Central Problem of Economics

1. Introduction to Economics

- Economics is the study of how scarce resources are allocated to the production
of goods and services to maximize the unlimited wants human beings desire

- With the knowledge of economics,

- Individuals maximize satisfaction and minimize expenses
- Businesses allocate resources more efficiently, maximizing profit
- Government provide better standard of living for people

- Microeconomics focuses on small econ groups like individual households, firms

and industries and how they make decisions related to production and profit
- Macroeconomics focuses on a wider view of the economy, emphasizing issues
faced by the whole economy, like inflation, unemployment and econ growth

2. Scarcity Choice and Resource Allocation

- Scarcity refers to the situation where supply < demand

- Limited resources in these areas:
- Natural Resources like coal
- Financial constraint like money
- Factors of Production like land, capital and labour
- Time and energy

- Opportunity cost is the gain you will have if you chose the opposing factor
instead of the chosen factor

3. Basic Economic Problems

- Goods that should be produced [should take into account consumer sovereignity
(what consumers want)]
- Method of production and amount to produce [should take into account
economic efficiency (cheapest method of production)]
- Target consumers
4. Application of Concept of Opportunity Cost

- Production Possibility Curve (PPC)

- It shows the possible combinations of 2 goods that an economy can produce at a
certain time given a limited amount of resources and at a certain level of technology,
assuming that all factors of production are fully employed and the economy can only
produce two goods at any time

- Points on the PPC represents that the resources are fully utilized and there is full
employment when any of those combinations of goods are chosen
- Combinations within the curve are attainable with the resources and technology
available, but these combinations do not fully utilize resources nor at full employment
- Combinations out of the curve are unattainable with the resources and
technology available, and can only be attained when there is more resources or a higher
level of technology to produce

- Concave PPC – Increasing Opportunity Cost (In order to produce an additional

unit of Good X, more units of Good Y has to be sacrificed) (Generally the case because
as you produce more of one good, the tradeoff increases due to external factors)

- Straight-line PPC – Constant Opportunity Cost (Both goods are perfect

substitutes of each other; they are equally desirable)

- Convex PPC – Decreasing Opportunity Cost (In order to produce an additional

unit of Good X, less units of Good Y has to be sacrificed)

- Movement along the PPC = relocation of resources in terms of combination of

goods produced
- Shift in PPC = change in production capacity due to an advancement in
technology, increased efficiency in production and increased availability of resources
5. Economic Efficiency

- For this to occur, there must be no wastage of resources and full employment of
resources
- Vilfredo Pareto (1848-1932) stated the Pareto optimality, a situation when
economic resource and output have been allocated in such a way that no one can be better
off without making someone else worse off

- Economic efficiency can be divided into 4 groups:

- Productive Efficiency
(Goods are produced at lowest cost possible)

- Allocative Efficiency
(Economy is at full employment and fully utilized all resources)

- Technical Efficiency
(Least amount of input to produce a given amount of output)

- Social Efficiency
(Social marginal benefit = Social marginal cost)
 6. Economic Systems

Free Market Economy Centrally Mixed

Planned Economy
Economy
Examples USA, Canada DPRK, Cuba Singapore,
Malaysia
Government None Yes Partial
Intervention intervention
Consumer Yes No Partially
Sovereignity
(Consumer is
King)
Unemployment Exists Does not exist Exists

Mobility of Geographical Occupational (change None Some

labour (change job)
location of Vertical Horizontal
job) (New job (New job
requires requires
diff set same set
of skills) of skills)
Presence of Strong None Strong, but
Competition not as strong
as F.M.E.
Level of Income High as there is no govt intervention Little Lower than
Disparity to ensure minimal diff between rich F.M.E. but
and poor higher than
C.P.E.
Other Information Technology Govt ensure
advancements no
and exploitation of
Globalisation consumers
made many with the
C.P.E.s to adopt existence of
market-based monopolies in
economies the market
(May
implement
price ceiling)