About basic concepts of economics .

1. TOPIC 2 :
BASIC CONCEPTS AND PROBLEMS
OF ECONOMICS

2. 2.1 Production Possibilities Frontier
2.2 Basic Questions of Economics
2.3 Economic Systems
Table of Content

3. 2.1: PRODUCTION POSSIBILITIES FRONTIER
(PPF)
DEFINITION:
The PPF shows the various possible combinations of
goods and services produced within a specified time period
using all resources efficiently.
• PPF is useful to explain the basic economic concepts:
Scarcity, Choices and Opportunity cost.

4. PRODUCTION POSSIBILITIES FRONTIER (PPF) (cont.)
Assumptions:
1. The economy is operating at full employment and
production capacity.
2. Fixed amount of resources.
3. The level of technologies are fixed throughout the
production.

5. PRODUCTION POSSIBILITIES FRONTIER (PPF) (cont.)
Shoes (thousand units)
Purse
12
4
D
C
6
5
A
F
2
4
8
10
14
16
0 1 2 3
A - allocates all its resources to produce shoes.
F - allocates all its resources to produce purse.
The country Kayangan, produces two products – shoes
and purse.
C - produce the combination of 12,000
units of shoes and 2,000 units of purse.
D - produce the combination of 9,000
units of shoes and 3,000 units of purse.

6. shoes
purse
12
4
D
C
6
5
A
F
2
4
8
10
14
16
0 1 2 3
B
E
• Z
• Y
Inside PPF (Point Y)  is
ATTAINABLE however :
WASTE of resources and
inefficiency (unemployment)
ATTAINABLE
UNATTAINABLE
Outside PPF (Point Z)  SCARCITY, then
production is unattainable
Any point along the PPF (A-F)  CHOICES of
production

7. 1. Economic
Growth
5
shoes
purse
12
4
6
When the country enjoys economic
growth, the PPF will bounds outward.
2
4
8
10
14
16
0 1 2 3
However, with natural disasters,
economic growth will decline and the
PPF will bounds inward.
PPF SHIFT

8. 2. Improvements
in Technology
purse
12
4
6
5
Technology increases the production of shoes.
2
4
8
10
14
16
0 1 2 3
Technology increases the
production of purse.
Shoes
PPF SHIFT

9. 3. Population
shoes
purse
12
4
6
5
Increase in population
2
4
8
10
14
16
0 1 2 3
Decrease in population
PPF SHIFT

10. SHAPE OF PPF
purse
4 5
PPF IS CONCAVE
shoes
12
6
2
4
8
10
14
16
0 1 2 3
Increasing Opportunity Cost

11. Law of Increasing Opportunity Costs
As more of a good is produced, the
opportunity costs of producing that
good has increased.

12. SHAPE OF PPF (cont.)
Shoes
purse
12
4
6
5
2
4
8
10
14
16
0 1 2 3
PPF IS CONVEX
Decreasing Opportunity Cost

13. SHAPE OF PPF (cont.)
purse
5
Shoes
12
4
6
2
4
8
10
14
16
0 1 2 3
PPF IS LINEAR
Constant Opportunity Cost

14. 2.2: BASIC QUESTIONS OF ECONOMICS
• S
1. WHAT TO PRODUCE?
 type of goods and services to be produced
2. HOW TO PRODUCE?
 the cheapest (cost effective/ efficient) method of production
3. FOR WHOM TO PRODUCE?
 concerned with the distribution of income among the factors
of production (land, labour, capital and entrepreneur)

15. 2.3 Economic Systems
• An economic system serves as a regulatory system for
controlling different aspects of production and distribution,
including capital, labor, land and other physical resources.
• Mechanism that deals with the production, distribution
and consumption of goods and services in a particular society.
• It addresses the problems of economics like the allocation of the
resources.
• An economic system is the combination of the various agencies,
that provide the economic structure that guides the social
community.

16. CAPITALISM
SOCIALISM
MIXED
ECONOMY
TYPES OF ECONOMIC SYSTEM
ISLAMIC
ECONOMY

17. CAPITALISM
An economic system where individuals and sellers
make economic decisions using a price mechanism.

18. CHARACTERISTICS
• Private ownership of resources
• Economic freedom
• Encourage Competition
• Limitation of Government intervention
• Price system

19. Advantages
 Production according to consumers’ needs
 Economic freedom
 Efficient utilization of resources
 Variety of consumer goods
 Enhanced trade, business and R&D

20. Disadvantages
• Unequal distribution of wealth and income
• Inflation and high unemployment rate
• Lack of social welfare
• Wasteful competition
• Misallocation of resources

21. SOCIALISM
An economic system which all the economic decisions
are made by the government or a central authority

22. • Public ownership of resources
• Central planning authority
• Central control and ownership
CHARACTERISTICS

23. Advantages
 Production according to basic needs
 Equal distribution of income (wealth)
 Improved allocation of resources
 Emphasized on social welfare

24. Disadvantages
 Lack of incentives and initiatives by
individuals
 Loss of economic freedom and consumer
sovereignty
 Absence of competition
 Waste of economic resources

25. ISLAMIC ECONOMY
An economic system which combines both capitalism
and socialism and guides by al Quran and Hadith

26. CHARACTERISTICS
• All resources are owned by God
• Price mechanism and government intervention are
limited
• Fair distribution of wealth
• Prohibition of interest
• Freedom of economic enterprise

27. Mix Economic Systems
Any economy in which private corporate enterprises
and public sector enterprises exist side-by-side,
and decisions taken through market mechanism are
supplemented by some form of partial planning.

28. Advantages
 The government intervenes to prevent
undue concentration of economic
power, and monopolistic and restrictive
trade practices.

29. 1. In your opinion, what do you think the
Malaysian economic system is?
Class Exercise 2