These can also be referred to as basic economic questions . Sinece there are limited resources , a nation or society has to decide how to allocate its limited resources eddicientlty to produce the goods and services to satisfy the needs of the people . To do this , three fundamental conomic questions need to be answered .
What to Produce
- The economy of every nation has to take fundamental decision of what to produce because of the limited economic resources . Every society must choose the type and the quantity of goods and services tht it will produce . Should more computes be produced than radios ? Should more clinics be built than schools ? How many cars should be produced ? The problem of what to produce is solved in different wats in different economic systems . In a captitalist economy , this problem is solved through the price mechanism , which reflecs consumers; taste and preferences . In a socialist system , it is solved by the Central Planning Authority .
How to Produce
- This refers to the cheapest method of production . There are alternative techniques of producing goods and services . Should farmers use traditional ways to harvest ?Should factories use more human power or robotics to produce goods ? Should cars be produced by automatic machines or assembly line workers ?
For WHom to Produce
- This referes to distribution . Distribution of economic benefits depends on the distribution of income . How is the national income distributed ? Who will drive the latest model of an imported car ? How much will pensioners receive ?
These three basic economic problems are solved differently in different economic systems . See economic systems .
Monday, October 10, 2011
Opportunity cost
Oportunity cost is 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 alternative . The next alternative that you choose not to do is the cost of the thing that you choose to do .
Definitions of opportunity cost - opportunity cost is defined as the second best altertnative that has to be forgone for another choice which gives more satisfaction .
Example - Dina has Rm 5 and she would like to buy two things : a book and a pen which cost Rm 5 each ( unlimited wants but limited resources ) . Dina has to choose either to purchase a book or a pen which would satisfy her needs ( choices ) . If Dina chooses the book , then the pen is the opportunity cost because it is the second best alternative which she has to forgo .
Opportunity cost - Second best alternative that has to be forgone for another choice which gives more satisfaction .
Definitions of opportunity cost - opportunity cost is defined as the second best altertnative that has to be forgone for another choice which gives more satisfaction .
Example - Dina has Rm 5 and she would like to buy two things : a book and a pen which cost Rm 5 each ( unlimited wants but limited resources ) . Dina has to choose either to purchase a book or a pen which would satisfy her needs ( choices ) . If Dina chooses the book , then the pen is the opportunity cost because it is the second best alternative which she has to forgo .
Opportunity cost - Second best alternative that has to be forgone for another choice which gives more satisfaction .
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 .
Scarcity
One of the most important concepts in economics is scarcity . Scarcity can be explained as want are always exceeding limited resources to satisf them . Scarcity is a universal problem faced by both poor and rich nations in order to fulfill their needs . if these 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 . Economics hjave classified the factors of production into four group namely :
- Labour - The services controibuted by people in the produ tion process that invole both mental and physical effort . Exmaples are lecturers , construction workers and others . For more details please see chapter 5 .
- Capital - Huiman made resources which are used in the production process to produce other goods and services . Examples are machinery , raw materials , building , tools and others .
- land - All natural resources such as land , air , water , forest , and others .
- Entrepreneur - Human ability and capability to combine land , labour and capital to develop production of goods and services .
Recall the definition by Robbins , " Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses'. When we observe this , we shall find some important concepts which comprise the main structure if Economic Science .
The meaning of the three important fundamentals are as follows :
The meaning of the three important fundamentals are as follows :
- ends refers to unlimited human wants . From our own experience , we want many things in life and if one want has been satisfied , it would create another need . For example , if we desire to buy a kancil car and we manage to purchase one , later we would want a bigger , imported car and these wants will continue without an end . So , when there is unlimited wants , we would need to choose between the most urgent need and the less urgent want .
- Scare refers to the wants which are unlimited although the means to satisfy these wants are limited . In other words , these are limited resources . Almost all things that men desire or want are scare .
- Alternatives refers to choices which may be made and involves opportunity cost . Scarce resources can be put to various uses . if we are not able to buy an imported car , then are other alternative cars that we can purchase with our limited income .
Positive Versus Normative Analysis
First of all , let use define what positive and normative analyses mean . A positive analysis is to deal with the question of "what is " and no indication of approval or disapproval .Basically , the positive analysis focuses on facts and cause-and-effect relationships . A positive analysis will predict the changes in economic phenomena such as production , consumption , and consumer's income due to changes in government policy . For example, suppose that the Malaysian government removes its subsidies for petrol and diesel . What is the impact on the consumers and automobile industry ? Will consumeers prefer bigger or smaller cars ? What is the impact on the transportation industry as well as tourism industry ? Will this subsidy removal increase the price of other related goods ? All these are called positive analysis because we need to analyze the cause-and-effect relationship .
On the other hand , a normative analysis is to deal with the question of "What ought to be " . The normative analysis incorpporates value judments about what the economy should be or what policy should be used to achieve economic goals . Pertaining to the same situation , question such as " should the car manufacture produce a more fuel efficient car ? " or should the goverment impose lower corporate tax on oil producing companies ?" will arise . All these are statements in normative analysis .
On the other hand , a normative analysis is to deal with the question of "What ought to be " . The normative analysis incorpporates value judments about what the economy should be or what policy should be used to achieve economic goals . Pertaining to the same situation , question such as " should the car manufacture produce a more fuel efficient car ? " or should the goverment impose lower corporate tax on oil producing companies ?" will arise . All these are statements in normative analysis .
Differences between Microeconomics and Macroeconomics
After the great depresion of the 1930s , the discipline of economics split into two , namely , microeconomics and macroeconomics . Ragnar Frish , a Norwegian economist and jan Tinbergen , a Dutch economist were the first to introduce the words micro-dynamics and macro-dynamics in 1933 and these were later known as microeconomics and macroeconomics .
The terms " Microeconomis" and " Macroeconomics " are derived from the Greek words "micro" and "macro" , where "micro" means small and "macro" mean large .
Mircoeconomics
- Microeconomics studies individual economic unit s in detail such as a household , a firm and a goverment . As the word " 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 .
Microeconomic concepts can be applied to our daily lives . individuals face questions like : What do I want for breakfast ? Shall I buy a DVD player or a computer ? where should I go for holidays ? Firms face questions like : Shall we produce rice or compact discs ? How many labourers should we employ ? Shall we use more machines or labour ? A government faces questions like : Shall we allocate a budget for schools or clinics ?
Macroeconomics
- Macroeconomics studies the aggregate behaviour of the entire economy . We study the gorss domestic product , the national income , inflation , feflation , unemployment , public finance , the trade cycle , international trade and others .
Some examples are : What is the unemployment rate in Malaysia ? What cause a high inflation ? Why did Bank Negara Malaysia cut interest rates by 2 percent ?
Microeconomics
- The study of individuals parts of the economy such as public choices , business choices and personal choices .
Macroeconomic
- The study of the economic system as a whole such as the national income , the trade cycle , the unemployment rate , inflation and general price levels .
The terms " Microeconomis" and " Macroeconomics " are derived from the Greek words "micro" and "macro" , where "micro" means small and "macro" mean large .
Mircoeconomics
- Microeconomics studies individual economic unit s in detail such as a household , a firm and a goverment . As the word " 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 .
Microeconomic concepts can be applied to our daily lives . individuals face questions like : What do I want for breakfast ? Shall I buy a DVD player or a computer ? where should I go for holidays ? Firms face questions like : Shall we produce rice or compact discs ? How many labourers should we employ ? Shall we use more machines or labour ? A government faces questions like : Shall we allocate a budget for schools or clinics ?
Macroeconomics
- Macroeconomics studies the aggregate behaviour of the entire economy . We study the gorss domestic product , the national income , inflation , feflation , unemployment , public finance , the trade cycle , international trade and others .
Some examples are : What is the unemployment rate in Malaysia ? What cause a high inflation ? Why did Bank Negara Malaysia cut interest rates by 2 percent ?
Microeconomics
- The study of individuals parts of the economy such as public choices , business choices and personal choices .
Macroeconomic
- The study of the economic system as a whole such as the national income , the trade cycle , the unemployment rate , inflation and general price levels .
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