Central Problem of Economics

1. Introduction to Economics

- Economics is the study of how scarce resources are allocated to the production of goods and services to maximize the unlimited wants human beings desire

- With the knowledge of economics, - Individuals maximize satisfaction and minimize expenses- Businesses allocate resources more efficiently, maximizing profit- Government provide better standard of living for people

- Microeconomics focuses on small econ groups like individual households, firms and industries and how they make decisions related to production and profit- Macroeconomics focuses on a wider view of the economy, emphasizing issues faced by the whole economy, like inflation, unemployment and econ growth

2. Scarcity Choice and Resource Allocation

- Scarcity refers to the situation where supply < demand- Limited resources in these areas:

- Natural Resources like coal- Financial constraint like money- Factors of Production like land, capital and labour- Time and energy

- Opportunity cost is the gain you will have if you chose the opposing factor instead of the chosen factor

3. Basic Economic Problems

- Goods that should be produced [should take into account consumer sovereignity (what consumers want)]

- Method of production and amount to produce [should take into account economic efficiency (cheapest method of production)]

- Target consumers

4. Application of Concept of Opportunity Cost

- Production Possibility Curve (PPC)- It shows the possible combinations of 2 goods that an economy can produce at a

certain time given a limited amount of resources and at a certain level of technology, assuming that all factors of production are fully employed and the economy can only produce two goods at any time

- Points on the PPC represents that the resources are fully utilized and there is full employment when any of those combinations of goods are chosen

- Combinations within the curve are attainable with the resources and technology available, but these combinations do not fully utilize resources nor at full employment

- Combinations out of the curve are unattainable with the resources and technology available, and can only be attained when there is more resources or a higher level of technology to produce

- Concave PPC – Increasing Opportunity Cost (In order to produce an additional unit of Good X, more units of Good Y has to be sacrificed) (Generally the case because as you produce more of one good, the tradeoff increases due to external factors)

- Straight-line PPC – Constant Opportunity Cost (Both goods are perfect substitutes of each other; they are equally desirable)

- Convex PPC – Decreasing Opportunity Cost (In order to produce an additional unit of Good X, less units of Good Y has to be sacrificed)

- Movement along the PPC = relocation of resources in terms of combination of goods produced

- Shift in PPC = change in production capacity due to an advancement in technology, increased efficiency in production and increased availability of resources

5. Economic Efficiency

- For this to occur, there must be no wastage of resources and full employment of resources

- Vilfredo Pareto (1848-1932) stated the Pareto optimality, a situation when economic resource and output have been allocated in such a way that no one can be better off without making someone else worse off

- Economic efficiency can be divided into 4 groups:

- Productive Efficiency (Goods are produced at lowest cost possible)

- Allocative Efficiency (Economy is at full employment and fully utilized all resources)

- Technical Efficiency(Least amount of input to produce a given amount of output)

- Social Efficiency(Social marginal benefit = Social marginal cost)

6. Economic Systems

Free Market Economy Centrally Planned Economy

Mixed Economy

Examples USA, Canada DPRK, Cuba Singapore, Malaysia

Government Intervention

None Yes Partial intervention

Consumer Sovereignity (Consumer is King)

Yes No Partially

Unemployment Exists Does not exist Exists

Mobility of labour

Geographical (change location of job)

Occupational (change job)

None Some

Vertical(New job requires diff set

of skills)

Horizontal (New job requires same set of skills)

Presence of Competition

Strong None Strong, but not as strong as F.M.E.

Level of Income Disparity

High as there is no govt intervention to ensure minimal diff between rich and poor

Little Lower than F.M.E. but higher than C.P.E.

Other Information Technology advancements and Globalisation made many C.P.E.s to adopt market-based economies

Govt ensure no exploitation of consumers with the existence of monopolies in the market (May implement price ceiling)