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INTRODUCTION TO PRINCIPLES OF ECONOMICS

INTRODUCTION TO PRINCIPLES OF ECONOMICS. What is Economics. All economic questions and problems arise from scarcity – they arise because our wants exceed the resources available to satisfy them

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INTRODUCTION TO PRINCIPLES OF ECONOMICS

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  1. INTRODUCTION TO PRINCIPLES OF ECONOMICS

  2. What is Economics • All economic questions and problems arise from scarcity – they arise because our wants exceed the resources available to satisfy them • The resources that can be used to produce goods and services are grouped into 4 categories: Labor, Land, Capital, Entrepreneurship

  3. Faced with scarcity, we must chooseamong the available alternatives – so only limited number of good and services can be produced with them • Economic is the science of choice – the study of how people choose to use their scarce resources to produce, exchange and consume goods and services in an attempt to satisfy unlimited wants.

  4. Concept of Opportunity Cost and Production Possibility Frontier • Because wants exceed resources – we must make choice • Choices made by people depend on the limits to production and opportunity cost

  5. Production Possibility Frontier (PPF) • A curve that show alternative combinations of goods that can be produced when available resources are used fully and efficiently • Is a boundary between those combinations of goods and services that can be produced and those that cannot. • To illustrate the PPF we assume there are only 2 goods will produce, while holding the quantities produced of all the other goods and services constant (ceteris paribus)

  6. Example:

  7. Soda 15 ●A ●B ●C 12 ● G (Unattainable) ●D 9 5 ●E ● H Attainable (Inefficient) ●F 0 5 Tapes 1 2 3 4

  8. Three main points from PPF: • Production efficiency – is when we cannot produce more of one good without producing less of some other good. When production is efficient, we are at a point on the PPF. • If the point is inside PPF (H) – production is inefficient because there are some unused resources • If the point is outside the PPF (G) – it is unattainable with the existing resources

  9. ii. Tradeoff • When the point is on the PPF, every choice involve tradeoff – we must give up something to get something (e.g. on the PPF we must give up some soda to get more tapes • All tradeoffs involve a opportunity cost.

  10. iii. Opportunity Cost • All tradeoffs involve a opportunity cost. The opportunity cost of an action is the highest-value alternative forgone • The opportunity cost of producing an additional tape is the number of bottles of soda that we must forgo. • Opportunity cost is a ratio – it is the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the PPF • Since the PPF is bowed outward the opportunity cost is increasing – implies that each additional increment of one good requires the economy to sacrifice successively larger and larger increments of other good (law of increasing opportunity cost).

  11. What can shift the PPF Economic growth – is an expansion in the economy’s production possibilities and reflected by an outward shift of the PPF 1. Changes in Resource Availability 2. Increases in the Capital Stock 3. Technological change

  12. X Increase in available resources or technology improves – more output will be produced – PPF shift outward Y X Decrease in available resources – less output will be produced – PPF shift inward Y

  13. X Increase in resources or technological advance that benefits good X – more X will be produced – PPF shift outward only at X Y X Increase in resources or technological advance that benefits good Y – more Y will be produced – PPF shift outward only at Y Y

  14. Economic Questions • What? – what goods and services are produced and in what quantities? • How? – how are goods and services produced? • When? – when are goods and services produced? • Where? – where are goods and services produced • Who? – who consumes the goods and services that are produced?

  15. What Economist Do? TWO APPROACH MICROECONOMICS MACROECONOMICS Study of the national economy and the global economy. It seeks to explain average prices, total production, employment, the price level and economic growth Study of the decisions of individual people and businesses (e.g. household and firms) and the interactions of those decisions in markets

  16. A major task of economists is to discover how the economic world work • In pursuit of this goal, economists distinguishes between 2 types of statements: I. Positive statements (what is) What is currently happening in the world or how the world is operating. Might be right or wrong and can be tested E.g. If the price of Pepsi increases, then the quantity demanded will decrease.

  17. II. Normative statements (what ought to be) Depend on value judgment and cannot be tested (someone’s opinion) E.g. “The distribution of income in the Malaysia should be more equal”

  18. Definition of Economics Concept of Scarcity Conflict between unlimited wants and limited resources Make choice - tradeoff Opportunity Cost (increasing) Production Possibility Frontier

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