Economics

AED 1312 WEEK 1

Contents
 Introduction  Definition  Microeconomics vs Macroeconomics  Basic economics concepts  Basic economics problems  Production possibilities curve

INTRODUCTION
 Economics is one of the oldest disciplines among the

humanities and is categorized as a social science.  Economics examines and analyses the economic activity of people in order to satisfy their needs and desires.  Human wants are the starting point of economic activity and provide the basis for economics.  Generally, economics deals with the economic problems of individuals, firms, societies and countries.

DEFINITION
 Basically, there are wide definitions of economics as a

social science.
 L. Robbins

A science that studies human behavior as a relationship between ends and scarce means which have alternative uses.  K.E. Case and R.C. Fair

A study of how people use their limited resources to try to fulfill unlimited wants and involves alternatives or choices.

MICROECONOMICS
 Microeconomics studies individual economic units

in detail such as a household, a firm and a government.  As ‘micro’ means looking closer into small units, microeconomics provides an outline for choices and decision making of an individual, a business and the public at large.  E.g.  What should I buy with RM5?  Where should I go for holiday?

MACROECONOMICS
 Macroeconomics studies the aggregate behavior of

the entire economy.  It studies the gross domestic product, the national income, inflation, deflation, unemployment, public finance international trade, etc.  E.g.  What causes a high inflation?  Why did Bank Negara Malaysia cut interest rates by 2%?

POSITIVE ECONOMICS
 Positive economics is the branch of economics that

concerns the description and explanation of economic phenomena. The price of milk has risen from $3 a gallon to $5 a gallon in the past five years.  This is a positive statement because it can be proven true or

false by comparison against real-world data. In this case, the statement focuses on facts.

NORMATIVE ECONOMICS
 Normative economics is that part of economics that

expresses value judgments (normative judgments) about economic fairness or what the economy ought to be like or what goals of public policy ought to be. The price of milk should be $6 a gallon to give dairy farmers a higher living standard and to save the family farm.  This

is a normative statement, because it reflects value judgments and cannot be proven true or false by comparison against real world data. This specific statement makes the judgment that farmers need a higher living standard and that family farms need to be saved.

BASIC ECONOMIC CONCEPTS
 SCARCITY  It can be explained as wants are always exceeding limited resources to satisfy them.  Scarcity is a universal problem faced by poor and rich nations in order to fulfill their needs.  If there is no scarcity, there will be no economics.  The needs or wants are unlimited but the world has only a limited amount of resources of factors of production.  Factors of production are the basic resources used in the production process in order to produce economic goods and services.

BASIC ECONOMIC CONCEPTS
 CHOICE  When there is scarcity, choices have to be made.  Everyone cannot have what he or she wants, so they have to choose from the available alternatives.  Individuals, firms, and government make decisions to choose from many alternatives.

BASIC ECONOMIC CONCEPTS
 OPPORTUNITY COST  The cost of one choice in terms of the best forgone alternative.  If you cannot obtain what you need, then you have to choose among the alternatives.  The next alternative that you choose not to do is the cost of the thing that you choose to do.  The second best alternative that has to be forgone for another choice which gives more satisfaction.  E.g. A book or a meal?

BASIC ECONOMIC CONCEPTS
 Factors of Production
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