CHAPTER 1

INTRODUCTION TO
ECONOMICS
 DEFINITION OF ECONOMICS
(conventional perspective)
Economics is a science which studies human
behaviors as a relationship between ends
and scarce which have alternative uses.
OR 
Economics is a study of how people use their
limited resources to try to fulfil unlimited
wants and involves alternatives or choices.

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 Human behavior
4 economic agents
1.individual/households
2.Firms/organizations
3.Government sector
4.Foreign sector

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 The main reason why we
study economics is man
has____________
resources,
unlimited______________
_______.

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 DEFINITION OF ECONOMICS
(Islamic perspective)
 Islamic Economics is a social science which studies the
economic problems of people imbued with Islamic values.

 Objectives of all economic activities:- achievement of Al-

Falah (prosperity in the world and in the Hereafter) and the
blessings of Allah.

 TAUHID:- It is belief & understanding that Allah is the creator,

the Lord, the Sustainer and the Giver. It encompasses 2
aspects;
 1. Hablumminaan Allah
 2. Hablumminaannas

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 5 Philosophic foundations of IE

1. Rububiyyah
2. Khalifah
3.Tazkiyyah
4. Ukhuwah
5.Al-Falah
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 MICROECONOMICS VS.
MACROECONOMICS
Differentiate between microeconomics and
macroeconomics (10 marks).

MICROECONOMICS MACROECONOMICS

The study of the economic

The study of system as a whole such as
individual parts of the national income, trade cycle,
economy such as unemployment rate, inflation
and general price level.
public choices,
business choices and *Other keywords – Aggregate,
Total
personal choices.

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 SCARCITY CHOICE

BASIC ECONOMIC
CONCEPTS (Conventional)

OPPORTUNITY COST

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 Explain/discuss three (3) basic economic
concepts
(10 marks)
Definition of economics- 1m
Points 3 x 1m = 3m
Explanation 3 x 1m = 3m
Example 3x 1m = 3m

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 BASIC ECONOMIC CONCEPTS

1. SCARCITY
 One of the important concepts in economics is
scarcity.
 Scarcity is defined as wants always exceed
limited resources to satisfy them.
 Scarcity is a universal problem faced by poor
as well as rich nations in order to fulfil their
needs.
 Four (4) factor of production (Text book, pg. 6

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 BASIC ECONOMIC CONCEPTS (cont.)

2. CHOICE
 Alternatives
 When scarcity exists, choices are to be
made.

3. OPPORTUNITY COST
 Opportunity cost is defined as the second
best alternative that has to be forgone for
another choice which gives more satisfaction.

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 Concepts Explanation Example

Scarcity

Choice

Opportunity cost

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 SCARCITY CHOICE

BASIC ECONOMIC
CONCEPTS (Islamic)

OPPORTUNITY COST

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 In Islam, resources provided by Allah are plentiful but human have
to explore other alternatives to replace the depleting resources.
Human unlimited wants in Islam is due to “ wasatiah” concept. The
wants based on “nafs”.
a)Land
Nature is a gift from Allah, therefore man should take care of the
environment without damaging it.
b)Labour

Responsible to find “halal” income and practice good work ethics.

Aware of his social obligation to the society such as paying ‘zakat’
and contribute to ‘amal jariah’

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 c) Capital
Should come from ‘halal’ sources. Return in the form
of ‘riba’ are extremely prohibited .

d) Entrepreneurship
Production of goods and services should follow the
Islamic rules.

Practice good corporate governance and responsible

for his workers’ welfare.

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 2. CHOICES
 It forces people to make a choice in order to
maximize their satisfaction since the
resources are limited.
 So, one must choose the best alternatives
which give benefit to them.

3. OPPORTUNITY COST
 Cost of the second best alternative forgone
for another choice which gives more
satisfaction.

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 BASIC ECONOMIC PROBLEMS (cont.)

1. WHAT TO PRODUCE?
Refers to the type of goods and services to be produced

2. HOW TO PRODUCE?
Refers to the cheapest method of production

3. HOW MUCH TO PRODUCE?

Refers to units to be produce

4. FOR WHOM TO PRODUCE?

Refers to the distribution of income

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 Explain/discuss four (4) basic economic
problems (10 marks)

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 PRODUCTION POSSIBILITIES CURVE
(PPC)


DEFINITION:
The PPC shows the various possible
combinations of goods and services
produced within a specified time period
with all its resources fully and
efficiently employed.

*soft reminder= graph paper

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 PPC

Used to explain the basic economic

concepts: Scarcity, Choices and Opportunity
cost.

PPC would produce more of a good if less of

another is produced.

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 By using an appropriate diagram, explain
three (3) basic economic concepts. (10
marks)
Definition of PPC -1M
Diagram

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 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)
Assumptions:

1. The economy is operating in full employment

and full production capacity (full
efficiency/fully utilized).
2. The amount of resources available are fixed.
3. The state of technology does not change
throughout the production. [technological
unchanged]
4. Produce only two goods

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 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)
APPLE
If it allocates all its resources to IPHONE, it will produce at Point
IPHONE A.
If it allocates all its resources to IPAD, it will produce at Point F.
16
A (X,Y)
The APPLE, produces two products – IPHONE AND IPAD.
14

12 C
If APPLE is at Point C on the PPC, it
can produce the combination of
10 D 2,000 UNITS IPAD and 12,000 units
of IPHONE.
8
Point D shows the production of
6 3,000 UNITS IPAD and 9,000 units of
IPHONE.
4
2
F
0 1 2 3 4 5 IPAD

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 PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)

Point outside the PPC

IPHONE
(Point Z)  SCARCITY

16 Z
A
Any point along the
14 B UNATTAINABLE PPC  CHOICES

12 Y C

10 D
8
ATTAINABLE
6 Point inside the PPC
(Point Y)  Waste of E
4 resources and inefficiency
2
F
0 1 2 3 4 5 IPAD

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 Detail explanation?

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 Factors that Influence the Shift of PPC
1. Economic Growth

IPHONE

16

14
When the country
enjoys economic
12 growth, the PPC bounds
outward@ shift
10 outwards@ shift to the
right
8 When the country is
struck by natural
6 disasters, economic
growth will decline and
4 the PPC will bounds
inward @ shift inward
2 @shift to the left.

IPAD
0 1 2 3 4 5
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 Factors that Influence the Shift of PPC
2. Improvements in Technology

IPHONE

16
Technology increases
the production of
14 IPHONE.

12

10
Technology increases
8
the production of IPAD.
6

4
2

0 IPAD
1 2 3 4 5
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 Factors that Influence the Shift of PPC
3. Population

IPHONE

16

14
Increase in population
12

10

8
Decrease in population
6

4
2

0 IPAD
1 2 3 4 5
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 Shape of PPC

IPHONE PPC IS CONCAVE

16

14

12
Increasing Opportunity
10 Cost

4
2

IPAD
0 1 2 3 4 5
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 OPPORTUNITY
Combination Good X Good Y COST

A 0 100
B 1 90 10
C 2 70 20
D 3 40 30

METHOD:-
Increase = Good X
Decrease = Good Y  Opportunity cost how much?

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 CALCULATE THE OPPORTUNITY COST OF
PRODUCING GOOD X.
Combination Good X Good Y OPPORTUNITY
COST

A 0 10 -
B 1 9.8 0.2
C 2 9 0.8
D 3 7 2
E 3.8 4 3
F 4 0 4

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 Shape of PPC (cont.)

Sewing Machine
PPC IS CONVEX
16

14

12

10
Decreasing Opportunity
8 Cost

4
2

Butter
0 1 2 3 4 5
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 Decreasing opportunity cost

Combination Good X Good Y OPPORTUNITY

COST

A 0 93
B 1 90 3
C 2 88 2
D 3 87 1

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 Shape of PPC (cont.)

Sewing Machine
PPC IS LINEAR
16

14

12

10
Constant Opportunity
Cost
8

4
2
Butter
0 1 2 3 4 5
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 combination Lorry (‘000) unit Motorcycle (‘000)unit Opportunity cost

A 0 200

B 30 150 50

C 60 100 50

D 90 50 50

E 120 0 50

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 ECONOMIC SYSTEM

MIXED
ECONOMY

CAPITALISM SOCIALISM
CAPITALISM

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 CHARACTERISTICS

CAPITALISM
 An economic system where individuals and sellers make
economic decisions using a price system

MERITS AND DEMERITS

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 CHARACTERISTICS

1. Private ownership of resources

2. Freedom of enterprise and choice

3. Consumers’ sovereignty

4. Competition

5. Government intervention

6. Price system
 
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 MERITS DEMERITS
 Production according to  Inequality of distribution
consumers’ needs of wealth and income
 Economic freedom  Inflation and high
 Efficient utilization of unemployment rate
resources  Lack of social welfare
 Variety of consumer  Wasteful competition
goods  Misallocation of
 Enhanced trade, business resources
and R&D  Social cost
 Automatic incentives
 Flexibility

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 CHARACTERISTICS

SOCIALISM
 An economic system where all the economic decisions are
made by the government or a central authority

MERITS AND DEMERITS

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 CHARACTERISTICS

1. Public ownership of resources

2. Central planning authority

3. Price mechanism of lesser importance

4. Central control and ownership

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 MERITS DEMERITS
 Production according to  Lack of incentives and
basic need initiative by individuals
 Equal distribution of  Loss of economic
income and wealth freedom and consumer
 Better allocation of sovereignty
resources  Absence of competition
 No serious unemployment  Waste of economic
or inflation resources
 Rapid economic
development
 Social welfare

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 CHARACTERISTICS

MIXED ECONOMY
 An economic system which combines both capitalism and
socialism

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 CHARACTERISTICS

1. Public and private ownership of resources

2. Price mechanism and economic plans in
making decisions
3. Government helps to control income
disparity
4. Government intervention in the economy
5. Co-operation between the government,
public and business sectors
6. Government control of monopolies

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