CHAPTER 3 – ASSESSING ECONOMIC CONDITION

Imagine how would be life like 10000 Years ago?

A Normal Day

Find Food

FIGHT FOR FOOD

PROTECT YOURSELF FROM OTHER ANIMALS

Do the same thing everyday.

What is Economics

A social science that studies and influences human behavior

Economics is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants.

What is Economics?

What is ECONOMY?

The study of how individuals and societies use limited resources to

satisfy unlimited wants

It is also a study of how individuals deal with the fundamental problem

of scarcity.

MAKING CHOICE

Needs and WantsNeeds:- “STUFF” we must have to survive.

E.g.:- Food, Clothing and Shelter

Wants:- “STUFF” we would really like to have.

E.g. :- Fancy Food, big screen TV, jewelry.

These are also known as Luxuries.

People try to balance needs and wants.

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Economics

Micro Macro

Types of Economics

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Micro Economics• Micro Economics studies how the individual

parts of the economy make decisions to allocate

limited resources • Microeconomics studies:

– how individuals use limited resources to meet unlimited needs

– the consequences of their decisions– the behavior of individual components like

industries, firms and households.– how individual prices are set– what determines the price of land, labor and capital

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Macro Economics• Macroeconomics studies about the functioning

of the economy as a whole (wide lens)• Macroeconomics studies about

• the total output of a nation • the way the nation allocates its limited resources of

land, labor and capital • the ways to maximize production levels • the techniques to promote trade

ECONOMIC GROWTHIncrease in a country's productive capacity(income) as measured by

comparing gross national product (GNP=GDP + Net income Property from abroad) in a year

with the GNP in the previous year.

GNP = Total income of a country attained from domestic output and international trade(when Malaysian companies operate outside of

Malaysia).GNP = GDP + NR (Net income inflow from assets abroad or Net Income Receipts) - NP (Net payment outflow to foreign assets)

GDP = consumption + investment + (government spending) + (exports − imports)

ECONOMIC GROWTH

Increase in the capital stock, advances in technology,

and improvement in the quality and level of literacy are considered to be the principal causes of

economic growth.

In recent years, the idea of sustainable development has brought in additional factors such as environmentally sound processes that must be taken into account in growing an economy.

ECONOMIC GROWTH AND BUSINESS PERFORMANCE

Economic growth means an increase in Real GDP.

Economic growth means there is an increase in national output and national income.

Lower economic growth = lower productivity = low supply due to low demand from consumers

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The Factors of Production

Product

Land

Labour Capital

Organization

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The Factors of Production

Land includes the “gifts of nature,” or natural resources not created by

human effort.

Capital includes the tool,equipment,and factories used in

production.

Labour includes people with all their efforts and abilities.

Entrepreneurs are individuals who start a new business or bring a

product to market.

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Economy

Market Command Mixed

Types of ECONOMIC SYSTEMS

In a pure market economy there is no government involvement in economic decisions.

Market Economies

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The Government lets the market answer the following three basic economic questions:

1. What ? Consumers decide what should be produced in a

market economy through the purchases they make.

2. How ?

Production is left entirely up to businesses. Businesses must be competitive in such an economy and produce quality products at lower prices than their competitors.

3. For whom ?

In a market economy, the people who have more money are able to buy more goods and services.

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In a command economy the Government takes economic decisions.

Command Economies

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In a command economy the Government answers the three basic economic questions.

1. What?

A central planning committee decides what products are needed.

2. How?

Since the Government owns all means of production in a command economy, it decides how goods and services will be produced.

3. For Whom ?

The Government decides who will get what is produced in a command economy.

Command Economies

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In the Mixed economies the Government and the Market work together in decision making

Mixed Economies

Inflation

A sustained increase in the general price level of goods and services in an economy over a period of time.

It all starts with the money losing

value(currency).

Impact of Inflation

The effect of inflation on savers and investors is losing purchasing power.

• Whether you've buried your money in a coffee can in the back yard or it is sitting in the safest bank in the world, it is becoming less valuable with the passage of time.

Impact on Interest Rate

INTEREST RATE – Interest is charged by lenders as compensation as return of capital(ROC) for the loss of the asset's use. In the case of lending money, the lender could have invested the funds instead of lending them out.

Impact on Interest Rate

In Malaysia, interest rates are typically known as the Base Rate(BR)

The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower, for the asset's use. In the case of a large asset, the interest rate is sometimes known as the "lease rate".

Impact on Interest Rate

• Increase the cost of borrowing• Increase in mortage interest payment• Higher interest rate increases the value of £.• Government debt interest payment increase• Reduce confidence of investors

How Market Prices are Determined?

?

Factors That Influence Market Prices

1.Supply and Demand

2.Government Laws and Regulation (Collusions and Price Fixing)

3.Price Elasticity

4.Substituition

Government Influence on Economic Decisions

i. Stabilization and Growth• Adjusting fiscal and monetary policy

= Slow down or speed up economic growth.

ii. Direct Service• Large military establishment• Construction and maintenance

of most highways• The public education systems

Government Influence on Economic Decisions

iii.Regulation and Control• to ensure that business serves the

best interests of the people as a whole.

• to protect the public(Food and Drug Administration bans harmful drugs, or requires standards of quality in food)

Government Influence on Economic Decisions

The Economic Problem

Unlimited WantsScarce Resources – Land,

Labour, CapitalMany Uses of Resources

What goods and services should an economy produce? – should the emphasis be on agriculture, manufacturing or services, should it be on sport and leisure or housing?

How should goods and services be produced? – labour intensive, capital intensive?

Who should get the goods and services produced? – Even distribution? More for the rich? For those who work hard?

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Opportunity Cost

Definition – the cost expressed in terms of the next best alternative sacrificed

The cost of anything in terms of other things given up or sacrificed.

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