CHAPTER 1: BASIC CONCEPT OF

ECONOMICS
LAW SIONG HOOK & MOHD NASEEM NIAZ AHMAD

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 Learning Outcomes
• Describe the scarcity of resources.
• Explain the difference between needs and wants, and how both are important
in understanding resource limitations and allocations.
• Identify the various economic agents in any society.
• Explain the difference between microeconomics and macroeconomics, and
provide examples of each of these divisions of economics.
• Discuss how economics choices are made in society, and the role of government
in facilitating those choices.
• Discuss the factors of production, and how these factors work together in the
overall economy.
• Identify and give examples of positive and normative economics.
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 DEFINITION OF ECONOMICS
• There is no single definition of the term “Economics” that is globally
accepted:
• Economics – social science that studies the choices of different economic
agents in particular and society in general from the available scarce resources
and the incentives that influence and reconcile those choices.

• Lionel Robinson which he defined it as

“the science which studies human behavior as a relationship
between ends and scarce means which have alternative uses”
(Robbins, 1935, p. 16).
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 DEFINITION OF ECONOMICS
• Basically, Economics deals mainly with how to efficiently utilize scarce
resources that are limited in relation to human wants in the society.

• American Economic Association:

“the study of scarcity => the study of how people use resources,
or the study of decision-making”

• Thus, inadequate resources in the economy – equitable distribution,

considering its direct impact on reducing poverty and unemployment.
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 SCARCITY ISSUE
• Scarcity

• arises due to unlimited human wants and limited resources.

• This is where choice becomes necessary in every decision we make.

• Therefore, wants are ranked according to priority.

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 SCARCITY ISSUE

• If watching premier league is more important than the two available

needs, so we have to give up = study that night & going to the movies.

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 OPPORTUNITY COST
• Opportunity cost

– assist to make decision of the best alternative want based on its

importance compared to other wants.

– this is also applicable to policy makers and firms

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 DIVISIONS OF ECONOMICS
• Microeconomics

• the study of choices that individuals and businesses make, the way those
choices interact in markets, and the influence of governments.

• E.g. of the microeconomics = consumer behavior, individual labor markets, and

the theory of firms (market structure).

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 DIVISIONS OF ECONOMICS
• Macroeconomics

• the study of the overall economic system.

• E.g. of the fundamental issues macroeconomics revolves around include:-

unemployment rates, the GDP of an economy, and the effects of exports &
imports.

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 THREE MAIN ECONOMIC CHOICES
• There are 3 main issues of economics, involving what, how & for whom goods and
services should be produced.

•What Should Be Produced? – in what quantities?

• since resources are not sufficiently available – focus on the production of

commodities which give it a cost advantage over other products.

• What to produce is an important question in every economy, because it involves

where the economy will focus most in its specializations.

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 THREE MAIN ECONOMIC CHOICES
•How Should It Be Produced?

• Land: This refers to the “gift of nature” – fixed and limited => enables
countries to enhance the production processes for transforming natural
resources into real consumer goods.

• Though some natural resources are include timber, food and animals,
which are renewable, physical land is usually a static resource in nature.

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 THREE MAIN ECONOMIC CHOICES
•How Should It Be Produced?

• Labor: This refers to the human capital– mainly determined by

educational status refers to the capable, able-bodied individuals who
work in the different sectors of the economy.

• Unlike land, labor is mobile, as it can move from one industry to another
or from one location to another. Training and development, especially
related to education, are important elements of promoting the level of
human capital in an economy.
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 THREE MAIN ECONOMIC CHOICES
•How Should It Be Produced?
• Capital: This refers to financial resources used to acquire other factors of
production required for the production process.

• It includes two economic definitions: monetary resources firms apply to

buy natural resources, land and other goods required in the production
process, and also refers to the main physical assets firms and individuals
use to produce goods and services – buildings, production facilities,
equipment, vehicles, etc.

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 THREE MAIN ECONOMIC CHOICES
•How Should It Be Produced?
• Entrepreneurs: These are the owners of the business or the persons who
coordinate the overall economic activities of a company.

• Entrepreneurship is regarded as a factor of production since someone

must take care of the overall managerial functions of gathering, allocating
and distributing economic resources to consumers and other businesses
in the country or even outside the country.

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 THREE MAIN ECONOMIC CHOICES
• For Whom Should It Be Produced?

• This it relates to where the goods produced will end up, as such goods and
services will be used by consumers in the society or exported to other
countries.

• Earnings due to participation in the production of goods and services is divided

across the four factors of production that transform the inputs into outputs.
i.e. Capital earns interest, Entrepreneurship earns profit, Labor earns wages,
Land earns rent.

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 THE ECONOMIC WAY OF THINKING
• Self-interest:

• Individuals make choices which best suit their needs.

• This type of choice is individualistic

– depends on how he ranks his preferences

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 THE ECONOMIC WAY OF THINKING
• Social interest:

• This choice is for the overall interest of the society.

• The welfare of the society, e.g. policy makers

• This decision is pareto-optimal – the efficient decision

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 POSITIVE VS NORMATIVE
ECONOMICS

• Positive economics:
• mainly relies on objective arguments; and can be tested scientifically and supported
with facts.

• Normative economics
• expresses an opinion and cannot be tested.
• => ‘what ought to be”

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 GOVERNMENT INTERVENTION
Benefits of a government intervening in an economy
• Protecting the safety and health of the public and the
environment.
• Offering consumers increased safety when choosing products.
• Preventing corporations from taking advantage of innocent
consumers.
• Keeping the country safe with military protection.

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 GOVERNMENT INTERVENTION
Arguments against government intervention in an economy
• Governments liable to make the wrong decisions – influenced
by political pressure groups, they spend on inefficient projects
which lead to an inefficient outcome.
• Personal freedom. Government intervention is taking away
individuals decision on how to spend and act. Economic
intervention takes some personal freedom away.
• The market is most efficient at deciding how and when to
produce.

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 GOVERNMENT INTERVENTION
Is it necessary for government to sometimes interfere in the economic
marketplace, and make choices for society as a whole
• The government should sometimes interfere in the economic marketplace
depending on which economic points of view we embrace.
• Using the free-market or capitalism point of view, the government should
not interfere at all in the marketplace; the role of government is limited to
law and order; society will suffer loss of efficiency if the government
interferes.
• However, from the socialists’ point of view, government needs to interfere in
the marketplace to ensure that there is fair competition in the marketplace,
equal distribution of wealth, no misuse of monopoly power, and that firms
are not earning profit based on exploitation of employees or customers.

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 ECONOMIC COORDINATION
•Circular Flows Through Markets
• illustrates how households and firms interact in the market economy.

• Markets coordinate individual decisions through price adjustments

• Factors of production, and …
• goods and services flow in one direction.
• Money flows in the opposite direction.

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