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UBEA 1013: ECONOMICS
CHAPTER 1:
PRINCIPLE OF ECONOMICS
1.1 Introduction: Why study economics?
1.2 Economics Defined
1.3 The Scope of Economics
1.4 Economic Method
1.5 Economic System
1.6 Production Possibility Frontier (PPF)
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UBEA 1013: ECONOMICS
1.1 Introduction: Why study economics?
To learn a way of thinking
To understand the society
To understand global affairs
To be an informed voter
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UBEA 1013: ECONOMICS
1.2 Economics Defined
Economics:
a) Is the study of how to allocate limited resource to
satisfy unlimited wants.
b) Is a social science concerned chiefly with the way a
society choose to employ its limited (scarce)
resources, which have alternative uses, to produce
goods and services for present and future consumption.
c) Deal with human behavior and characteristic as an
individual, family, group, state or as decision maker
units in a firm.
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UBEA 1013: ECONOMICS
Scarcity:
The core problem
Three basic economic problems:
Choice
 What products to produce
(Price theory),
How to produce and how much
to produce (Output theory),
For whom to produce
(Distribution theory).
Opportunity
cost
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UBEA 1013: ECONOMICS
Opportunity
cost
Opportunity
cost
Opportunity
cost
Choice
Analyze thru:
Economic method
Economic System
Opportunity
cost
Choice
Scarcity:
The core
problem
Opportunity
cost
Opportunity
cost
Opportunity
cost
Choice
PPF
View from:
Economic philosophy
Economic Thought
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UBEA 1013: ECONOMICS
1.3 The Scope of Economics
Categorization:
Economic philosophy:
positive, normative and applied economics
Major Fields:
microeconomics and macroeconomics
Specific Fields:
industrial organization, econometric,
finance, development economics, etc
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UBEA 1013: ECONOMICS
Economic philosophy: positive, normative and applied economics
Positive economics attempts to understand behavior and the
operation of economics system without making judgments about
whether the outcomes are good or bad.
Normative economics looks at the outcomes of economic behavior
and asks whether they are good or bad and whether they can be
made better. Thus, normative economics involves judgments and
prescriptions.
Applied economics is about the application of economics theory and
statistic, combined with knowledge of institutions to explain the
behavior of real-world phenomena. It is known as the art of
economics that accepts some set of goals determined in normative
economics and discusses how to achieve those goals in reality,
given insights of positive economics.
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UBEA 1013: ECONOMICS
Major Fields: microeconomics & macroeconomics
Microeconomics studies the economics activities of economic
decision-making units that included individuals, households and
firms. It concerned about the behavior and interaction of those units
in the market.
Macroeconomics studies the behavior of economics aggregates or
the economy as a whole. Thus, macroeconomics focuses on the
behavior of the overall economy, including growth, unemployment
and inflation.
Microeconomics looks at the individual unit – the household, the
firm, the industry. It sees and examines the “tree”. Macroeconomics
looks at the whole, the aggregate. It sees and analyzes the “forest”
(Case & Fair 2004: 6).
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UBEA 1013: ECONOMICS
Macroeconomics
Specific field
PPF
Economic System
Economic Thought
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UBEA 1013: ECONOMICS
1.4 Economic Method
Theoretical economics:
Consists (1) observing the real facts; (2) formulating possible explanation
(hypothesis); (3) testing the hypothesis; (4) formulation of theory; (5) the
evolvement of hypothesis into principle or law; and (6) incorporating
principle or law into model.
Empirical economics
Use data to test economic theory
Economic policy
(1) Applying theory in policy
(2) Explain & predict theory effectiveness
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UBEA 1013: ECONOMICS
1.5 Economics System
i. Capitalist system
 Known as laissez-faire, market economy, free enterprise and
free market economy.
 No government intervention in the economic activities and the
present of free competition.
 Price, demand and supply are said play the role of invisible
hand that governs the economy in achieving maximum
efficiency.
 The pure capitalist system or laissez-faire market is the highest
degree of economic globalization.
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UBEA 1013: ECONOMICS
ii. Socialist system
 Also called centrally planned economy or command economy.
 Seen as an opposite to the capitalist system, anti-globalization
and being linked with communist or Marxist ideology.
 Main characteristics are the presence of total or heavy control of
the economy by the government and thus, the absence of
competition.
 Consumers theoretically have no power to determine which
product to be produced but to accept the government or central
planning authority’s decision.
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UBEA 1013: ECONOMICS
iii. Mixed economy
 The most widely practice in reality.
 There is several of selective government interventions in the
economy to “fix” the weaknesses of the laissez-faire system but
free competition still exist.
 both public and private sector exist and both play important role
to ensure the growth of the economy and the welfare of the
society.
 The Keynesian economic schools of thought that questioned the
efficiency of invisible hand and emphasize the need of active
role of the government in the economy fall into this mixed
economy system.
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UBEA 1013: ECONOMICS
1.6 Production Possibility Frontier (PPF)
 The curve that shows all of the possible combinations of goods
(products) and services that can be produced.
 C: Maximum possible production
 H: Under production
 F: Not possible production
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Movement along the PPF represent
the opportunity cost
That mean increase in producing a
particular product can only possible
with reduce production of another
product.
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Table 1.2: Opportunity Cost (per bushels of extra wheat per year)
Point on PPF
Opportunity cost (bushels of corn)
A to B
(700 – 650) / (200 – 100) =
0.50
B to C
(650 – 510) / (380 – 200) =
0.78
C to D
(510 – 400) / (500 – 380) =
0.92
D to E
(400 – 300) / (550 – 500) =
2.00
 The opportunity cost from point A to
B, B to C, C to D and D to E are
increasing, implying the law of
increasing opportunity cost.
 It also represented in the increasing
steepness of the slope and the
concave shape of PPF.
End
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UBEA 1013: ECONOMICS
Figure 1.4 (a): PPF Shift Inward
Figure 1.4 (c): PPF Pivot Outward
from “Industrial Product”-axis
Figure 1.4 (b): PPF Shift Outward
Figure 1.4 (c): PPF Pivot Outward
from “Agriculture Product”-axis
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UBEA 1013: ECONOMICS
Example of PPF analysis
Figure 1 illustrated the Production Possibility Frontier (PPF) for
the allocation of resources in Malaysian banking sector.
Assumed that the Malaysian banking sector only consist of two
types of banking product/services that are the conventional
banking and Islamic banking.
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UBEA 1013: ECONOMICS
Example of PPF analysis
Point on
PPF
Opportunity cost (Ringgit of conventional outputs per one Ringgit of
Islamic banking output)
(i) A to B
(800 – 600) / (400 – 0)
=
0.50
(ii) B to C
(600 – 400) / (500 – 400) =
2.00
(iii) C to D
(400 – 200) / (550 – 500) =
4.00
End
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Scenario A:
Malaysian is currently producing at Point B. The government
is encouraging the development of Islamic banking, thus,
advising all the banks in Malaysia to divert more resources to
Islamic banking from conventional banking. If all the banks
follow the government’s advice, sketch a PPF diagram to
illustrate this scenario. Mark a possible new production
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combination (point) as “E”. Give your explanation.
UBEA 1013: ECONOMICS
Scenario B:
The government successfully invites foreign Islamic banks to
invest in Malaysia by opening branches here. What happen
to the PPF? Illustrate this scenario in the same PPF diagram
as in question (c). Mark a new possible production point as
“F”. Give your explanation.
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UBEA 1013: ECONOMICS
Scenario C:
If scenario A & B happen that is both the local banks and the
foreign Islamic bank follow the Malaysian government’s
advice, mark a possible production combination as “G” in the
same PPF diagram you have sketched. Give your
explanation.
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