CHAPTER 1 : INTRODUCTION

1. DEFINITION OF ECONOMICS 2. SCOPE OF MACRO & MICRO3. BASIC ECONOMICS CONCEPTS :

SCARCITY, CHOICE, OC4. ECONOMIC SYSTEM

DEFINITION OF ECONOMICS• Study of how society chooses to allocate its

scarce resources to the production of g & s in order to satisfy unlimited wants – Irvin B. Tucker

• Science which studies human behaviour as a relationship between ends & scarce means which have alternative uses – L. Robbins

• Study of man in everyday business life – Alfred Marshal

• Social-science study as it deals with human behaviour in making the decision on how people use scarce resources in fulfilling their unlimited wants - Economist

2 problems in economya) Productive resources which to produce g

& s are limitedb) Human wants for g & s are unlimited

Economy has to decide how to use these resources efficiently in order to attain the max possible satisfaction for the members

DEFINITION OF ECONOMICS

DIFFERENCES :CONVENTIONAL VS ISLAMIC

Conventional IslamicEco obj – to reach max o/put with the use of scarce resources

Tends to reach the same obj as conventional but constrained by the islamic ethical philosophy

Consumer – max satisfactionProducer – max π

Through 4 concept ie tauhid, rububiyyah, khalifah, tazkiyah

DIFFERENCES : MICRO VS MACROECONOMICS

Microeconomics MacroeconomicsPart of economics that studies indv units or economic elements in the process of DMie focus on small economic units

Studies the economy as a whole or deals with the aggregateSeeks to understand the big picture rather than the detailed of indv choice

↑ in price of sugarProduction of canned pineapples

National incomeEconomic growthInflation

ECONOMIC CONCEPTS

a) Scarcity – the condition in which human wants are forever greater than the available ss of time, goods & resources

b) Choice – since factor of prodn are limited, choices must then be made between various g & s to satisfy the potential dd

c) Opportunity Cost (OC)– the best alternative sacrificed for a chosen alternative – real cost forgone for choosing the next best alternative

Scarce – resourcesResources – basic inputs to produce g & s

– factors of prodn – 4 categories ie land, labour, capital, entrepreneur

i) Land – any natural resources provided by natureeg : categories : renewable & nonrenewablecharacteristics : immobile & limited in ss

ECONOMIC CONCEPTS

ii) Labor – mental & physical capacity of workers to produce g & seg :characteristics : greater mobility than land but less mobile than capitalmeasured by : Σ of people, skills, qualitydiffer between nation

iii) Capital – physical plants, machinery, equipment used to produce other goodsmoney ? Capital or not

ECONOMIC CONCEPTS

iv) Entrepreneur - skill & creative ability of indv to

seek profits by combining resources to produce innovative products

- a motivated person who seeks π by undertaking such risky actvt as starting new bus, creating new product or inventing new ways of accomplish tasks

ECONOMIC CONCEPTS

3 BASIC ECONOMIC PROBLEMi) What to produce

- know that resources are scarce in relative to human wants- economy must choose among diff alternative combinations of g & s

eg : more good x, less good yii) How much & how to produce

- how – choose the best efficient methodseg : K intensive @ L intensive

- how much – determine the quantities needed by society at particular time

iii) For whom to produce- society must have a method to decide who will be rich & famous ( poor & unknown)

PRODN POSSIBILITIES CURVE / FONTIER

• To measure OC• Curve showing the combination of max

amount goods produced by fully utilizing the limited resources

• Various possible combination of 2 goods that the economy can produce in a given period of time with its available amount of resources & a certain level of technology

• Ceteris paribus – other variables remain constant

ASSUMPTIONS PPCi) Fixed resources

- qt & Q off all resources i/puts remain unchanged BUT resources from prodn of 1 o/put to another are allowed to shift- no of L are fixed BUT can be transferred to produce fewer consumer goods & more capital good

ii) Fully employed resources- economy operates with all of its factors of prodn fully employed & producing the greatest o/put possible w/out waste or mismanagement

iii) Technology unchanged- body of knowledge applied to how goods are produce

TYPES OF PPC MODELa) Straight line PPF (extreme case)

- constant OCb) Bowed outward PPF (general case)

- increasing OC- more good y produce, more good x foregone

• Any movement along curve mean more of one product is producing only by producing less of the other product

• Efficient - all points along PPC are max possible combination of goods

• Unattainable - society prefer more goods but economy cannot reach the no because of limited no of resources & techno

• Inefficient – wasteful of resources / unemployment

FACTOR THAT INFLUENCE THE GROWTH OF PPC

• Econ growth – ability to produce greater levels of o/put – PPC will shift outward

• Sources of econ growtha) Changes in resources / factors of prodnb) Techno progress ie dvlpmt of new & better waysi) Advancement in both product (3 types)ii) Advancement in one product only (2 types)

ECONOMICS SYSTEM• System or method through which an economy

is operated top organize prodn & provide answer to 3 basic economic problems

• How particular society distributes its resources to produce g & s demanded by a population

• 4 types of economic systemsi) Capitalistii) Socialistiii) Mixediv) Islamic

CAPITALIST (Laissez Faire)

• Free market with limited or not govt intervention

• Private ownership of choice / enterprise• Free market forces & the importance of P

mechanism• π oriented / max π• High degree of competition• DM is decentralized

CAPITALIST (Laissez Faire)

Advantages DisadvantagesPromote competition Failure in provide

public goodEncourage techno growth

Economic instability

Emphasize indv welfare

Income inequality

MonopolyExternal effect

SOCIALIST (Centrally Planned Economy)

• Centralized economic planning• No private enterprise• Public interest• Social / public ownership

Advantages DisadvantagesEfficient in prodn Making wrong DMLow cost Lack of motivation &

insentivePromote economic stability

No improvement in techno

No distribution effect

MIXED (Capitalist + Socialist)

• Coexistance of the public & private sector• Can improve income, L forces allocation• Govt regulation & control of private sector

ISLAMIC

• Based on Quran & Sunnah• Concept of Khalifah, Ukhuwwah, Tazkiyah• Fair competition – balance between

private* public ownership• Emphasize more on moral• Limited freedom – avoid forbidden actvt• Need govt intervention ie govt & private

work together to achieve al-Falah

END OF CHAPTER 1