CHAPTER 3

ASSESSING
ECONOMIC
CONDITION

Imagine how would be life like 10000 Years ago?

A Normal Day

Find Food

FIGHT FOR
FOOD

PROTECT YOURSELF FROM OTHER ANIMALS

Do the same thing

everyday.

What is Economics

What is
Economics?
A social science that studies and
influences human behavior
Economics is the study of what
constitutes
rational
human
behavior in the endeavor to fulfill
needs and wants.

What is ECONOMY?
The study of how individuals and
societies use limited resources to
satisfy unlimited wants
It is also a study of how individuals
deal with the fundamental problem
of scarcity.
MAKING CHOICE

Needs and Wants

Needs:- STUFF we must have to survive.
E.g.:- Food, Clothing and Shelter

Wants:- STUFF we would really like to

have.
E.g. :- Fancy Food, big screen TV, jewelry.

These are also known as Luxuries.

People try to balance

needs and wants.

Types of
Economics
Economi
cs

Micro

Macro
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Micro Economics
Micro Economics studies how the
individual parts of the economy make

decisions to allocate limited resources

Microeconomics studies:
how individuals use limited resources to
meet unlimited needs
the consequences of their decisions
the behavior of individual components like
industries, firms and households.
how individual prices are set
what determines the price of land, labor
and capital
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Macro
Economics
Macroeconomics studies about the
functioning of the economy as a
whole (wide lens)
Macroeconomics studies about

the total output of a nation

the way the nation allocates its limited
resources of land, labor and capital
the ways to maximize production levels
the techniques to promote trade

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ECONOMIC GROWTH
Increase in a country's productive
capacity(income) as measured by
comparing gross national product (GNP=GDP +
Net income Property from abroad) in a year
with the GNP in the previous year.
GNP = Total income of a country attained from domestic output and
international trade(when Malaysian companies operate outside of
Malaysia).
GNP = GDP + NR (Net income inflow from assets abroad or Net
Income Receipts) - NP (Net payment outflow to foreign assets)
GDP = consumption + investment + (government spending) +
(exports imports)

ECONOMIC GROWTH
Increase in the capital
stock, advances in technology,
and improvement in the quality and level of
literacy are considered to be the principal causes of
economic growth.
In recent years, the idea of sustainable
development has brought in additional factors such
as environmentally sound processes that must be
taken into account in growing an economy.

ECONOMIC GROWTH AND

BUSINESS PERFORMANCE
Economic growth means an increase in Real GDP.
Economic growth means there is an increase in
national output and national income.
Lower economic growth = lower productivity =
low supply due to low demand from consumers

The Factors of
Production
Labour

Capital

Land

Produ
ct

Organizati
on

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The Factors of
Production
Land includes the gifts of nature, or
natural resources not created by
human effort.
Capital includes the
tool,equipment,and factories used in
production.

Labour includes people with all their

efforts and abilities.

Entrepreneurs are individuals who

start a new business or bring a
product to market.
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Types of ECONOMIC SYSTEMS

Economy

Market

Command

Mixed

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Market
Economies
In
a
pure
market
economy there is no
government
involvement
in
economic decisions.

The Government lets the market answer

the following three basic economic
questions:
1. What ?
Consumers decide what should be produced
in a
market economy through the
purchases they make.

2.How ?
Production is left entirely up to businesses.
Businesses must be competitive in such an
economy and produce quality products at
lower prices than their competitors.

3.For whom ?
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Command
Economies
In a command economy
the Government takes
economic decisions.

25

Command
In a command
economy the
Economies

Government answers the three basic

economic questions.
1.What?
A central planning committee decides what
products are needed.

2.How?
Since the Government owns all means of
production in a command economy, it
decides how goods and services will be
produced.

3. For Whom ?
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The Government decides who will get what

Mixed Economies
In the Mixed economies the
Government and the Market
work together in decision
making

27

Inflation
A sustained increase in
the general price level
of goods and services
in an economy over a
period of time.
It all starts with the
money losing
value(currency).

Impact of Inflation
The effect of inflation on savers and
investors is losing purchasing power.
Whether you've buried your money in a coffee
can in the back yard or it is sitting in the safest
bank in the world, it is becoming less valuable
with the passage of time.

Impact on Interest Rate

INTEREST RATE Interest is charged by
lenders as compensation as return of
capital(ROC) for the loss of the asset's use.
In the case of lending money, the lender
could have invested the funds instead of
lending them out.

Impact on Interest Rate

In Malaysia, interest rates are typically known as
the Base Rate(BR)
The assets borrowed could include, cash,
consumer goods, large assets, such as a vehicle or
building. Interest is essentially a rental, or leasing
charge to the borrower, for the asset's use. In the
case of a large asset, the interest rate is sometimes
known as the "lease rate".

Impact on Interest Rate

Increase the cost of borrowing

Increase in mortage interest payment
Higher interest rate increases the value of .
Government debt interest payment increase
Reduce confidence of investors

How Market Prices are

Determined?

Factors That Influence Market

Prices
1.Supply and Demand
2.Government Laws and
Regulation (Collusions and
Price Fixing)
3.Price Elasticity
4.Substituition

Government Influence on
Economic Decisions
i. Stabilization and Growth
Adjusting fiscal and monetary policy
= Slow down or speed up economic
growth.

Government Influence on
Economic Decisions
ii. Direct Service
Large military establishment
Construction and maintenance
of most highways
The public education systems

Government Influence on
Economic Decisions
iii.Regulation and Control
to ensure that business serves the
best interests of the people as a
whole.
to protect the public(Food and Drug
Administration bans harmful drugs, or
requires standards of quality in food)

The Economic Problem

Unlimited Wants
Scarce Resources
Land, Labour, Capital
Many Uses of
Resources

What goods and services should an

economy produce?
should the emphasis be on agriculture,
manufacturing or services, should it be
on sport and leisure or housing?
How should goods and services
produced?
labour intensive, capital intensive?

be

Who should get the goods and services

produced?
Even distribution? More for the rich?
For those who work hard?
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Opportunity Cost
Definition the cost expressed in terms
of the next best alternative sacrificed
The cost of anything in terms of other
things given up or sacrificed.

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