Chapter 1 - Introduction To Economics (Law) - PDF

CHAPTER 1 INTRODUCTIO N TO ECONOMICS PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013...

CHAPTER 1 INTRODUCTIO N TO ECONOMICS PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 1  TOPIC OUTCOME After reading this chapter, student should be able to : Define economics and distinguish between microeconomics and macroeconomics Describe basic economic concepts: scarcity, choices and opportunity cost Explain the basic economic problems Use the production possibilities curve (PPC) to explain the basic economic concepts Explain the three types of economic systems: capitalism, socialism and mixed economy. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 2  DEFINITION OF ECONOMICS Economics is a science which studies human behaviours as a relationship between ends and scarce which have alternative uses. OR Economics is a study of how people use their limited resources to try to fulfill unlimited wants and involves alternatives or choices. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 3  WHY ECONOMICS? Understanding market functioning and legal frameworks. Evaluating the economic impact of laws. Addressing market failures. Informed policymaking. Legal regulation of economic activities. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 4  MICROECONOMICS VS. MACROECONOMICS MICROECONOMICS MACROECONOMI CS The study of individual parts of the The study of the economy, such as economic system public choices, as a whole, such business choices and as national personal choices. income, trade cycle, unemployment rate, inflation and general price level. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 5  POSITIVE VS. NORMATIVE ANALYSIS A positive analysis is to deal with the question of “what is” and no indication of approval or disapproval. It focuses on facts and cause-and-effect relationships. A normative analysis is to deal with the question of “what ought to be”. It incorporates value judgements about what the economy should be or what policy should be used to achieve economic goals. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 6  SCARCITY SCARCITY CHOICE CHOICE BASIC ECONOMIC BASIC ECONOMIC CONCEPTS CONCEPTS OPPORTUNITY OPPORTUNITY COST COST PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 7  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. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 8  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. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 9  BASIC ECONOMIC PROBLEMS 1. WHAT TO PRODUCE?  Refers to the type of goods and services to be produced 2. HOW TO PRODUCE?  Refers to the cheapest method of production 3. FOR WHOM TO PRODUCE?  Refers to the distribution of income PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 10  PRODUCTION POSSIBILITIES CURVE (PPC) Used to explain the basic economic concepts: Scarcity, Choices and Opportunity cost. DEFINITION: The PPC shows the various possible combinations of goods and services produced within a specified time period with all its resources fully and efficiently employed. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 11  PRODUCTION POSSIBILITIES CURVE (PPC) (cont.) Assumptions: 1. The economy is operating in full employment and full production capacity (full efficiency). 2. The amount of resources available are fixed. 3. The state of technology does not change throughout the production. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 12  PRODUCTION POSSIBILITIES CURVE Sewing Machine (PPC) (cont.) If it allocates all its resources to sewing machine, it will produce at Point A. 16 A If it allocates all its resources to butter, it will produce at Point F. 14 The country Jaya, produces two products – 12 C butter and sewing machine. If the country Jaya is at Point C 10 D on the PPC, it can produce the combination of 2,000 kg butter 8 and 12,000 units of sewing machine. 6 Point D shows the production of 3,000 kg butter and 9,000 units 4 of sewing machine. 2 F 0 1 2 3 4 5 Butter PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 13  PRODUCTION POSSIBILITIES CURVE Sewing Machine (PPC) (cont.) 16 Z A B UNATTAINABLE Point outside the PPC 14 (Point Z)  SCARCITY C 12 Y Any point along the PPC  CHOICES 10 D 8 Movement from one point ATTAINABLE to another (point C to D)  OPPORTUNITY COST 6 Point inside the PPC (Point Y)  Waste of E 4 resources and inefficiency 2 F 0 1 2 3 4 5 Butter PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 14  FACTORS THAT INFLUENCE THE SHIFT OF PPC Sewing Machine 1. Economi c 16 Growth When the country 14 enjoys economic growth, the PPC 12 bounds outward. 10 8 When the country is 6 struck by natural disasters, economic 4 growth will decline and the PPC will 2 shift to the left. Butter 0 1 2 3 4 5 PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 15  FACTORS THAT INFLUENCE THE SHIFT OF PPC (cont.) Sewing Machine 2. Improvements in Technology 16 Technology increases the 14 production of sewing machine. 12 Technology increases the 10 production of butter. 8 6 4 2 0 Butter 1 2 3 4 5 PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 16  FACTORS THAT INFLUENCE THE SHIFT OF Sewing Machine PPC (cont.) 3. Population 16 14 Increase in population 12 10 8 Decrease in 6 population 4 2 0 Butter 1 2 3 4 5 PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 17  SHAPE OF PPC Sewing Machine 16 PPC IS CONCAVE 14 Increasing Opportunity Cost 12 10 8 6 4 2 Butter 0 1 2 3 4 5 PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 18  SHAPE OF PPC (cont.) Sewing Machine 16 PPC IS CONVEX 14 12 Decreasing Opportunity Cost 10 8 6 4 2 Butter 0 1 2 3 4 5 PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 19  SHAPE OF PPC (cont.) Sewing Machine 16 PPC IS LINEAR 14 12 Constant Opportunity Cost 10 8 6 4 2 Butter 0 1 2 3 4 5 PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 20  ECONOMIC SYSTEM TYPES OF ECONOMIC SYSTEM MIXED ISLAMIC ECONOMY SOCIALISM CAPITALISM ECONOMY PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 21  CAPITALISM An economic system where individuals and sellers make economic decisions using a price system Characteristics; Private ownership of resources Freedom of enterprise and choice Consumers’ sovereignty Competition Government intervention Price system PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 22  MERITS DEMERITS  Production according to  Inequality of distribution consumers’ needs of wealth and income  Economic freedom  Inflation and high  Efficient utilization of unemployment rate resources  Lack of social welfare  Variety of consumer  Wasteful competition goods  Misallocation of  Enhanced trade, business resources and R&D  Social cost  Automatic incentives  Flexibility PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 23  SOCIALISM An economic system where all the economic decisions are made by the government or a central authority Characteristics; Public ownership of resources Central planning authority Price mechanism of lesser importance Central control and ownership PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 24  MERITS DEMERITS  Production according to  Lack of incentives and basic need initiative by individuals  Equal distribution of  Loss of economic income and wealth freedom and consumer  Better allocation of sovereignty resources  Absence of competition  No serious unemployment  Waste of economic or inflation resources  Rapid economic development  Social welfare PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 25  ISLAMIC ECONOMY The Islamic Economic System operates within the framework set by Islamic law (Sharia). It’s a moral economy that values social justice and the welfare of the community, alongside individual needs and market forces. Characteristics; Prohibition of Interest (Usury) Ethical Investment Wealth Redistribution Asset-Backed Financing and Real Economic Activity PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 26  MERITS Provision of Basic Necessities: It mandates the provision of basic necessities like food, clothing, shelter, and education to every citizen, emphasizing societal welfare over individual gains​. Enforcement of Islamic Law: Sharia law guides economic activities, ensuring justice and financial stability for citizens​. Economic Justice: It aims for equal employment opportunities and economic development for all, irrespective of colour and caste​​. Social Justice: The system advocates for equality before the law for all citizens, promoting social justice​. Utilization of Resources: There's an emphasis on the optimal utilization of economic resources for the welfare of the people​​. Stability and Resilience: By prohibiting interest and speculative practices, the system aims to PRINCIPLES OF ECONOMICS All Rights Reserved reduce the risk ofThird Edition bubbles and crises, promoting economic financial © Oxford stability​ Fajar Sdn.​. Bhd. (008974-T), 2013 1– 27  DEMERITS Implementation Challenges: The Islamic economic system's implementation can be challenging due to its moral values base, especially in non-Muslim societies. The calculation and collection of Zakat and Usher can be difficult to verify, which might lead to evasion​​. Interest Prohibition: The prohibition of interest can reduce flexibility in financial markets and may hinder collaboration with other economic systems that are interest-based​​. Regulatory Challenges: A robust regulatory framework is required to ensure Sharia compliance, which can be complex and might pose a challenge in terms of enforcement and adjudication​. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 28  MIXED ECONOMY A Mixed Economic System is a blend of market, command, and sometimes Islamic economic systems. It features both private and public sector involvement in economic decision-making. Characteristics; Public and private ownership of resources Price mechanism and economic plans in making decisions Government helps to control income disparity Government intervention in the economy Co-operation between the government, public and business sectors Government control of monopolies PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 29  Examples of Countries: Mixed economies are common globally. Examples include France, India, and Canada. Some of these countries, like Malaysia, incorporate elements of Islamic economics within their mixed economic system. PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 30