Tutorial 1

Introduction to Economics

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LEARNING OUTCOMES• The term “economy”• 2. Difference between microeconomics and

macroeconomics;• 3.The three basic economic problems;• 4. Concepts of scarcity, choice, and opportunity cost

using the production possibility curve;• 5. How an economic system answers the three basic

economic questions• 6. Assess the process of circular flow of income in an

economy without governmental intervention.

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INTRODUCTIONEconomy is a theory that affects the lives of

individuals and society as a wholeSocial systems where individuals interacted to

satisfy unlimited wantsDefinition – research on how a society utilises

limited resources to satisfy their unlimited wants due to resource scarcity

Economic method – orderly way of generating facts through scientific research

Theory – conclusion made through general observation

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THE SCOPE AND METHOD OF ECONOMICS STUDIES

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Microeconomics and Macroeconomics

Microeconomics Macroeconomics The market forces of demand

and supply; elasticity and its application; the theory of consumer choice; consumers, producers, and the

efficiency of markets; the costs of production; firms in competitive markets; monopoly; oligopoly; monopolistic competition; markets for the factors of

production; the demand for resources;

production and growth; savings investment and the

financial system; Unemployment rate; money growth and inflation; open-economy concepts; aggregate demand and

aggregate supply; monetary and fiscal policy on

aggregate demand; five debates over

macroeconomic policies

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SCARCITY, CHOICE AND OPPORTUNITY COSTScarcity problem emerges when our

material needs exceed the ability to fulfil them due to limited resources.

Individuals and society need to make choices among various alternatives; and opportunity cost is the value for the best alternative forgone.

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PRODUCTION LIMITATIONSFirstly, assume that the economy produces only

two types of goods, that is, consumer goods and capital goods.

Secondly, both goods can be produced using the same economic resources.

Thirdly, in the short run, resource provision and level of technology remain constant.

Fourthly, economic resources will be utilised fully and efficiently.

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Production possibilities curve

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Production Possibility Table Combination Consumer Goods

(Unit)Capital goods (Unit)

A 0 15

B 4 14

C 7 12

D 9 9

E 11 5

F 12 0

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Production possibility curve

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Shift in production possibility curve

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Shift in production possibility curve

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Choice of production combination

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Effects of the choice of production combination

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BASIC ECONOMIC QUESTIONS ANDECONOMIC SYSTEMS

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What Should be Produced

Society needs to determine the types of goods and services to be produced using limited resources to maximise satisfaction.

The selected combination must be in PPC as it is the efficient production combination. When the type of output required has been identified, the society has to determine the production amount for every output chosen.

The indifference curve of the society indicates the relative importance for every product in the society’s point of view.

If the society chooses to produce more consumer goods, then the consumer goods for current use will give more satisfaction compared to the capital goods that can increase production in the future.

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How Should it be Produced?After deciding on the type and quantity of the output

to be produced, then comes the question of how it should be produced.

Mechanism that can transfer resources from low-demand industry to the industry with higher demand.

In free-market economy, this task is carried out by the market mechanism.

Resources are distributed through the process of demand and supply. this process, resources will shift into the industry that offers the highest pay.

Firms in the industry have to utilise resources efficiently too.

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For Whom Should it be Produced?After being produced, goods and services have to

be distributed. Consumer goods will be disseminated to

consumers while capital goods to firms. A mechanism should be available for this purpose.

In the free-market economy, this task is carried out by the price mechanism.

All consumers and producers who can afford to buy the economic product at the stated market price will be able to obtain what they require

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Economic Systems

Societies based on traditional occupational systems

System where decisions are made by the market systems

All economic and social activities are controlled & regulated by a body

Where both the market forces and the government work side by side to solve the economic problems

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CIRCULAR FLOW OF INCOME ANDEXPENDITURE

Groups within the society in the market economy21

Circular flow of production and goods factors

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Summary

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Past Year Questions

Distinguish between microeconomics and macroeconomics

How can problems of scarcity be resolved?

Explain the characteristics of the Production Possibility Curve (PPC).

Explain the THREE basic economic questions

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