2. Do you know…
• According to the Bureau of Labor Statistics,
since the 2009 financial crisis, there are now
9.6 million people in the U.S. who are still
unemployed?
3. Do you know…
• … Who are the richest people in the world?
4. Do you know…
• Answer (from Forbes):
No 1: Bill Gates
USD$79.2B
No 2: Carlos Slim
Helu
USD$77.1B
No 3: Warren
Buffett
USD$72.7B
5. Do you know…
• … what was the best-selling smart phone
in the world in 2014? What is the retail
price for the item?
6. Do you know…
• Which movie has the highest grossing in
2014?
10. What is Economics?
• The word “economics” comes from the Greek
word “oikonomia” – meaning the
management of a household.
• As it turns out, managing an economy (today)
and a household have much in common –
they both involve making decisions.
11. What is Economics?
Household
• How much salary should
mom and dad earn?
• How much money to
spend on food, clothes,
and rent?
• Who does the cooking?
• Should we hire a maid?
• Where to go on vacation?
Economy
• How many goods and
services to be produced in
Malaysia this year?
• How many units of cars
should be manufactured next
year?
• How many doctors and
engineers should be trained?
• Should we import more
goods from China? Or India?
12. What is Economics?
• Why are these decisions relevant to us?
• Or put it another way, what do all these
decisions involve?
13. What is Economics?
• All of these decisions involve the managing of
scarce/limited resources!
• Example: time, money and energy. Nobody
has unlimited supply.
Can you name other types of
scarce resource?
14. What is Economics?
• Since these resources are limited, one must
use them with care.
• E.g. How would you spend your monthly
allowance? On food? Clothes? Transport?
Latest phones?
15. What is Economics?
• E.g. How would you spend your time in a day?
Work/study hard? Watch “The Walking Dead”
marathon? Etc.
16. What is Economics?
• E.g. Only 1 percent of the world’s water
supply is drinkable. Should we use it for
farming or producing luxury items instead?
1000 liter of water 1 T-Shirt
=
17. What is Economics?
• Specifically, managing scarce resources
involve:
– Deciding on how to use it… (e.g. using money
to buy food, instead of Iphone).
– Deciding who should get it (e.g. Mom gets
more food because she is pregnant).
19. What is Economics?
• Definition:
Economics is therefore “a study of how
individual and economies make decisions
about the use and allocation of their scarce
resources”.*
* Principles of economics (7th
International Edition), K.E. Chase & R.C. Fair (2004)
21. Microeconomics
• The word “micro” means… small or very
small.
• Microeconomics is the study of how
individual households and businesses
function or behave in a market.
22. Microeconomics
• Example: How much does your family spend on
basic necessities a day? Month?
• Example: How many movies should Marvel
Studios produce next year?
23. Macroeconomics
• The word “Macro” means… well, you
should have guessed what it means by
now!!
• Macroeconomics studies the workings of
an economy (national, regional) as a
whole.
24. Macroeconomics
• E.g. How much did Malaysia’s economy produce
in 2013? Did it grow or contract? What was the
amount of tax revenue collected?
Sources: IMF, Department of Statistics Malaysia.
GDP
RM1 Trillion
(2013)
GDP
+ 6.2%
(2013 vs. 2012)
Inflation
Rate
2.1%
(2013)
26. Positive Econs Vs Normative Econs
• Since the economy affect our everyday lives
(from the price for a kilo of sugar to national
unemployment rate), economists and
governments are interested in studying and
managing them.
• To do so, 2 methods of study are used.
27. Positive Economics…
• …attempts to understand how economic
systems work or behave without making
judgments.
• Example: What causes inflation rate go up?
What causes long-term unemployment?
28. Positive Economics…
• Positive economics is divided into 2
subcategories:
– Descriptive economics - the gathering of data that
describe facts and statistics.
– Economic theory - a tool to make sense of the
data and predict a cause and effect relationship.
E.g. Theory of demand and supply (lecture 2).
29. In contrast, Normative Economics…
• …attempts to find out if an economic outcome or
behaviour is good or bad, and whether they can
be made better.
• Example: A high inflation rate is bad for the
economy. How can it be reduced?
• Example: High employment rate is good. How
can we sustain it?
30. Positive Econs Vs Normative Econs
• Of course, most normative issues are related
to positive issues.
• Example: To judge whether high inflation is
good or bad (normative), economists needs to
first observe the effect of inflation on the
economy (positive).
32. Economic Principles
• 1st
Principle: People face tradeoffs
– To get something we want, we must give up
another thing in return.
– E.g. Should you spend your evening studying or go
to a party with your friends?
– For every hour you spend on studying, you lose
one hour on spending time with your friends.
33. Economic Principles
• 1st
Principle (continued)…
–Businesses also face the same principle.
–E.g. Apple Inc. has $1 billion to spend on
research. For every $ it spends on
researching a new iPhone model, it has less
$ to spend on researching Macbooks.
34. Economic Principles
• 2nd
Principle : Opportunity Cost
–If individuals and businesses face trade-offs,
then how do they decide what is the best
choice?
35. Economic Principles
• 2nd
Principle : Opportunity Cost
–First, they have to know the opportunity
cost for each choice.
–Then they will compare the opportunity
costs of these choices.
36. Economic Principles
• 2nd
Principle : Opportunity Cost
–What is an opportunity cost?
- An opportunity cost is the benefit you lose
when choosing one decision over another.
37. Economic Principles
• 2nd
Principle : Opportunity Cost
– The best choice is the one where your
opportunity cost (or benefits lost) is the
lowest or smallest.
38. Economic Principles
• 2nd
Principle (continued)…
–If you decide to study, the opportunity cost
(or benefit lost) is missing out fun times…
–If you decide to go out with friends, the
opportunity cost (or benefit lost) is not
getting good grades…
39. Economic Principles
• 2nd
Principle (continued)…
–So which decision has the lowest
opportunity cost for you? Would you rather
lose some fun or lose some good grades?
40. Economic Principles
• 2nd
Principle (continued)…
– For Apple Inc., if it spends $1 billion on IPhone
research, it can make better IPhone and
generate $2 billion profit.
– If it spends the money on MacBook research, it
can sell more upgraded Macs and make $1.5
billion.
41. Economic Principles
• 2nd
Principle (continued)…
– If Apple does research on IPhone, its
opportunity cost is $1.5b profit lost from the
better MacBook.
– If research is done on MacBook, the
opportunity cost is $2b profit lost from
researching better IPhone.
42. Economic Principles
• Which option has a lower opportunity cost?
Research
iPhone
Research
MacBook
Lose $1.5 Billion Lose $2 Billion
44. Economic Principles
• 2nd
Principle (continued)…
– The PPF can be used to illustrate the concepts of
tradeoff and opportunity cost.
– The PPF curve (see point A, B and C) shows the
different possible combinations of Product A and
B that can be produced by a firm when resources
are used efficiently.
45. Economic Principles
• 2nd
Principle (continued)…
– Due to scarce resources, if a firm wants to
produce more of Product A, then it must produce
less of Product B (see point A).
– On the other hand, if a higher amount of Product
B is produced, then there will be less resource for
Product A (see point C).
– This is Tradeoff!
46. Economic Principles
• 2nd
Principle (continued)…
– The PPF can also be used to find out the
opportunity cost of Product A and Product B.
– For example, if the firm wants to increase Product
A by 10 units but needs to give up 20 units of
Product B to do so, then the opportunity cost of
each unit of Product A is 2 units of Product B.
20 units of Product B
10 units of Product A = 2 B : 1 A
47. Economic Principles
• 2nd
Principle (continued)…
– Conversely, this also means that the
opportunity cost for producing an extra unit of
product B is ½ unit of Product A:
10 units of Product A
20 units of Product B = ½ A : 1 B
48. Economic Principles
• 2nd
Principle (continued)…
– Point X, on the other hand, shows a
production combination that is not efficient as
it is below the curve.
– For example, point X could be caused by
outdated technology, inadequate
management skills or practices that waste
resources.
49. Economic Principles
• 2nd
Principle (continued)…
– Point Y shows a production combination that
cannot be reached yet as it require more
resources than what the firm can currently
obtain, or it requires technology that is beyond
what is currently technically possible.
50. Economic Principles
• 2nd
Principle (continued)…
– However, Point Y can be achieved
(eventually) in the following means:
• A) The firm or economy acquires new
resources e.g. a bigger labor force, discovery
of a new energy source.
• B) The firm or economy continues to use
better and better production technology.
51. Economic Principles
• 2nd
Principle (continued)…
– The best way to think about point Y is to
compare our country through the last 50 years…
Was there a difference in our standard of living?
This is known as economic growth!
52. Economic Principles
• 3rd
Principle: People respond to incentives
– Let’s go back to our earlier example on choosing
between study and going out.
– What if, while choosing between studies or going
out, you were told that your dream girl (guy) will
be there as well?
53. Economic Principles
• 3rd
Principle: People respond to incentives
– Now your opportunity cost has changed - if you
study, your opportunity cost is missing out fun
and meeting that special person.
– Now, you may become more motivated to choose
going out with friends.
54. Economic Principles
• 3rd
Principle (continued)…
– Another example: you can get rid of your garbage
by the usual means or travel extra 5km to a
recycle center.
Opportunity Cost:
Pollution
Opportunity Cost:
Time and energy
55. Economic Principles
• 3rd
Principle (continued)…
– But what if you were told that every Kg of garbage
that you recycle earns you an extra $5?
– This would indeed motivate more people to
recycle instead of disposing the usual way.
56. Economic Principles
• 4th
Principle: Marginal Cost and Benefit
– Let’s say that you have decided to spend the evening
study for your exams (instead of going out).
– The following is a table showing the relationship
between hours studied and the expected exam score:
HoursHours
studiedstudied 22 33 44 55
ExpectedExpected
scorescore 6565 8585 9595 9999
MarginalMarginal
scorescore
increaseincrease
00 2020 1010 44
57. Economic Principles
• 4th
Principle (continued)…
– As you can see, even after you have made your
choice by comparing the opportunity cost, it does
not mean that repeating the same decision will
keep giving you the same benefits.
58. Economic Principles
• 4th
Principle (continued)…
– If you continue to study more than 5 hours, the 6th
hour (the marginal cost) onwards will not provide
better exam scores (marginal benefit).
– In fact, you might even get a headache and ruin
your exam performance the next day!
59. Economic Principles
• 4th
Principle (continued)…
– In that case, you can decide to go out with
your friends after studying for 4 - 5 hours –
hopefully they haven’t gone home yet!!
60. Economic Principles
• 4th
Principle (continued)…
– Marginal cost is the additional input needed
to produce an extra unit of output (e.g. each
hour of study).
– Marginal benefit is the additional
benefit/output generated from an extra unit
of input (e.g. extra test score).
61. Economic Principles
• 4th
Principle (continued)…
– Imagine that Apple has decided to spend the $1 billion to
research on IPhone. If Apple was to spend more research
money on IPhone, its expected marginal (extra) profit will
decrease (for example, the upgraded model may become
more and more complicated for customers)
AmountAmount
SpentSpent $1b$1b $2b$2b $3b$3b $4b$4b
ExpectedExpected
revenuerevenue $2b$2b $3.3b$3.3b $3.5b$3.5b $3b$3b
MarginalMarginal
profitprofit
increaseincrease
00 $1.3b$1.3b $0.2b$0.2b -$0.5b-$0.5b
63. Types of Economic Systems
• Most countries these days practice the free market
system or capitalistic system.
• In this market system, people have the freedom to
set up, grow, sell or shut down their businesses.
• Likewise, buyers have the freedom of choice (i.e.
what to buy and at what price & quantity).
64. Types of Economic Systems
• On the other hand, there are a few countries
that practice(d) planned economy.
• In an planned economy the government
decides what to produce and sell. It controls
all the factors of production (e.g. labour, raw
materials, and machinery).
65. Types of Economic Systems
• Although buyers in a planned economy can still
decide what to buy, etc., their choices are very
limited.
• Example of planned economies: former Soviet
Union, China (under Mao) and North Korea.
66. Types of Economic Systems
• However, it is probably more correct to say that
most countries these days adopt a “mixed market”
approach that combines the 2 systems above.
• For instance, although you are free to set up a shop
to sell cigarettes, you are controlled by the
government as to whom you can sell it to i.e. no
minors.
67. Summary
• Economics is the study of how people and societies
choose to use the scarce resources available to hem
• Microeconomics vs. Macroeconomics
• Normative vs. Positive Economics
• Economic Concepts
– Tradeoffs
– Opportunity Costs
– People Respond to Incentives
– Marginal Benefits and Costs
• Types of Economic Systems
