JC1 H2 Economics, Syllabus 9732

Central Economic Problem

What is Economics?
Economics is a social science. It seeks to explain something about society, just like other social sciences such as psychology, sociology and political science.

What is Economics?
But economists generally ask different questions about society than the sociologist and psychologist do, such as: !! Why are some countries growing faster than others? !! When a country is struck by a natural disaster such as earthquake, how are peoples incomes & living standards affected? !! When inflation rates in an economy increase significantly, what would the government do to reduce inflation rates?

What is Economics? Economics is the study of choice under conditions of scarcity

What is Economics?
Economics is a social science which studies how society uses scarce resources which have alternative uses to produce goods and services to satisfy unlimited human wants.

Economic Resources
Resources
Limited

Land

Labour

Capital

Entrepreneurship

Alternative Use Goods & Services

Economic Resources
ENTREPRENEURSHIP LABOUR Mental and physical human effort LAND Gifts of nature - includes all natural resources such as agricultural land, urban land, rivers, soil, climate and mineral deposits . A specialized type of labour that possess risk-taking and decision making ability to organize other factors of production to produce goods and services. CAPITAL
!!Physical

man-made goods, eg machinery, tools, buildings, unsold inventory !! can be used as inputs for further production.

Resources versus inputs

The term resources is often confused with another more general term inputs. An input is anything used to make a good or service. Inputs include not only resources but also many other things made from them (cement, rolled steel, electricity), which are, in turn, used to make goods and services.

Resources versus inputs

Resources, by contrast, are the special inputs that fall into one of the four categories: labour, land, capital, and entrepreneurship, They are the ultimate source of everything that is produced.

The central problem of economics is: Scarcity

Limited Resources (limited in Supply) Unlimited human wants

Scarcity

Unlimited Human Wants

Due to the desire for even higher levels of consumption once a particular level is attained. Similarly, desires increase over time as old wants are satisfied and new wants are created.

Scarcity
Scarcity exists because human wants always exceed what can be produced with the limited resources and time that nature makes available.

Scarcity
!! All

individuals face scarcity. !! As individuals, we face a scarcity of time and spending power. Given more of either, we could have more the goods and services that we desire.

Scarcity
!! !!

!!

Because of scarcities of time and spending power, each of us is forced to make choices. We must allocate our scarce time to different activities: work, play, education, sleep, shopping and more. We must allocate our scarce spending power among different goods and services: housing, transport, food, medical and others.

Scarcity
!! Even

the richest person must live with scarcity and must, at some point, choose one want or desire over another. !! As we get more affluent, we learn of new luxuries to provide us with satisfaction.

The central problem of economics is: Scarcity

Limited amount of Resources For both the rich & the poor Unlimited Human Wants
there are not enough to meet everyones wants for goods & services to the point of satiety

Scarcity
Scarcity can never will be eradicated.

Scarcity " Choice

Limited Resources Unlimited Human Wants

Scarcity
Choice is the act of selecting among alternatives

Scarcity " Choice

Because of scarcities of time and spending power, each of us is forced to make choices. !! Each time we choose to buy something or do something, we also choose not to buy or do something else.
!!

Scarcity The Central Economic Problem

Limited Scarce Resources Unlimited Human Wants

Choice Opportunity Costs

Opportunity Cost
The opportunity cost of any action is the next best alternative foregone.

Opportunity Cost
If you cannot have everything you want, then you have to choose among the alternatives. The next best alternative which you forgo is the opportunity cost of the thing you chose. There are trade-offs in every choice we make.

Example 1:
Tom has $2 to spend on either bread or chocolate. If he decides to buy bread instead of chocolates, the opportunity cost of buying the bread is the amount of chocolates that he could have bought with the $2, not the $2 spent.

Think-Pair-Share Activity
Give an example of opportunity cost that you face in daily life?

Think-Pair-Share Activity
Assuming you bought a bicycle for $100 but never use it. A similar bicycle would now cost $120, but yours would fetch only $40 for a second-hand bicycle. What is the present opportunity cost of owning the bicycle?

A free lunch?
!! There's

no such thing as a free lunch. !! A lunch may be free to you, but it is not free from society's perspective. !! Some of society's scarce resources that could have been used to produce something else of value will have been used in the preparation of the lunch.

Choice
All economies will have to constantly make choices regarding resource allocation because of the problem of scarcity. There are three important questions that any economy will have to consider in allocating resources.

What to produce

How to produce

For whom to produce

What to produce?
!! We

cannot produce everything, we need to decide what to produce and in what quantities. !! We have to choose, for e.g. whether to produce lots of goods and services, such as food, clothing and vehicles or to produce more military weapons.

What to produce? - An example At the government level Military Gds Hospitals

How much of each good must be produced

How to produce?
!! Arises

from the basic economic problem that, since resources are scarce in relation to unlimited wants, we need to consider how resources are used so that the best outcome arises. !! To consider how we can get the maximum use out of the resources available to us.

How to Produce

Labour Intensive Method of production

Capital Intensive Method of production

Aim of Producer: Use the least-cost method of production Why? Maximizes the level of output or Minimizes wastage of resources.

For whom to produce?

!! In

every society, some mechanism must exist to determine how goods and services are to be distributed among the population. Who gets what? !! Are goods and services produced for those who are able and willing to pay the prices for the goods and services?

Resources
! Limited ! have alternative uses
Limited amt of gds & srvs produced at any one time
Can never satisfy all of societys unlimited wants with limited resources

Human Wants
! Unlimited !Vary in Importance
Unlimited amts of gd & srvcs desired

Scarcity Choice Opportunity Costs

Scope of Economics
2 Branches of Economics

Microeconomics i individual economic units (1)! Consumers/ households (2)! Firms (3)! Government (4)! Industry

Macroeconomics a aggregate demand & supply It deals with the aggregate level of economic activities e.g. national income, total employment rate, aggregate investment and savings, the general price level & the level of govt spending.

Microeconomics

Basic Tools Demand for & supply of various goods & services and factors of production Examples of topics: Prices of various goods, eg cars, houses Level of output in an individual market in an economy Profits / losses in a firm

Macroeconomics

Basic Tools Model of the circular flow of income. Examples of topics: General level of prices in an economy Determination of National Income Level of employment or unemployment in the whole economy