6/9/2015

DEFINITION

CHAPTER 1

Economics defined as a study of how

people choose to use theirs limited
resources to satisfy their limited wants

Economics is concerned with the use of

limited resources to satisfy the unlimited
wants of the society and it involved choice.

Introduction to economics

Definition of economics
Economic concepts
Production Possibilities
Curve (PPC) with calculation

OF ECONOMICS

Basic economic problems

Types of Economics system

FACTORS

The discipline of economics is divided into two main branches namely

microeconomics and macroeconomics

macroeconomics

microeconomics
Is the study of individual
units in the economy. It
focuses on the price theory
, production theory and
distribution theory.

Example: pricing decisions of

firms within or among
industries, purchasing
decisions of consumers of a
particular good, government
intervention in the pricing a
goods and services and etc

Factors of
production

Lands include all resources found in the sea and on

the land.
In economics ,land include:
Raw materials such as copper, timber and rubber.
Landscape such as mountains, valleys and hills
Ports such as natural harbour.
Climatic conditions such as rain and snow.
Geographical location such as continents and
islands.

LABOR

Labor represents the services of human beings in

the production of goods and services. Both physical
and mental efforts are included in this category.

Cont..
CAPITAL

ENTREPRENEURSHIP

Explanations

LAND

Is the study of economy as a

whole or aggregate. It focuses on
national income, general
employment, general price level
etc.

Example :
inflation,unemployment,eco
nomic slowdown or growth
and etc

OF PRODUCTION

BASIC ECONOMIC
Capital is equipment, factories, machines
and tools that man creates to help them
produce goods and services. The
productivity of capital is limited by the
state of technology.

Entrepreneurship is the human ability and

talent to develop products and processes and to
organize factors of production to make goods
and services available. They undertake
necessary to get the process of production
started and make the decisions relating to the
use of inputs.

SCARCITY

CHOICE

CONCEPTS

Scarcity occurs when a societys wants exceed the ability of the

economy to meet those wants. Humans wants are virtually
unlimited but at any one time the world can only produce a
limited amount of goods and services. This is because the
world has only a limited amount of resources.

Individual, business and society must make decision to choose.

We must choose among many alternative. A choice must be
made due to the scarcity of resource that we faced.
Example : as an individual we must choose between job and
college education, between saving and consumption, or
between going to a movie and studying. Government must
choose between more spending on defense or more spending
for public education

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THE

CONT.
Making a choice is not easy task. Each time you choose to
use resources for a purpose, it means you must forgo some
other purpose. Making a choice involves a sacrifice. In
economics that is what we mean by the term opportunity
cost. Opportunity cost is the best alternative(good or service)
sacrificed for a chosen alternative which gives more
satisfaction

OPPORTUNITY Examples: suppose you have to choose between buying a

new car and going for a vacation. If you decided to buy a new
COST
car, the opportunity cost of buying a new car is the lost of
going for a vacation. If you decide to go for a vacation,the
opportunity cost is the lost of buying a new car.

Cont.

HOW TO
PRODUCE

FOR WHOM TO
PRODUCE

BASIC ECONOMICS PROBLEMS

WHAT AND HOW

MUCH TO
PRODUCE

What to product refers to the type of product

to produce. Decisions must be made about
what to produce with the limited resources
available.
How much to produce refers to the quantity
of goods and services to be produced.
It usually depends on the demand from
consumers or the population of the society
and resources available in the country.
Societies have to decide what to produce
and also how to produce to ensure that
scarce resources are utilized properly and
efficiently

COMPARISON : MICROECONOMICS AND MACROECONOMICS

It refers to the technique or method of
producing a product.
It involves mixing technology and scarce
resources in order to produce the wanted
commodities.
Method of product can be either capitalintensive or labor-intensive.
This decision is important to minimize the
use of scare resources and to achieve
maximum possible output of goods and
services.

This means that how the products are to be

distributed among the society.
Is it to those who are willing and able to pay
or those in need?

PRODUCTION POSSIBILITIES CURVE (PPC)

VIDEO:PRODUCTION POSSIBILITIES
CURVE.MP4

MICROECONOMICS

MACROECONOMICS

The study of smaller scope of

economic activity.

The study of bigger scope of

economic activity

It examines the functioning of

individual industries and behavior of
individual decision making units.

It focuses on the determinants of

total national output and aggregate
decision making.

It deals with household income only. It deals with the whole national
income
It focuses on the factors that
influence the production of a
particular of particular product
and he behavior of individual
industries.

It focuses on the determinants of

national output.

It analyses individual prices of

goods and services.

It analyses the overall general

price level.

It given attention to the specific

units making up the various
aggregates.

It concerns with the obtaining

overview of general outline of the
structure of economy and
relationship among the major
aggregates which constitute the
economy.

BASIC ASSUMPTION

OF

PPC

products we assume that our

economy is producing is producing only 2
goods (i.e. corn and cloth)
Efficiency - Operating in full efficiency (full
employment, full production capacity)
Fixed resources- the available supplies of
the factors of productions are fixed in both
quantity and quality.
Fixed
technology-technology does not
change during our course of analysis.
Two

Used

to explain the basic economic

concept:
scarcity,
choices
and
opportunity

The

PPC shows the various possible

combinations of goods and services
produces within a specified time
period with all its resources fully
and efficiently employed.

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Explanation based on diagram above

are as follows:
Line passing through the points is PPC
which
separates
attainable
from
unattainable
Points inside the PPC shows waste
of
resources,
inefficiency
and
unemployment problem since the
product has not reached maximum
level.

PRODUCTION POSSIBILITY CURVE (PPC)

POSSIBILITY

CORN

CLOTH

20

18

15

11

Point outside the PPC shows the main basic economic concept: SRACITY. At
this point with limited resources and technology, unable to produce.
Point along the PPC shows the second concept: CHOICES. Such as point a,
b, c, d, e) individual will make choices among various possible combinations of
2 goods to give more satisfaction.
Movement from one point shows the third concept: OPPORTUNITY COST.
(Such as point b to c) involves an opportunity cost having less of one good to
get more of another.

FACTORS THAT INFLUENCE THE SHIFT

OF PPC

Factors that Influence the Shift of PPC

Population 3.

Shift to the right production has increased

Good y

PPC shift outwards- because growth in eco. Tehn improv.,etc

Sewing Machine
16
14

Increase in population

12

Good x

Shifts to the left production has decreased

10
8

Good y
PPC shift inwards- because natural disaster, decrease in resources, etc

Decrease in population

4
2
0

Butter

Good x

THE SHIFT OF PPC

Technology increases the production of good Y only

SHIFTS

OF

PPC HAPPEN

ONLY

Economic growth - An increase in the total output

due to the availability of new resources, machinery
and increase in productivity. In other hand,
expansion of our production possibilities.
Improvement in technology -an increase in a
particular output due to new innovation, application
of new and efficient techniques of production or the
development of new and better ways of producing
goods and services.
Population An increase in the population can also
lead to the shift of production possibility curve to
right. More population can increase in the production.

Good y

Good x
Technology increases the production of good X only
Good y

Good x

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SHAPE OF PPC

4 BASIC ECONOMICS QUESTIONS/PROBLEMS

WHAT to produce?

i.

20

Knowing that resources are limited a producer

has to decide what to produce.

How to mix technology and resources to produce

goods and services.

22

What is the most cheapest or economical

way to produce?
One has to decide whether to use capital
(machine) or labor (human) intensive.
The most important thing is to minimize
the cost of production

For WHOM to produce?

iv.

ECONOMIC SYSTEM

Islamic economic system

4.

Socialist economic system

2.

Command economy
The govt. owns and governs economic resources
Main objec. is to make sure that the people get whatever
they need

Economic inputs public and private ownership

Economic run by both parties
Govt. and private sectors discuss economic problems
24

23

Free market/laissez-faire economic system

Everyone makes their own decision
No govt. intervention

It refers to how goods and services are distributed

among society.
Who is the market? Who is going to get the goods
produced? Should everyone get an equal share?
Is it for the high-income earners or for the low/
idle income earners.

Mixed economic system

3.

Capitalist economic system

1.

depends on the demand from consumers and also

the availability of resources.

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HOW many/when to produced?

iii.

HOW to produce?

ii.

Do you want to produce military goods or

consumer goods?
Should we produce small cars or large
cars ?
Produce more public transportations
(buses, commuters, LRT, monorail) or
private vehicles?

Main objec. achieve Al-Falah

success in the world now and hereafter
Look at economic activities from materialistic and spiritual
aspect in this world and hereafter

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CAPITALISM
CHARAC:-

1. Prod. accord.
to need
(variety of
goods)
2. Economic
freedom
3. R & D

1. Prod. Based
on needs
2. Equitable
income and
wealth
distribution
3. Better
allocation of
resources
4. Social welfare

MIXED
1. Public and
private
ownership
2. Private and
govt.
economic
planning

CAPITALISM
Demerits

Basic philosophical foundation of Islamic Economic

System

iv.Concept

ii.

27

i.

relationship between man and Allah (habluminallah

relationship among mankind (habluminannas)

Believing that Allah is the creator and most powerful

of Ukhuwwah

Concept of brotherhood; love, respect and be responsible to

each other.

Concept of Tazkiyyah

iii.

Purification of man through giving zakat and sedekah

(sharing of wealth)

How to solve basic economic problems?

1.

of Khalifah

Man is servant of Allah and crated as trustee to prosper

land and to be in servitude to Allah by Islamic Law
(Syariah)

v.Concept

Concept of Rububiyyah

ii.

MIXED

28

Believing there is only Allah.

The belief of:-

SOCIALISM
1. Lack of
incentives &
initiative by
individuals
2. Loss
economic
freedom and
consumer
sovereignty
3. Absence of
competition

Basic philosophical foundation of Islamic Economic

System

Concept of Tauhid

i.

1. Inequality
distribution of
income
2. Lack of social
welfare
3. Misallocation
of resources
4. Social cost

26

1. Public
ownership
2. Central
planning

25

Merits

SOCIALISM

1. Private
ownership
2. Freedom of
enterprise
and choice
3. Consumers
sovereignty
4. Minimum
govt.
intervention
5. Price system

What and how much to produce?

goods produce must be Halal (in accordance to Islamic
classification of goods)
Personal interest must not exceed public interest

Classification of good and services

Hierarchy of goods in Islam:-

1.Dharuriyyah

2.

How to produce?
Most cost effective and efficient method

2.Hajiyyah

For whom to produce?

The poor should come first (but the rich should not be ignored)

3.Kamaliyyah/Tahsiniyyah

3.

goods

Basic goods
Must have to live food, shelter, clothing

goods

Comfort goods
Makes life more better car, television, refrigerator

goods

Luxury goods
Without it live can still go on comfortably bungalow, BMW

4.Tarafiyyah

30

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goods

Not permissible (Haram); extravagant and wastage

Golden cutlery, golden bed