Economic Systems (cont...)

• Free Market: Private ownership, price mechanism.
• Planned: Centralized planning, minimal private ownership.
• Mixed: Combination of features from both.

Malaysian Banking PPF Analysis

• Illustrates the allocation of resources.
• Compares conventional and Islamic banking.
• Opportunity cost is calculated to find the cost of shifting to more Islamic banking products.
• Possible shift in production is illustrated, and the new combination is marked as point "E" on the new PPF..

Changes in the PPF

• Changes in available resources shift the PPF.
• Technological changes can shift the PPF by increasing efficiency and production.
• Movement along the same PPF and changes resulting in shifts (pivot, rotate, outward, inward).

This quiz covers the fundamental concepts of economics, including scarcity, choice, and trade-offs. Explore the factors of production, opportunity cost, and the distinction between microeconomics and macroeconomics. Test your understanding of the production possibility frontier and the efficient use of resources.