C H A P T E R 1 I N T R O D U C T I O N T O M I C R O E C O N O M I C S

What is Economics

?1Zulkhairi Nisa-Sg Petani Campus

CHAPTER 1

a) From Conventional perspectives• i) Economics could be define as a social sciences

which studies man’s behavior in trying to reconcile his unlimited materials needs with the relative scarcity of available resources or the study of the ways that individuals and societies allocate their limited resources to try to satisfy their unlimited wants.

• ii) Economics is the efficient allocation of the scarce means of production toward the satisfaction of human wants.

b) From Islamic perspectives Islam as Ad-Deen is a complete way of life aims to

construct and guide human life and culture according to the values and principles revealed by Allah for man’s guidance.

In Islamic economics we do not attempt to build our society on economic foundation alone but also focuses on ethical and moral values. Every human being must bear in mind that they are merely custodians over their property and not the real master and the wealth must be acquired by lawful means and not through dishonesty and treachery.

2Zulkhairi Nisa-Sg Petani Campus

CONVENTIONAL ECONOMICS

There are 3 fundamental economic problems or basic

concepts in relation to economic definition.

Scarcity

Choice

Opportunity Cost

Basic Economic Concepts


i) Scarcity • The problems of economics arise because we do

not have enough resources to produce everything we want. The factors of production are limited and the amount of output that can be produced is also limited.

• It means that there are not enough available goods for everyone to freely take as much as they want. Due to this, we have to choose the best alternative of goods and services to be produced by the society.


ii) Choice • Because of the resources in the world are

limited, we cannot satisfy all our wants and force us to choose. Choice involves a rational decision to be made due to scarcity of resources in order to satisfy unlimited human wants. A choice has to be made among several wants which involves some trade off known as opportunity cost.


This means something which must be sacrificed in order to obtain something else. For example, between a football game and a lecture, the opportunity cost of going for a lecture is a football game and vice versa.

iii) Opportunity Cost

• Opportunity cost is concerned with the problem of choice and the fact of scarcity, forces us to make choices. So that opportunity cost is defined as the value of the best alternative foregone when a choice is made.


ISLAMIC ECONOMICS

Based on 4 philosophical foundation of the

Islamic approach comprises the concept of;

1) Tauhid Rububiyah2) Khalifah3) Tazkiyyah4) Ukhuwah


1. Tauhid Rububiyah

• Belief Allah alone determines the nourishment, sustenance and directing things towards their perfection.

• This is the fundamental law of the universe which throws light on the divine model for the useful of development of the resources and their mutual support and sharing.


According to Al-Quran concept of TAUHID encompasses two (2) integrated aspects:I. Hablumminannas

The relationship between man and his fellow menExample: brotherhood and justice

II. HablumminAllahThe relationship between man and his CreatorAllah S.W.TExample: to achieve al-Falah

Al-Falah means prosperity/success in this world and the hereafter rather than maximizing one’s own selfinterest.


2. Khalifah

• Man’s role as God’s vicegerent on earth• This defines man’s status and role, specifying

the responsibilities of man as such, of a Muslim, and of the Muslim ummah as the repository of this khalifah.


3. Tazkiyyah

• Purification plus growth• The mission of all prophet of God was to

perform the Tazkiyyah of man in all his relationship.


4. Ukhuwah

• The principles of brotherhood has many aspects which gives the Muslim society an active and positive equality and the character of equality and cooperation.


The Fundamental Economic Problems

As a result of scarcity, choice and opportunity

cost, there are three (3) fundamental economic

problems that facing all economic systems.

1) What to produce?

• This problem directly relates choice among scarce resources to satisfy wants.

• The economy has to decide what goods and services to be produced and which ones to do without. 13Zulkhairi Nisa-Sg Petani Campus

2) How to produce?

• It refers to the appropriate technology of how to combine the resources to produce goods and services is being used either to used labor intensive or capital intensive or combination of both.

• Once the type of technology is chosen, it involves an opportunity cost that the scarce resources are being used for producing a basket of goods rather than another.


3) For whom to produce?

• The economic system has to decide whose wants will be met and whose wants will be left unsatisfied.

• The first two problems are often termed as “the allocation of resources” and the third problem is about “the distribution of goods and services”.

• Usually necessity good is produced for everybody and normal good is for those who have purchasing power in the economy.


Production Possibility Curve (PPC)

Definition• Production Possibility Curve (PPC) or

Production Possibility Frontier (PPF) is a curve shows the maximum output of 2 goods or services that society can produce given its existing resources and level of technology.

Other definition:• The Production Possibility Curve can be

defined as a curve which shows the various possible combinations of two goods that the economy can produced given a limited amount of resources and a certain level of technology.


Production Possibilities Curve (PPC)

20

18

16

12

8

4

0 1 2 3 4 5 6Good X

Good Y

attainable

unattainableX

X

X

efficiency


Assumptions

1. Producing 2 goods2. Fixed resources3. Fixed technology4. Producing at full employment


Economic System

Mixed Economy Socialism Capitalism

Economic Systems


Capitalism Economy (Market Economy)

Also known as laissez-faire, market economy, free enterprise, price mechanism or free market economy.

USA, Canada, Germany, South Korea & Japan

Characteristics Of Capitalism

1. Right to own property2. Freedom of enterprise and choice3. Existence of consumer sovereignty4. Presence of competitive5. No or less government intervention in the economic

activities of the economy (Private Ownership)

6. Presence of price mechanism


Socialism Economy (Command Economy)

Also known as communist and planned economy. Cuba, North Korea, Venezuela, Laos, Vietnam & Belarus

Characteristics Of Socialism

1. Public ownership of resources2. Central planning authority3. Price mechanism of lesser importance4. Central control and ownership5. Absence of consumer’s sovereignty6. Absence of competition 7. Non-existence of unemployment because every potential

worker available will be given a job by the government


Zulkhairi Nisa-Sg Petani Campus 22

Mixed Economy

Mixture between the capitalist and socialist economic systems Malaysia, Singapore and Great Britain

1. Public & private ownership of resources2. Price mechanism & economic plans in making economic

decision3. Government help to control income disparity4. Government intervention in the economy5. Co-operation between the government, public and business

sector6. Government control of monopolies

Characteristics Of Mixed Economy

C H A P T E R 1 I N T R O D U C T I O N T O M I C R O E C O N O M I C S

Documents

Transcript of C H A P T E R 1 I N T R O D U C T I O N T O M I C R O E C O N O M I C S