TUNKU ABDUL RAHMAN UNIVERSITY COLLEGE
Centre for Pre-University Studies
Course: Foundation in Accounting
Unit: FPEC 1034 Basic Economic Principles
Topic: 1 – Introduction
scarcity
1. What is economics?
Economics is the study of how society uses scarce resources to produce goods and
services to satisfy unlimited human wants.
2. Economic Resources
Economic resources are also known as factor of production (input). These resources are raw or
man-made materials used in the production process of goods and services (output).
Factor of production
Description
Land
Refers to all natural resources that are gifts of nature eg. river,
forest, mineral, sea, land.
Labour劳工
Refers to human resources or physical and intellectual services
provided by man.
Capital (Modal)资金
Refers to raw or man-made resources used to produce other
goods e.g. machinery, assembly plant, robots, buildings, trucks,
roads
Enterprise (Usahawan)
Refers to the action of an individual that organizes the other
three factors of production, involves taking risk to produce
goods and services to fulfill human wants.
3. Basic Economic Concepts
Scarcity
Scarcity can be explained as wants which are always
exceeding limited resources meant to satisfy them. Problems
of scarcity occur when economic resources are limited
compared to man’s unlimited wants and needs.
Choices
When there is scarcity, choices have to be made. Since there
are not enough available resources to satisfy the wants of
individual and societies, individuals and societies must make
choices among competing alternatives.
Opportunity Cost
Opportunity cost can be defined as the next best alternative
sacrificed for a chosen alternative. When we choose one
alternative, we must forgo all the other alternatives. The next
best alternative given up is the opportunity cost of what we
1 of choice result in opportunity cost.
have chosen. Problems
Example 1:
David has RM 5 and he would like to buy two things: a book and a pen which cost RM5 each
(unlimited wants but limited resources). David has to choose either to purchase a book or a pen
which would satisfy his needs (choices). If David chooses the book, then the pen is the
opportunity cost because it is the next best alternatives which he has to forgo.
Example 2:
Raymond hopes to be a rock star, and he would need a large amount of income to set up his
band. By doing so, he must forfeit a large amount of income to attend college and the
opportunity cost is the inability to further his studies.
4. Basic Economic Problems

What and how much to produce?
The problem of scarcity restricts our ability to produce everything we want during a given
period, so the choice of producing more of one good, requires producing less of another good.
This will lead to opportunity cost.
 How to produce?
Society has to decide how to combine technology and the scarce resources to produce goods
and services. The production technique could be labour-intensive or capital-intensive.
 For whom to produce?
Society must know how to distribute the produced goods and services. This is usually
determined by income distribution. Those in the higher income group will get more and better
quality goods as compared to the lower income group.
5. Types of goods
 Free goods
- can be defined as goods with zero opportunity cost. They are abundant in supply (unlimited
in quantity) and are considered gifts of nature. There is no price to be paid for these goods.
Example: air, sunlight, rain-water, snow
 Economic goods
- can be defined as goods where opportunity cost is involved. There is a price to be paid for
these goods. It has the characteristics of excludable and involves rivalry. They are scarce in
supply. Example: television, clothing, raw materials
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 Private goods
- A private good or service has three main characteristics:
(i) Excludability排他性: Consumers of private goods can be excluded from consuming the
product if they are not willing or able to pay for it. For example - a ticket to the cinema or
a meal in a restaurant. Another good example is the increasing use of “pay-per-view” as a
means of extracting payment from people wanting to watch exclusive coverage of sporting
events on television or the use of subscription-based services on the internet.
(ii) Rivalry竞争: With a private good, one person's consumption of a product reduces the
amount left for others to consume - because scarce resources are used up in producing and
supplying the good or service. Example: If you order the last piece of pizza, then that pizza
is no longer available to someone else. Likewise driving your car on a road uses up road
space that is no longer available at that time to another motorist.
(iii)Rejectability: Private goods and services can be rejected - if you don't like the meal on the
college menu, you can use your money to buy something else at somewhere else. You can
also choose not to travel by bus or you can choose instead to travelby taxi.
 Capital goods
- goods that can be used to produce other goods. Example: machinery, factories
 Consumption goods
- Goods that are consumed by people and give immediate satisfaction. Consumption goods can
satisfy human wants. Example: clothing, shoes, food, health services
 Public goods
- can be defined as goods and services provided by the government for communal use. Nobody
is prohibited from using these goods and services, regardless whether he is a taxpayer or not.
Public goods have the characteristic of non –excludability which means nobody is prevented
from using them and non-rivalry which means the consumption by one person will not reduce
the availability to others. Example: street lighting, flood control systems, national defence
services.
 Merit goods
- can be defined as goods and services that are beneficial to consumers. Merit good are
those goods and services that the government feel that people will under-consume, and which
ought to be subsidized or provided free at the point of use.
Both the public and private sector provide merit goods & services. Consumption of merit
goods is widely believed to generate positive externality effects - where the social benefit
from consumption exceeds the private benefit.
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A merit good is a product that society values and judges that everyone should have regardless
of whether an individual wants them. In this sense, the government (or state) is acting
paternally in providing merit goods and services. They believe that merit goods are underconsumed as individuals have imperfect information about the benefits that can be derived
from these goods. Examples of merit goods include health services, education, work training
programmes and public libraries.
The government often provides merit goods “free at the point of use”, financed through
taxation. Examples include primary health care available to people through the National Health
Service and books borrowed from local authority libraries.
 Demerit goods
- generate negative externality effects. Example: alcohol drug, taxes(high)
6. Economic System
An economic system is a complex network of individuals, organizations and institutions in a
society whose decision determine the ways in which the scarce resources are used to produce
goods and services and the manner in which these outputs are distributed for consumption.
There are three types of economic systems:
 The command economy
It is also known as the planned economy(socialist). Everything is controlled by the government
and the three basic economic problems like what and how much to produce, how to produce
and for whom to produce will be solved by the government.
Features: 
All factors of production are owned by the state/government.

Centralized planning - all economic activities are decided and controlled by the central
planning authority.

Choice – individual has little choice (low consumer sovereignty主权) as the type of goods
produced is determined by the government.

There is little incentive for enterprise and innovation.

Inefficient allocation of resources – tend to have shortages of certain goods and services and
surplus of others. This represents a waste of resources.

Tendency to exist large bureaucratic structure where there is a need to coordinate and control
the system to ensure that various units perform their assigned tasks. Such huge structures
tend to create problems in communication and coordination.

Income and growth – failed to match growth performances of the other 2 economic systems.

Example: North Korea
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 The market economy
It is also known as the capitalist, laissez-faire economy. There is no government intervention and
all economic activities are carried out by the private sector or individuals.
Features: 
All factors of production are privately owned by individuals, firms and institutions.

Freedom of choice – individuals have the right to own, control and dispose of their resources in
any way they want. Consumers are free to choose goods and services that satisfy them.
Consumers are provided with a wide range of choice in terms of price and quality.

Self-interest as the dominating motive - consumers attempt to maximize satisfaction, producers
attempt to maximize profit. Consumers indicate to the producer what they desire by the price that they
are willing to pay. The higher the price, the higher level of profit to the producers. Resources are
channeled to produce the goods that individuals demand. In order to maximize profit, the producers must
maximize revenue and minimize cost. The producer may decide to use either labour- intensive method
or capital-intensive method.

Goods will be produced for those consumers who are willing to pay and able to pay. Usually, the
amount of goods in the market is insufficient to meet the demand of all who are willing to pay.
Competition will drive up price eliminating those who are unable or unwilling to pay. Thus,
product price will ration out scarce goods to those who can afford to pay the price.

The economy achieves economic efficiency in allocating resources. Self-interest encourages the
use of resources in line with consumers’ preferences. The producers produce goods according to
the wants of society. There is minimum wastage in terms of producing goods that are unwanted.

There will be automatic response to change and there is no need for costly and complex
bureaucracies to coordinate plans. The producers will respond to the change in the demand of
the goods and reallocate resources accordingly.

High economic growth can be achieved as the high profit is the reward thus incentive to
increase productivity.

However, there will be inequality in income distribution due to the non-intervention by the
government. A wide gap between the poor and the rich exists. The rich who are normally the
producers will get richer while the poor will get poorer.

The economy fails to provide public goods like street lighting
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 The mixed economy
Both the public sector and private sector work hand in hand to ensure the economic growth of the
country.
Features: 
Resources are partly owned by private individuals and partly by the state/government.

The main motivation of the private producers is profit while the state attempts to considerthe
welfare of the community. The private sector conducts businesses in the economy andthe
government encourages the private sector by providing them with infrastructures like
electricity, water, highways and ports.

The role of the public sector is not to compete with the private sector but to complementthe
private sector by providing assistance and infrastructures to speed up economic growth.

The government will create a framework of rules to supplement and modify the price
system to achieve high economic growth and to stabilize the economy.

The government will also control the existence of monopolies. A monopolist is a single seller
of a particular good that usually reduces output to keep prices of its goods high. In this way,
the consumer is exploited when needed to pay a high price for the goods and thegovernment
intervenes to regulate the power of monopolies.

There will be the redistribution of income by the government to achieve a more equitable
distribution. The government may impose a progressive tax system where higher income
earners are taxed more than the lower income earners and the poor are given assistance in the
form of subsidies. In this way the gap between the poor and rich is narrowed down.

Example: Malaysia, Singapore
7. Production Possibility Curve(Frontier)
It shows the various possible combinations of goods and services that the economy can
produce given a limited amount of resources and the most efficient technique of production.
Assumptions of Production Possibilities Curve:




A country produces only two goods, eg: good X and good Y
Fixed quantity and quality of resources
Level of technology is fixed or stagnant
The economy is operating at full employment and has achieved maximum
efficiency.
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Diagram
Illustration

Point A on the PPC indicates that the economy would allocate all its resources to provide good
Y only and zero units of Good X. At the other extreme, point D indicates that the economy
would allocate all its resources to provide good X only and zero units of Good Y.

Points A, B, C and D indicate that the economy has achieved full employment (on the curve),
hence usesall the resources available in production.

The economy can also produce any combinations inside the curve, but this would mean that
some resources are unemployed or inefficient method of production is being used. Eg. Point F.
The economy could produce more of both goods by moving to a point such as point C. If the
point inside PPC such as point F moves towards the PPC eg point C,
it is referred as an increase in economic activities.

Point outside the PPC such as G is not attainable with the present production capacity.
The factors which enable point G to be reached: a)
b)
c)
d)
e)
An increase or advancement in technology
Increase in labour force
Increase in population
Increase in resources example raw materials
Specialization and division of labour
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8. a) Production possibility curve with increasing opportunity cost
The production possibility curve displays a bowed-out shape due to the increasingopportunity
cost. The opportunity cost increases as production of one output expands.
Table and Diagram
calculation
Points on
PPC
A
B
C
D
E
Good Y
(units)
(Y-axis)
15
13
10
6
0
Good X
(units)
(X-axis)
1
2
3
4
5
The production possibility curve displays a bowed-out shape (the shape is concaved to the origin) due
to the increasing opportunity cost. The opportunity cost increases as production of one output expands.
This means that to increase one unit of a good, the number of units of the other good that needs to be
forgone or sacrificed increase at each combination of production. For example to increase 1 unit of
Good X from 1 to 2, the economy has to sacrifice 2 unit of Good Y(15 – 13) and to increase 1 more unit
of Good X from 2 to 3, the economy has to sacrifice 3 units of Good Y(13
– 10). This shows that the opportunity cost is increasing.
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b) Production possibility curve with constant opportunity cost
The production possibility curve displays a downward sloping straight line curve due to the
constant opportunity cost. The opportunity cost remains the same as production of output
expands.
Table and Diagram
Points on
PPC
A
B
C
D
E
Good Y
(units)
(Y-axis)
50
40
30
20
10
Good X
(units)
(X-axis)
0
1
2
3
4
The production of an additional 1 unit of Good X as shown in the movement from point A to
point B involves forgoing the production of 10 (50 – 40) units of Good Y. From point B to C
involves forgoing 10 units of good Y as well. When there is additional production of Good X,
an equal number of Good Y needs to be sacrificed thus this is law of constant opportunity cost.
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9. Economic growth (↑ production)
The outward shift of the PPC is referred as economic growth, the country’s capacity to produce
goods increases. This outward shift permits the economy to produce greater quantities of
output. Technology advances or growth in the resource base enables the PPCto shift outwards.
Diagram
The production possibility curve shifts outwards (shifts to the right) from PPC to PPC1 indicating
economic growth. This means that the economy (country) is now able to produce more goods and
services. At point A, the economy produces 10 units of Good X and 10 units of Good Y. With
economic growth, the economy is able to produce more of Good X and Good Y. This is shown bypoint
B where the economy produces 18 units of Good X and 15 units of Good Y.
10. Economic Decline (↓ production)
Production possibilities of a country could have declined where the PPC shifts inward:
Factors that lead to an economic decline are:
a)
b)
c)
d)
Depletion of natural resources
Natural disaster
War
Decrease in population
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Diagram
The production possibility curve shifts inwards (shifts to the left) from PPC to PPC1 indicating economic
decline. This means that the economy (country) is now able to produce less (fewer) goods and services
compared to before. At point A, the economy produces 8 units of Good X and 7 units of Good Y. With
economic decline, the economy is able to produce fewer of Good X and Good Y. This is shown by point B
where the economy produces 5 units of Good X and 5 units of Good Y.
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