Introduction to Economy

1. MICROECONOMICS
CHAPTER 1:
INTRODUCTION TO ECONOMY – THE
BASIC PROBLEMS IN ECONOMY AND
ECONOMY SYSTEM
MUHAMMAD NAZMI NAWI

2. LEARNING OBJECTIVES
• At the end of the lesson, students should
be able to:
– Understand the concept of economics
– Explain the economic problems
– Identify the effects of production factors
– Discuss the economic system
2

3. • A social science that studies and influences human
behavior
• Economics is the study of what constitutes rational
human behavior in the endeavor to fulfill needs and
wants.
• It is the study of how scarce resources are allocated to
fulfill the infinite wants of consumers
1.0 WHAT IS ECONOMICS?

4. NECESSITIES
Food Clothing Shelter
Luxuries
V.
.

5.  NEEDS: are the basic necessities that a person must
have in order to survive
e.g. food, water, warmth, shelter and clothing
 WANTS: are the desire that people have
e.g. things that people would like to have, such
as bigger homes, Iphones, etc.

6. 1.1 THE ECONOMIC PROBLEM
Unlimited
wants
Scarcity
Choice

7. SCARCITY
 The excess of wants resulting from having limited
resources (land, labor, capital and entrepreneurs) in
satisfying the endless wants of people.
 It is a universal problem for societies – it is not limited to
poor countries.
 To the economist, all goods and services that have a price
are relatively scarce. This means that they are scarce
relative to people’s demand for them.

8.  There are only a limited number of resources such as
workers, machines, factories, raw materials etc. Yet
there are a number of different ways in which they
could be used.

9.  Similarly people only have a limited amount of
money. Yet they have lots of needs and wants to
satisfy

10.  Also the Government has a limited amount of
money!!! However, it is unable to satisfy all its
wants.

11. CHOICE
• Since people do not have infinite income, they need to make
choices whenever they purchase goods and services.
• They have to decide how to allocate their limited financial
resources and so always need to choose between
alternatives.
• People wants are infinite; resources are finite, therefore,
choices must be made.

12.  The basic economic problem arises because
resources are scarce, but human wants are
unlimited.
 Economic choice is deciding between different uses
of scarce resources

13. OPPORTUNITY COST
 It is the benefit that is lost in making a choice between
two competing uses of scarce resources.
 The cost expressed in terms of the next best alternative
sacrificed
 The cost of anything in terms of other things given up or
sacrificed.

14. 14

15. 15

16. • For example, if an individual has £10 to spend, and if
books are £10 each and downloaded music tracks are
£1 each, buying a book means the loss of the benefit
that would have been gained from the 10 downloaded
tracks.

17. 1.2 ALLOCATION OF RESOURCES
 Any individual, organization or nation has to make three
fundamental types of choices about how to allocate the
scarce resources available to it. It has to decide:
1. WHAT TO PRODUCE – food or industrial machinery, books
or newspapers, and so on
2. HOW TO PRODUCE – how many workers will be used, with
what machinery…
3. FOR WHOM TO PRODUCE – will some people get a bigger
share of resources than other? Will some people get so few
resources that they cannot survive, while other live in luxury?

18.  What goods and services should an economy produce?
–should the emphasis be on agriculture, manufacturing
or services, should it be on sport and leisure or
housing?
 How should goods and services be produced? –
labour intensive, capital intensive?
 Who should get the goods and services produced? –
Even distribution? More for the rich? For those who
work hard?

19. 19
1.3 THE FACTORS OF
PRODUCTION
Product
Land
Labour Capital
Entrepreneur

20. .
1. Land [natural resources] – Nature’s items [“gifts of nature”]
A. In the earth - coal, oil, fossil fuels, etc.
B. On the earth – vegetation and water
C. In the atmosphere – sun, wind, and rain
The Four Factors of Production
“Gifts of Nature”
[Land is the starting point of all production.”
“Stuff” from which everything is made.
Water Wind
Sun Fossil fuels

21. .
2. Labor [human resources] {“effort”}
anyone who works [“paid work”]
[Labor is the “brain-power” and
“muscle-power” of human beings]
A. Physical – pro athletes & lumberjacks
B. Intellectual – ministers, doctors & lawyers
“Hired Help”
*Most important resource – 70% of input cost

22. .

23. .
Real Capital v. Financial Capital
FINANCIAL CAPITAL
[stocks, bonds, and money]
REAL CAPITAL
[tools, machinery, & factories]
Can produce something
directly with these
Can’t produce anything
directly with these

24. .
4. Entrepreneurship – starting a new business or introducing a
new product. “Sparkplugs” who introduce the product or start the
new business. He combines land, labor, and capital to
produce products.
Resource payments. The resource owners receive rent [for
the use of their land; wages [for their labor]; interest [payment
for financial capital], and profits [for their entrepreneurial ability].

25. Factors of Production
Land Labor Capital Enterprise
Rent Profit
Interest
Wages
INCOME

26. 26

28. 1.4 TYPES
ECONOMICS
MICRO MACRO

29. MICRO ECONOMICS
 Micro Economics studies how the individual parts of the
economy make decisions to allocate limited resources
 Microeconomics – this is the branch of economics that is
concerned with the behavior of individual entities such as
market, firms and households e.g. how individual prices
are set, how prices of land, labor, capital are set,
inquires into the strength and weakness of the market
mechanism.

30.  Concerned with specific economic units and a detailed
consideration of the behaviour of these individuals units, a
better understanding of the firm’s internal environment can
help us to strengthen the firms existing strengths and turn
weaknesses into strengths in order to develop competitive
advantages.

31.  Microeconomics studies:
– How individuals use limited resources to meet unlimited
needs
– The consequences of their decisions
– The behavior of individual components like industries, firms
and households.
– How individual prices are set
– What determines the price of land, labor and capital
– Inquire into the strengths and weaknesses of the market
mechanism.

32. MACRO ECONOMICS
 Macroeconomics – is the branch of economics that is
concerned with the overall performance of the economy
e.g. Studies the effect of unemployment on the
economic, growth, inflation etc.
 Deals with the economy as a whole, or with the basic
subdivisions or aggregates that make up the economy, a
better understanding of the firm’s external environment
can help us better identify and make better use of
opportunities and turn threats into opportunities into
order to develop competitive advantages.
 It examines the economy through wide-lens.

33. The four main areas of study
1. Growth (increase in total output)
2. Price level (inflation)
3. Labor Markets (unemployment)
4. The balance in the foreign sector (exports/imports,
exchange rates)
• After observing the society as a whole, Adam Smith
noted that there was an "invisible hand" turning the
wheels of the economy: a market force that keeps the
economy functioning.

34. Example
MICRO
• Firm’s reaction to
increased demand for its
product.
• Decision of a worker to
work less due to lower
wages
• The effects on an industry
(group of firms producing
similar goods) due to higher
labor taxes
• Government legislation
aimed at monopolies
MACRO
• Studying the effects on all
firms in the economy due to
a general increase in
demand
• Total hours of labor (and
unemployment)
• Effect on total production in
the economy due to taxes
• Government legislation
aimed at increasing taxes
on profits for all firms

35. 35
1.4
ECONOMY
SYSTEM
MARKET COMMAND MIXED

36. CENTRALLY PLANNED ECONOMY
• Also called COMMAND ECONOMY is one where all economic
decisions are made by the government.
• The government decides what to produce, how it is to be
produced and how it is to be allocated to consumers. This
involves a great deal of planning.
• Planned economies tend to be run by governments who, in
theory at least, want to see greater economic equality
between consumers.

37. • By state planning, goods and services can be produced to
satisfy the needs of all the citizens of a country, not just those
who have the money to pay for goods.
37

38. MARKET ECONOMY
 Also called FREE-MARKET ECONOMY is one where decisions
are made through the market mechanism.
 The forces of demand and supply, without any government
interference, determine how resources are allocated. What to
produce is decided upon by the level of profitability for a
particular product.
 Buyers cast their spending votes in the market place. How
production should be organized is equally determined by
what is most profitable

39.  Firms are encouraged through the market
mechanism to adopt the most efficient methods of
production.
 For whom production should take place, production
is allocated to those who can afford to pay.
Consumers with no money cannot afford to by
anything.

40. MIXED ECONOMY
• In reality, all economies are mixed economies.
• It is one where some goods and services are produced in the
free-market sector of the economy, but others are produced
by the state – i.e. it is mixture of a pure free-enterprise
market economy and a pure command economy.
• Government involvement is deemed essential, since there are
some dangers that will exist if the free market is left to
operate without interference.

42. TUTORIAL QUESTIONS
1. Explain the importance of economy
study.
2. Elaborate the common economy
problems.
3. Discuss the advantages and
disadvantages of every economic
system.