1.2 ECONOMIC DEFINED Economics: a) K.E. Case and R. C. Fair view that economics is a study of how people use their limited resources to try to fulfill unlimited wants and involves alternatives or choices. b) David N. Hyman defined economics as a study of how scarce resources are allocated among alternative uses c) Economics is a science that studies human behavior as a relationship between ends and scarce , which have alternative uses, according to L. Robbins
Microeconomics deals with individual units; a household, a firm and an industry. Studies the interrelationship between these units to determine the pattern of distribution of goods and services.
Macroeconomics looks at the economy as a whole. Its deal with the economic behavior of aggregates; national output, overall price level, inflation, unemployment.
Scarcity : The core problem Choice Opportunity cost Danny has RM5 and he would like to buy two things; a book and a pen which cost RM5 each (unlimited wants and limited resources). Danny has to choose either to purchase book or a pen which would satisfy his needs (choices) . If Danny choose the book, then the pen is the opportunity cost . 1.4 SCARCITY, CHOICES AND OPPORTUNITY COST
Movement along the PPF represent the opportunity cost
That mean increase in producing a particular product can only possible with reduce production of another product.
Calculating the Opportunity Cost
Table 1.2: Opportunity Cost (per bushels of extra wheat per year)
The opportunity cost from point A to B, B to C, C to D and D to E are increasing, implying the law of increasing opportunity cost.
It also represented in the increasing steepness of the slope and the concave shape of PPF.
End Point on PPF Opportunity cost (bushels of corn) A to B (700 – 650) / (200 – 100) = 0.50 B to C (650 – 510) / (380 – 200) = 0.78 C to D (510 – 400) / (500 – 380) = 0.92 D to E (400 – 300) / (550 – 500) = 2.00
Shifts in the Economy’s Production Possibilities Frontier
Computer - As we move along the production possibility curve with increasing computer, constant unit of food must be forgone 0 5 10 15 20 30 20 15 10 5 PPF A B Food C D CONSTANT OPPORTUNITY COST : A to B = [(20 – 15)/(10 – 5)] = 1 C to D = [(10 – 5) /(20 – 150)] = 1
Computer -As we move along the production possibility curve with increasing computer, less and less food must be forgone 0 PPF 15 10 7 2 10 30 B A Food C DECREASING OPPORTUNITY COST : A to B = [(15 – 10)/(10 – 2)] = 0.625 C to C = [(10 – 7) /(30 – 10)] = 0.15
1.7 ECONOMIC SYSTEMS Free Market Economy Mixed Economy Planned Economy ECONOMIC SYSTEMS
Economic Systems Free Market Economy Planned Economy Mixed Economy
Figure 1 illustrated the Production Possibility Frontier (PPF) for the allocation of resources in Malaysian banking sector. Assumed that the Malaysian banking sector only consist of two types of banking product/services that are the conventional banking and Islamic banking. Example of PPF analysis
Example of PPF analysis End Point on PPF Opportunity cost (Ringgit of conventional outputs per one Ringgit of Islamic banking output) (i) A to B (ii) B to C (iii) C to D
Scenario A : Malaysian is currently producing at Point B. The government is encouraging the development of Islamic banking , thus, advising all the banks in Malaysia to divert more resources to Islamic banking from conventional banking. If all the banks follow the government’s advice, sketch a PPF diagram to illustrate this scenario. Mark a possible new production combination (point) as “E”. Give your explanation.
Scenario B : The government successfully invites foreign Islamic banks to invest in Malaysia by opening branches here. What happen to the PPF? Mark a new possible production point as “F”. Give your explanation.