UBEA 1013 ECONOMICS

Ms. Siti Rohaya Mat Rahim

Consultation Hours:
Monday : 10 am - 12 pm
Thursday: 2 pm - 4pm
Room : H203
Email: rohaya@utar.edu.my
1
2
3
4
Christopher Sims, Nobel Laureate in Economics, 2011.

Economics, at its best, is a set of ideas and

methods for the improvement of society. It is
not, as so often seems the case today, a set of
ideological rules for asserting why we cannot
face the challenges of stagnation, job loss and
widening inequality.

5
 CHAPTER 1:
ECONOMICS

6
 CHAPTER OUTLINE

1.1 Why Study Economics?

1.2 Economics Defined
1.3 The Scope of Economics
1.4 Scarcity, Choices & Opportunity cost
1.5 Basic Economic Problems
1.6 Production Possibility Frontier (PPF)
1.6 Economic System

7
 1.1 WHY STUDY ECONOMICS?

To learn a way of thinking

To understand the society
To understand global
affairs
To be an informed voter

8
 1.2 ECONOMIC DEFINED

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

9
1.3 THE SCOPE OF ECONOMICS

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.

10
Branch of Economics
urban and regional economics
econometrics
finance
comparative economic systems
economic development
labor economics
international economics
public economics
economic history
law and economics

the history of economic thought

neuroeconomics
agricultural economics
environmental and natural resource economics
fisheries economics
welfare economics
behavioral economics
mathematical economics
health economics
11
etc
QUESTION

Should economics be considered a science?

12
Careers related to economics
Accountancy
Banking
Insurance
Business Intelligence
Market research
Social research
Journalism
Public sector
Management consultancy
Human Resource Management

Economic Adviser
Financial Manager
Stock Broker with insurance company
Research Analyst
Research Assistant
Actuarial Analyst
Finance Analyst

13
Types of Work Entered

Business & finance professionals or 43%

associate professionals
Commercial, industrial, public sector 15%
managers

Administrative, clerical, secretarial 15%

positions

5%
Media, sales, advertising, PR etc

Others, inc. teaching, IT, health, 22%

retail, uniformed services, etc.

Figures from HESA(www.prospects.ac.uk/links/wdgd)

14
 1.4 SCARCITY, CHOICES AND
OPPORTUNITY COST
Scarcity:
The core problem
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).
Choice 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.
Opportunity
cost
15
Scarcity
Human wants are always greater than the
available resources.
Society has limited (scarce) resources (factors
of production), and therefore cannot produce
all the goods and services people wish to
have.
Economist has classified the factors of
production into four groups namely Labour,
Capital, Land and Entrepreneur.

16
 Choice

Faced with scarcity, people must make

choices cannot get all.
Choice involves sacrifice (opportunity costs).
Choices made by any society to decide on
what to produce, how to produce and for
whom to produce.

17
Opportunity cost

Economists use the term of opportunity cost

to emphasize that making choices in the face
of scarcity implies a cost.
The opportunity cost of any action is the
second best alternatives that has to forgo for
another choice which gives more satisfaction.

18
Economists encourage us to consider the
benefits and costs of our decisions.
Karens Decision-making Grid
Alternatives

Sleep late Wake up early to study

Benefits Better grade on test

Enjoy more sleep
Teacher and parental approval
Have more energy during the day
Personal satisfaction

Decision Sleep late Wake up early to study for test

Opportunity cost Extra study time Extra sleep time

Benefits forgone Better grade on test Enjoy more sleep

Teacher and parental approval Have more energy during the day
Personal satisfaction

19
Thinking at the Margin

Options Benefit Opportunity Cost

1st hour of extra Grade of C on 1 hour of

study time test sleep

2nd hour of extra Grade of B on 2 hours of

study time test sleep

3rd hour of extra Grade of B+ on 3 hours of

study time test sleep

20
1.5 BASIC ECONOMIC PROBLEMS
What to Produce
- Every society has to take a fundamental decision
of what goods and services to produce because of
the limited resources.
How to Produce
- There are alternatives techniques of producing
goods and services, and firm will choose the
cheapest method of production-minimizing cost.
For Whom to Produce
- This refers to distribution. Distribution of economic
benefits depends on the distribution of income.

21
South Africa
1. What to Produce?
Most of South
Africas GDP comes
from privately owned
businesses based on
mining, agriculture, The South African
services, and government has taken
manufacturing. control of housing,
business development,
education, basic
services, and
healthcare in the
country in an effort to
remedy the inequitable
distribution of
resources during
apartheid.
South Africa
2. How to produce
In the developed
section, private
businesses and
consumers make
production decisions
based on market
principles and
international economic
standards.

Social services are

administered by a
number of government
departments.
South Africa
3. For whom to produce?

The private sector

produces goods and
services for domestic
and international
markets based on the
market price system.

The government social

services sector
produces public goods
and services based
upon the needs of the
population throughout
the country.
 Assumptions
for PPF

Full employment
Fixed resources
Technology constant

25
 1.6 PRODUCTION POSSIBILITIES
FRONTIER (PPF)
The curve that shows all of the possible
combinations of 2 goods (products) or services that
can be produced within a specified time with all its
resources fully and efficiently employed.
The economy can produce at
any combination on or inside
the curve (C and H).

Point outside the curve is

not attainable (F).

26
Production Possibilities: Inside, On, or
Outside the Frontier

Point on the curve (C): Attainable and

Efficient because all resources are fully and
efficiently employed.
Point inside the curve (H): Attainable and
Inefficient because resources are not fully
and efficiently employed.
Point outside the curve (F): Unattainable
because of limited resources.

27
 Production Possibilities Frontier (PPF)
Sewing machines
(thousands units)
Z
A Point A, B, C, D, E
Unattainable
B and F is
C attainable and
Y efficient
Point Y is
D attainable but
Attainable inefficient
Point Z is
E unattainable

F Butter
(thousand kg)
0 1 2 3 4 5

28
 Calculating the 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.

29
 Table 1.2: Opportunity Cost (per bushels of extra wheat per year)

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

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.

30
 The Shape of PPF
The shape of PPF depends on the
opportunity costs:

Increasing opportunity cost (PPF is concave)

Constant opportunity cost ( PPF is linear)

Decreasing opportunity cost (PPF is convex)

31
Increasing Opportunity Cost
(PPF is concave)

As we move
along the
production
possibility curve
with increasing
computer, more
and more food
must be
forgone
INCREASING OPPORTUNITY
COST:
Q to R = [(11 10)/(6 5)] = 1
T to V = [(8 5) /(10 9)] = 3

32
 Constant Opportunity Cost
Food (PPF is linear):
-As we move along
30
the production
possibility curve with
20 A increasing computer,
15
B PPF
constant unit of food
must be forgone
10 C

5 D CONSTANT OPPORTUNITY
COST:
A to B = [(20 15)/(10 5)] = 1
0 5 10 15 20 C to D = [(10 5) /(20 15)] = 1
Computer

33
 Decreasing Opportunity Cost
Good Y
(PPF is convex):
-As we move
along the
production
A
15 possibility curve
10 B PPF with increasing
good X, less and
7 C
less good Y must
be forgone
Good X
2 10 30 DECREASING OPPORTUNITY
0 COST:
A to B = 15 10/10 2 = 0.625
C to C = 10 7 /30 10 = 0.15
34
Shifts in the Economys Production Possibilities
Frontier

35
 1.7 ECONOMIC SYSTEMS

ECONOMIC
SYSTEMS

Planned Economy
@ Mixed Economy Free Market Economy

Command Example: @ Capitalism

Economy Example: United
India & Malaysia
@ States

Socialist
Example: Cuba,
Soviet Union &
North
36 Korea
A Classification of Economic
Systems
U.S., Canada,
Cuba China, former
Soviet Union Western Europe
Pure Pure
socialism capitalism

France, Mexico, Hong Kong

Sweden, Latin
America,
Israel
Japan

37
Mixed Economy In Between
Economic Systems
Free Market Planned Economy Mixed Economy
Economy
Private ownership of Public ownership of Public and private
resources ownership of
resources Central planning resources
Price mechanism authority Price mechanism and
Freedom of economic plans
Price mechanism of
enterprise and choice less importance Selective government
intervention
Consumers Central control and
Government control
sovereignty ownership of monopolies
Laissez-faire No competition Free competition
Free competition

39
Capitalism
Capital (resources) are privately owned by
individual citizens, there is a right private
property.
The motivating force of Capitalism is self
interest.
Price systems are used in the market, which
means price determines everything.
Capitalism
The distribution of goods in a
capitalistic society is to each
according to his/her quantity and
value of contribution to society.
This distribution scheme causes an
unequal spread of income and
wealth.
Many of the values of Capitalism are
founded on the ideas of Adam Smith.
Smith, the author of The Wealth of
Nations, came up with the idea of
the Invisible Hand. This meant having
competitive markets, price systems
and the distribution of good and
income to the strongest competitors.
Capitalism
An economic system characterized by
private ownership of businesses and
marketplace competition
The government is concerned about its
people and takes care of those who
cannot care for themselves
The political system is a democracy
with leaders elected by the people
The United States and Japan are
examples of a Capitalist Economy
Socialism
Capital (resources) are owned by society. It
advocates the collective or government
ownership of goods. There is no right to
private property in this system. In this system
means of planning, producing, and distributing
goods is controlled by a central government.
The motivating force of Socialism is altruism
and government commands.
The distribution of goods in a socialist society
is from each according to ability and to each
according to need.
 Socialism
The most influential of socialist
theory is derived from Karl Marx
and Friedrich Engels, who
marked Socialism as the stage
that would end Capitalism and
precede Communism.
One of the main principles from
the Marxist concept of socialism
is that the class system could
be eliminated, the state
wouldnt be as needed and that
people would no longer be
shaped by their wage slavery.
Karl Marx: Economic Revolutionary
A New View of Economics
Marx lived during Industrial Revolution
Argued factory owners used workers as resource
exploited workers by keeping wages low to increase
profits
workers would rebel, establish classless society
Wrote The Communist Manifesto (with Friedrich
Engels), Das Kapital
Socialism
Increased government involvement in
peoples lives and the economy
The main goal is to keep prices low for
all people and to provide employment
for many
The government runs key industries
and makes economic decisions
More social services for all and free or
low cost medical care
Canada, Germany, Sweden, Australia
and Great Britain are all examples of
socialist economies
 Communism
The government runs everything
(Totalitarian government)
Only one political party, the Communist
party, runs the government
All people able to work are assigned
jobs there is virtually no
unemployment
The government assigns housing,
schools, and occupations
There is little to no economic freedom
Cuba, North Korea, and China are
examples
Command Economies Today
North Korea
Communist North Korea
used resources for
military, not necessities
built large army; nuclear
weapons program
In 1990s and early 2000s,
millions died of hunger,
malnutrition
In 1990s, production
decreased and economy
shrank
Since 2003, some market
activity allowed
 Capitalism vs. Socialism
Socialism
Capitalism
In a recent Newsweek study, the top
It is roughly estimated that 100 countries were ranked according
to 5 categories. This research found
about 78% of countries that the socialist nations of Sweden
follow capitalistic principles. and Norway were ahead of the US.
http://www.newsweek.com/2010/08/15/in
Some of the most
teractive-infographic-of-the-worlds-b
economically successful est-countries.html
countries practice a form of
capitalism.
"Socialist societies have
been dramatically
outperformed by any
number of successful
capitalist countries,
especially in Asia.
Capitalism vs. Socialism
Capitalism
Some of the largest
criticisms of capitalism
Socialism
One of the main arguments
against socialism is that it limits
the prosperity of its citizens.

are the uneven One of the major problem of

socialism is the shift to extreme
distribution of wealth, government control and
imperialism, class division dictatorships.

and the tendency of

market monopoly.
Environmentalists argue
that capitalism requires
constant economic
growth, which will deplete
the worlds resources.
How do They Compare Statistically?
United States
Sweden Literacy Rate- 99%
Literacy Rate- 99% Avg Schooling- 15.8 yrs
Avg schooling- 15.4 yrs Life Expectancy- 70 yrs
Income Inequality-40.8%
Life Expectancy- 74 yrs Productive Growth-$46.4k
Income Inequality-25% Political Stability- 82.5
GDP- $14.26 Trillion
Productive Growth-
$36.8k
Political Stability-89
GDP-$406.07 Billion
Germany vs. United States
Germany United States
Population-310,815,000
Population- 81,757,600 GDP- $14.26 Trillion
Per Capita- $47,701
GDP- $2.81 Trillion

HDI- Ranked #4 with a 0.902(^9)

Per Capita- $34,212
HDI- Ranked#10 with a
0.885 (^12)
What is a Mixed Economy?

As the name suggests, An economic system

including features of both public and
governmental control.
Mixture of Capitalism and Socialism.
Private economic freedom co-existing with
centralized economic planning and
government regulation.
Iceland, India, Malaysia.
Mixed Economies Today
When a country is
not completely a
command economy
and not completely a
market economy, but
somewhere in
between, it is called
a Mixed Economy.
India: A Mixed Economy
Post Independence (1947), Pandit Jawaharlal
Nehru proposed the idea of Mixed Economy.
Initial motive: to reduce social and economic
stress.
Priority on Economic growth with social justice.
Commanding role of state in industrial
production and import substitution strategy.
Role in agriculture limited to infrastructure
development, irrigation and trade.
Resulting low GDP at 3-4% p.a.
Finally, Balance of payment crisis of 1991 initiated
Economic Liberalization.
Most Countries Lie Somewhere in Between
-However, they may be closer to one side
than the other.
Refresh Your
Mind!!!

57
 Example of PPF analysis

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.

Question (i):

Calculate opportunity
cost from A to B, B to
C and C to D.

58
Answer (i) :
Point on Opportunity cost (Ringgit of
PPF conventional outputs per one Ringgit of
Islamic banking output)
(i) A to B (800 600) / (400 0) = 0.50
(ii) B to C (600 400) / (500 400) = 2.00
(iii) C to (400 200) / (550 500) = 4.00
59 D
 Question (ii):
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 governments advice, sketch a PPF diagram to
illustrate this scenario. Mark a possible new production
combination
60 (point) as E. Give your explanation.
 Answer (ii):
Conventional Banking
products/services (RM Millions)

600
E
(<600)
E

400 (>400) Islamic Banking products/services

(RM Millions)
Divert resources (transfer resources), there is no changes in total
amount of resources - movement along the PPF.
Any point after point B can be point E, it shows that more products
from Islamic Banking and less Conventional Banking will be produces.

61
 Question (iii):
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.
62
 Answer (iii):
Conventional Banking
products/services (RM Millions)

600 F

PPF1 PPF2
400 (>400) Islamic Banking products/services
(RM Millions)
PPF will pivot (rotate) outward from PPF1 to PPF2.
More Islamic Banking products/services will be produced.

63
 THANK YOU

64