• Definition of Economics
• Basic Economic Concepts : Scarcity, Choice and Opportunity Cost • Production Possibility Curve
• The Basic Economic Problems
• The Economic Systems
Definition of Economics
Economics is a study on how individuals and societies choose to use the scarce resources (land, labor, capital and entrepreneur) to satisfy their unlimited wants. In other words, economics is concerned with the use of limited resources to satisfy the unlimited wants of the societies.
The discipline of economics is divided into two main branches, microeconomics and macroeconomics. Microeconomics is the study of individual units in the economy (households, firms and industries). For example, demand for and supply of a particular good or service, output of a firm or industry, etc. Macroeconomics is the study of economy as an aggregate. For example, total or national output of a country, aggregate spending in the economy, inflation and unemployment rates in Malaysia, etc.
Basic Economic Concepts: Scarcity, Choice and Opportunity Cost
There are three basic economic concepts: scarcity, choice and opportunity cost.
Scarcity occurs when the society’s wants exceed the ability of the economy to meet those wants. The ability of an economy to produce goods and services depends on the availability of factors of production or also known as economic resources, which are limited or scarce. The factors of production are: • Land, which is natural resources that are used in crude form. These include, among other things, deposits of minerals and petroleum, timber and etc. • Labor, which refers to the services of human beings in the production process. • Capital, which is goods produced to produce other goods and services, such as tools and equipment, machines, factory building, and office space. • Entrepreneur, which is a person who undertakes the task to coordinate and make decisions relating to the use of factors of production in producing goods and services. He is faced with risks, and as a result, will enjoy profits and bear losses associated with his decision. All of the above resources are limited in supply. For example, a country has only a specified amount of fertile land for agriculture, labor, and capital. If all of these resources have been utilized, then there will be no more supply of these resources. Since the factors of production are scarce, there are not enough goods and services to satisfy the potential demand. Due to this fact, choices must then be made. Making a choice involves a sacrifice. Suppose someone has limited amount of money and chooses to buy some fish rather than say, milk. Then the opportunity cost of having fish can be measured as the amount of milk that would have been bought or the amount of fish forgone. Thus, opportunity cost of an item is therefore the alternative forgone in order to enjoy the item.
Production Possibility Curve (PPC)
PPC is a graph showing all combinations of two goods that can be produced when all resources are fully utilized. It can be used to illustrate the three basic economic concepts. Several assumptions must be made in order to construct the PPC:
1. Two Products - Only two products are produced, for example rice and butter
2. Efficiency - The economy is operating at full employment and achieving full production.
3. Fixed Amount of Resources - Thee supply of the factors of production is fixed in both quantity and quality.
4. Fixed Technology - The level of technology used remains unchanged.
A numerical example can be shown below:
|Production Choices |Rice (ton) |Butter (ton) | |A |10 |0 | |B |9 |4...