Introducing The Economic Way Of Thinking

• This chapter will discuss the concept of scarcity as the basic economic problem faced by every country in this world
• Scarcity


  The condition that exists when the limited number of resources the economy is met with the unlimited human wants
• Resources


  Inputs in the production of goods and services, also known as factors of production
• Types of resources


  • Land (Natural Resources)
  • Labor (Human Resource)
  • Capital
  • Entrepreneurship
• Resources are limited which means that they are available in a specified quantity in the economy
• Human wants are unlimited which means people would want to have as many goods as possible
• Economics


  A social science that studies how society chooses to allocate its scarce resources to alternative uses, to provide goods and services to satisfy human's unlimited wants
• Islam recognizes scarcity as result of human's greed
• Opportunity cost


  The next best alternative that we must sacrifice as we chose a good or an action
• Marginal analysis


  The process of making decisions by comparing the additional benefit (marginal benefit) against the additional cost (marginal cost)
• In the world of scarcity, when one cannot have all the goods that they desire, then the process of marginal analysis becomes important in decision making
• Normative economics and positive economics are two different approaches to deriving economic theories
• Normative economics


  Deals with what ought to be, based on value judgments and opinions
• Positive economics


  Deals with what is, based on objective analysis of facts
• Types of goods and services

  • Goods versus Services
  • Economic Goods versus Non-Economic Goods
  • Private Goods versus Public Goods
  • Consumer Goods versus Capital Goods
• Marginal analysis


  The process of comparing the marginal benefit against its marginal cost
• Marginal benefit


  The additional benefit gained from consuming an additional unit
• Marginal cost


  The additional cost incurred from consuming an additional unit
• Opportunity cost


  The cost incurred by making a choice, which is the benefit of the alternative that was not chosen
• Marginal analysis and opportunity cost are closely related concepts
• Macroeconomics


  The study of the economy as a whole or in aggregate
• Microeconomics


  The study of individual units in the economy such as individual firms and households
• Microeconomic decisions


  Influence the economy as a whole (macroeconomics)
• Macroeconomic conditions


  Influence decisions by individual firms and households (microeconomics)
• Economic model


  A simplified representation of reality used to study economic behaviour
• Positive economic model


  A model that describes the way the world is, based on facts and data
• Normative economic model


  A model that prescribes how the economy should be, based on value judgments and opinions
• Economic goods


  Anything that can satisfy human wants and is scarce
• Non-economic goods


  Goods that are non-desirable and abundant
• Private goods


  Goods purchased for individual private consumption, with characteristics of excludability and rivalry in consumption
• Public goods


  Goods provided by the government for communal use, with characteristics of non-excludability and non-rivalry in consumption, and large external benefits
• Types of consumer goods

  • Durable goods
  • Non-durable goods
  • Consumer services
• Types of capital goods

  • Durable goods
  • Non-durable goods
  • Services
• Economics


  A social science concerned with how individuals, institutions and society make best choices under condition of scarcity
• Economics is the study about human behavior using scientific approach
• Scarcity


  The condition that exists when the limited amount of resources in a country is met with human unlimited wants
• Scarcity


  The condition that exists when the limited amount of resources in the economy is met with the unlimited human wants
• Resources


  • LAND
  • LABOR
  • CAPITAL
  • ENTREPRENEURSHIP
• Land


  Natural resources provided by God in this world
• Labor


  Human resources that may contribute either mental or physical capacity