economics

• Economics


  A social science that studies how people and society organize scarce and limited resources to satisfy unlimited human wants
• Factors of Production (FOP)


  • Land
  • Labour
  • Capital
  • Entrepreneur
• Land


  Includes all natural resources which are derived from the earth and land itself, e.g. timber, oil, coal, soil and water. 'Rent' is the return to land.
• Labour


  People who contribute their energy mentally and physically to earn wages or salaries. Can be categorized into skilled, semi-skilled and unskilled. 'Wages/salaries' are the returns to labour.
• Capital


  Man-made goods used to produce other goods and services, e.g. machinery, tools, equipment, buildings, factories. 'Interest' is the return to capital.
• Entrepreneur


  A person who has the ability of planning, organizing, directing and controlling, and organizes the other FOP to produce goods and services. 'Profit' is the return to the entrepreneur.
• FOPs are limited and society will try to use them efficiently to produce goods and services which later satisfy their unlimited wants
• Unlimited wants


  • Goods (can be seen and touched, e.g. books, cars, computers)
  • Services (intangible things, e.g. transportation, education)
• Scarcity


  Society is faced with scarcity due to unlimited wants and limited resources
• Choice


  Due to unlimited wants and limited resources, society has to make choices to maximize satisfaction, minimize cost and maximize profit, or maximize society's welfare
• Opportunity cost


  The number of goods forgone to make the best choice or the best alternative forgone
• Production Possibilities Curve (PPC)

  • Shows the alternative combinations of two goods which can be produced with the existing resources and the current level of technology
  • Assumptions: only two goods, fixed level of technology, fixed and limited FOP, full level of employment
• Points on the PPC


  • Point A (all resources to produce only TV and no radio)
  • Point F (all resources to produce only radio and no TV)
  • Point B (80 units TV and 20 units radio)
  • Point C (60 units TV and 30 units radio)
• In order to obtain one more unit of a good, less units of another good would have to be sacrificed
• Increase in the level of technology, increase in economic growth, increase in population

  Shift the PPC outwards
• Recession, decline in economic growth, natural disaster

  Shift the PPC inwards
• Basic economic problems


  • What to produce
  • How much to produce
  • How to produce
  • For whom to produce
• Capitalist economic system


  • Resources owned by private sectors, no government intervention, price mechanism used, producer objective is to maximize profit, consumer objective is to maximize satisfaction
  • Advantages: freedom of choice, right to own wealth, mobility of labour, competition leads to quality
  • Disadvantages: wide disparity between rich and poor, misallocation of resources, human welfare ignored, social cost and negative externalities
• Socialist economic system


  • Government makes all economic decisions, government owns all resources and allocates through central planning, society has no right to make decisions, equal distribution of income
  • Advantages: equal distribution of income, low unemployment, government provides public goods, inequality minimized
  • Disadvantages: consumers have no freedom of choice, workers have no incentive, absence of competition, inferior technology, hard to estimate demand
• Mixed economic system


  • Resources owned by both government and private sectors, government provides public goods, individuals and firms free to own wealth and make economic decisions
  • Advantages: variety of goods and services, economic activities more stable and organized, narrow gap between rich and poor, social costs minimized
• Islamic economic system


  • Based on principles of Tauhid, Habluminallah, Habluminannas, Rububiyyah, Tazkiyyah, Zakat and Sadaqah, Khalifah, Ukhuwwah
  • What/How Much to Produce: produce permissible (halal) goods and services only, according to Shari'ah
  • How to Produce: choose most efficient and cost-effective method, avoid haram goods/services
  • For Whom to Produce: need of the poor comes first, not ignore the rich, produce essential goods first then luxury goods