INTRODUCTION

TO ECONOMICS
CHAPTER 1
 Contents
1) Definition of Economics
2) Economic Concept
3) Production Possibilities Curve (PPC)
4) Four Basic Economic Problems
 Definition of Economics
 Economics is defined as
‘a social science that studies how people and society organize
scarce and limited resources to satisfy unlimited human
wants’
 FOP are inputs used to produce goods and services
1) Land
- Includes all natural resources which derived from the earth
and land itself
- Ex: timber, oil, coal, soil and water
- “Rent” is the return to land
2) Labour
- Labor are workers, which contribute their energy mentally
and physically to earn wages and salaries
- Categorized into:
a) Skilled workers
b) Semi-skilled workers
c) Unskilled workers
- “Wages/salaries“ is the return to workers/labors
3) Capital
- The most important resources
- Refers to the stock of goods created by the society to help
them in the production of goods and services
- Or, it is man-made goods used to produce other goods and
services
- Ex: Office building, stores and factories, machinery and etc
- “ Interest “ is the return to capital
4) Entrepreneur
- Refers to the ability of planning, organizing , directing and
controlling
- Entrepreneur is a person who organizes the other FOP to
produce goods and services
- The difference between a labor and entrepreneur,
entrepreneur takes risk in setting up his own business
- Labor works for others and does not take risks
- “ Profit “ is the return to entrepreneur

 FOPs are limited and society will try to use them efficiently to
produce goods and services which later satisfy their unlimited
wants
The unlimited wants :

1) Goods
- Tangible
can see and touch
ex: books, cars and computers

2) Services
- Non-tangible
ex: transportation, education and etc
 Limited resources vs unlimited
wants

Society must make choice on how to use

the FOP to minimize wastage
 Goods under Conventional
Economics
1) Free Good
- Zero opportunity cost
- No price to be paid
- Ex : air and water

2) Public Good
- Goods and services provided by the government to ensure the
society live in comfort and harmony
- Ex : public transport and street lighting
3) Economic Good

- Involve opportunity cost

- There is price to be paid
- These goods are scarce in relation to demand
- There are two groups :
a) Perishable goods – fruits and meats
b) Non – perishable – house and TV
 Types of Goods in Islam
• In Islam goods are bounties bestowed by Allah SWT
• Goods in Islam are classified into 4 categories according to the
hierarchy of needs

a) Dharuriyyah Goods
- Basic goods, without it we cannot survive
- Ex : food, shelter, clothes and education

b) Hajiyyah Goods
- Comfort goods, which provide comfort and without them , man will
feel less comfortable
- Ex : refrigerator
c) Tahsiniyyah Goods
- Luxury goods which complete the needs of man but without
them, man can still survive and live in comfort
- Ex: Mercedes cars

d) Tarafiyyah Goods
- Should be avoided
- Bring negative impact on society
- Extravagant and lead to wastage
- Ex: Golden chairs
 The Scope of Economics
Microeconomics Macroeconomics
Analyzes specific economic units in Analyzes aggregate behavior of the
detail such as households, firms and entire economy such as national
government income, trade cycle and international
trade
It look a the individual units It looks at the whole / aggregate
It sees and examines the “trees” It sees and analyzes the “ forest”
Example: Example:
Production in individual industries National production
and business a) Total industries output
a) How much steel to produce
b) How much cars

Prices of individual goods and Aggregate price level

services b) Consumer pieces
c) Price of food c) Producer prices
d) Price of medical care
THE BASIC ECONOMIC
CONCEPT

Choices

Scarcity
1) SCARCITY
- The unlimited wants of human cannot be fulfilled because of the limited FOP
- Therefore, the society is faced with scarcity

2) CHOICE
- Due to unlimited wants and limited resources, society has to make choices
- Society will make the best choice
- Consumers – maximize satisfaction
- Producers – minimize cost and maximize profit

3) OPPORTUNITY COST
- Every choice is associated with opportunity cost
- OC is defined as “ the number of goods forgone to make the best choice or
the best alternative forgone “
- Other words, second-best choice
- Ex: Either to produce building more hospitals or more schools.
 PRODUCTION POSSIBILITIES
CURVE (PPC)
• Defined as “ a curve that shows various combinations of
two goods which can be produced with existing resources
and current level of technology within a specified time “
• Assumptions:
1) Only 2 goods are produced by the society
2) There is fixed level of technology (only in the SR)
3) Fixed and limited FOP
4) Full level of employment (the FOP are used efficiently – no
waste of resources and unemployment)
 Opportunity Cost Calculation

Combination Radios (Unit) TVs (Unit) Opportunity Opportunity

of Goods Cost of Radio Cost of Radio
(Total) (per unit)
A 0 10 - -
B 4 9 1TV ¼ = 0.25TV
C 7 7 2TV 2/3 = 0.6TV
D 9 4 3TV 3/2 = 1.5TV
E 10 0 4TV 4/1 = 4TV
 Try this out !
Combinati Radio (Unit) Cloth Opportuni Opportuni
ons (Unit) ty Cost of ty Cost of
(Total) (per unit)

A 0 60 -

B 8 48

C 16 36

D 24 24

E 32 12

F 40 0
The Shape of PPC
Concave – Increasing Opportunity Cost

In order to increase one more unit of a good, more

units of other good have to be forgone/sacrificed
Convex – Decreasing opportunity Cost

In order to produce one more unit of good X,

fewer good Y to be forgone/sacrificed
Straight Line/Linear – Constant Opportunity
Cost

In order to increase one more unit of good X, an

equal number of good Y needs to be
forgone/sacrificed
 Shift of PPC
Shift Outwards – Increase in PPC

Increase in the level of technology

Increase in Economic Growth

Increase population
 Shift Inwards – Decrease in PPC

• Recession
1

• Decline in Economic Growth

2

• Natural Disaster
3
It also may cause either one good that will be
produced more
Four Basic Economic Problems
• Refers to the type of product to produce
• Decision must be made about what to produce

What to
with the limited resources available
• Ex: whether to produce radio or TV

produce

How
• Refers to the quantity of goods and services to
be produced
• It depends on the demand from consumers or
population

much to • Societies must decide what to produce and how

much to produce to ensure that scarce resources
are utilized properly and efficiently

produce
 • Refers to the technique or method of
production

How to
• It involves both technology and scarce
resources in order to produce the commodities
• The method of production could be either
labor intensive or capital intensive

produce • It involves the cheapest method of production

to minimize possible COP and maximize
profit

For • Refers to the group of people in the society

who will buy the goods produced

whom
• Or how the products to be distributed among
the society
• It depends on the society’s income level
• Whether to those who are willing and able to

to pay or those who in need

produce