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(2ECO0903N / 1ECO0909)

Main Reference
1. Mankiw, N. Gregory. 2008. Principles of Economics. Cengage Learning
2. Sloman, John. Economics. Prentice Hall
Supporting Reference
1. Bernanke, Ben S. 2007. Principles of Economics McGraw Hill
Prepared by : Anthony Yap B.A. (Hons), M.A.
Basic Economics Concept What is Economics?
Economics
Financial market
Money $$$
Government
Commodity
Exchange rate
Individual /
Households
Prices
Definition :
Economics is a study of mechanism to
manage and allocate scarce resources
efficiently in a designated market
through the interaction of various
economics agents.
Banks
Inflation
Components of definition:
Mechanism :
Refers to a process of adjustment /
moderation. Example : Prices / Exchange rate
Resources :
Factors of production required to accomplish
economic activities. Example: Capital / Money
/ Commodity
Economic Agents :
Decision makers or actors that have impact on
the economy through their actions. Example,
banks / governments / households
How the Economy looks like ?
Basic Economic Concept Mapping the Economy
Markets for Goods
and Services :
Firms sell
Households buy
Goods and
services bought
$$$ Spent
Households
Buy and consume goods and
services
Own and sell factors of production
Markets for Factors of
Production
Households sell
Firms buy
Labour, land,
and Capital
Income
Firms
Produce and sell goods and
services
Hire and use factors of production
Hire Factors of
production
Revenue
Wages, rent
and profit
Goods and
Services sold
Pick Your
Brain !
Discuss and identify
what possibly are the
assumptions being
employed in this
simplified circular flow
diagram?
Diagram 1 : Circular Flow Diagram
The Concept of Scarcity
1. The concept of scarcity is fundamental in economics.
2. All theories and principles of economics are based on the reality that resources i.e. the factors of production are limited and finite.
3. As productive factors are scarce / limited, economists formulate theories and principles to optimize these resources to yield the
maximum output possible
Choices
1. Economic agents often have unlimited desires but faced with scare / limited resources
2. Thus, decisions have to be made and each decisions made will involve sacrifices. How then should the decisions be made? What
are the principles guiding the decisions?
Opportunity Costs
1. Opportunity costs is a loss that is involved in a trade-offs for items that are of your choice. Often the loss incurred is the second
best alternative to the chosen item that has to be foregone.
Basic Economics Concept The Underlying Principles
Basic Economics Concept Illustration on Opportunity Cost
Illustration 1:
Assuming Andy has a cash of RM30 in his wallets and below are activities that he want to carry out:
No Activity Cost Level of Satisfaction
1 To go for lunch RM20 8
2 To go for karaoke RM30 5
3 To go for movie RM15 6
Based on the level of satisfaction, he will go with lunch and forgo the rest. Opportunity cost is defined as the 2
nd
best
alternative foregone i.e. in this case it will be to go for movie which will give a level of satisfaction of 6
Illustration 2:
Andy has RM5,000 cash in hands and below are some of the investment opportunities :
No
Investment
Opportunity Return Risk Net Return
1 Buying stocks 8% 5% 3%
2 Deposit 2% 0% 2%
3 Bond 5% 1% 4%
Based on the Net Return, he will invest in Bond and the opportunity cost is the 8% return / 3 % net return from buying
stocks
Basic Economics Concept Production Possibilities Frontier
Making decisions on the most efficient combination of outputs produced in a given economy
PPF shows the optimum allocation of resources to produce
combination of outputs (2 types) in a given economy.
It illustrates the concept of scarcity, hence opportunity costs are
incurred for every additional unit of desired output.
Combinations that are within or on the PPF itself e.g. point A, B and C
are combinations that can be achieved with the given technology and
resources
Combinations which are out of the frontier are non-achievable, E and
combinations, D that are within the frontier represents under-utilized
of resources
E
D
Pick Your Brain !
Discuss and identify what possibly are the assumptions being employed
in Production Possibilities Frontier ?
Diagram 2 : Production Possibilities Frontier
Basic Economics Concept Economic System
Economic system defined the methodology adopted that governs the interaction and decision making among economic
agents.
Three type of economic system that are widely practiced
Type of
Economic
System
Characteristics Pros Cons
Market
Economy
1. Also known as Free market or laissez-faire economy
2. Economy functions without any intervention from
the government
3. Pricing is the main mechanism for decision making
4. Individuals taste and preference is of importance.
5. Consumer is the king as demand plays a central
role. It is more likely as demand led economy
6. Highly competitive market
7. Prodit driven economy
8. Minimally regulated
1. Maximum capital efficiency
2. Drives innovation therefore
extensive product choices for
consumers
3. Creation of wealth
4. Enhanced productivity and
efficient use of resources
1. Lack of social welfare
2. Inequality distribution of
wealth
3. Can lead to waste of
resources too
Basic Economics Concept Economic System
Type of
Economic
System
Characteristics Pros Cons
Planned
Economy
1. Also known as socialism
2. All decisions are made by the government or
central authority
3. All resources are publicly owned and
managed by the government or central
authority
4. Prices no longer reflect the demand and
supply mechanism as they are fixed by the
government
5. Private wealth is discouraged over public
wealth
6. There is no individuality
1. Parity of wealth
distribution
2. Avoid cyclical
economic ills due to
disequilibrium of
demand and supply
3. Better allocation of
resources
4. Social welfare is well
taken care off
1. No impetus for wealth
creation
2. Loss of economic freedom
3. Putting the whole
economy on the hands of
few individuals, thus
subject to a lot of risks
4. Consumer worse off due
to absence of innovation
and competition
Basic Economics Concept Economic System
Type of
Economic
System
Characteristics Pros Cons
Mixed
Economy
1. A mixture of Market economy and Planned economy
2. Prices are determined based on demand and supply.
However, government intervenes on basic commodities
3. Government lays out regulation and set the stage for the
economic agents to interact and transact based on price
mechanism
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