Extra Lessons Part 1

Schedule
• 8 Jul (Thur), 6-7.30pm (1h30)
• 9 Jul (Fri), 6-7.30pm (1h30)
• 10 Jul (Sat), 9.30-11am (1h30), 11.15am-12.30pm (1h15)
• 15 Jul (Thur), 6-7.30pm (1h30)
• 16 Jul, Fri, 6-7.30pm (1h30)
• 10 Jul (Sat), 9.30-11am (1h30), 11.15am-12.30pm (1h15)
• 22 Jul (Thur), 6-7.30pm (1h30)
• Progress Test next term starting August
Topics at a glance – Part 1
• 1. Why study economics? The economic problem
• 2. Scarcity, choice and the allocation of resources, the concept of demand
• 3. Positive and normative statements
• 4. Economic activities and economic agents, the concept of supply
• 5. Free and economic goods, consumer and capital goods, needs and wants
• 6. Factors of production
• 7. Production possibilities frontier
• 8. Inward and outward shifts of PPFs
• 9. Opportunity cost
1. Why study economics? The economic
problem
2. Scarcity, choice and the allocation of
resources, the concept of demand

Anderton: unit 1, pgs. 2-5

Powell: 1.1, pgs. 2-5
Anderton: unit 3, pgs. 12-16
Powell: 1.4, pgs. 8-11
Economics is a social science
• Economics has similarities to and differences in methodology from
the sciences.

• Like Maths or a science, Economics uses data, graphs, equations and

calculations.

• However, Economics is also like History, Politics or Psychology because

it studies people’s values and how they think and act.
Economics is a social science
• This is because value judgements influence economic decision making
and policy.

• In conclusion, economics is a social science.

• It uses scientific methods to study human beings.

Why study economics?
• We talk about economics whenever we talk about the best way to
manage and use the resources we have.

• These resources could be: money; land; possessions; time; people;

etc.

• Such resources are scarce: there is not enough of them to do

everything that we would like.

• Economics is the study of how scarce resources are allocated.

What is the basic economic problem?
• Humans have a small number of needs (clean air;
nutritious and plentiful food; clean water; adequate
shelter, etc.), and they have infinite wants.

• The basic economic problem is that wants are

unlimited but resources are scarce.

• Scarcity is a situation where the demand for

resources exceeds the available supply.

• So, we have to make choices. We have to allocate

resources.
3. Positive and normative statements

Anderton: unit 1, pgs. 3-4

Powell: 1.1, pgs. 4-5
Positive and normative statements
Positive statements
• Can be proven or disproven
• Are definitely true or false
• ”The basic rate of income tax is
20%”
• “It’s raining”
• “I will go to the cinema this
weekend”
• “Boris Johnson is the Prime
Minister”
Normative statements
• Are opinions
• Can be argued about but not
proven
• ”The rate of income tax should
be lowered”
• ”It rains too much”
• “Films are boring”
• “Keir Starmer would be a better
Prime Minister”
Positive or normative?
• “Unemployment benefits should be cut to prevent idleness in
society”

• “If pensions are cut, more old people will die of hypothermia”

• “The government must devote more resources to healthcare”

The concept of demand
• Demand is defined as the quantity of goods and services that will be
bought at any given price over a period of time.

• The law of demand states that

• A rise in the price will lead to a decrease in the quantity demanded of a good,
or
• A fall in the price will lead to an increase in the quantity demanded of a good
The concept of demand
Demand schedule Demand curve

Anderton: pg. 36, table 1, figure 1

4. Economic activities and economic
agents, the concept of supply
The purpose of economic activity
• The central purpose of economic activity
is the production of goods and services to
satisfy needs and wants.

• We need to direct resources to the

desired areas to produce goods and
services that are demanded by society.
Three key economic decisions
• There are three key economic decisions:

• What to produce?
• How to produce?
• Who is to benefit from the goods and services produced?
Four economic agents – at a glance
• Consumers
• Workers
• Firms
• Governments

• What do you think are the

objectives of each of these
economic agents?
The purpose of economic activity
• Consumers

• Economic theory states that consumers want to maximise their own

economic welfare.

• They don’t have enough income to purchase all the goods and services they
would like, so they have to allocate their resources – in particular, their
income – to maximise their welfare.
The purpose of economic activity
• Workers

• Economic theory states that workers want to maximise their own welfare at
work.

• This may mean they want as high a salary as they can get, although other
factors could be important too: the nature of the work; the location of the
job; job satisfaction; etc.
The purpose of economic activity
• Firms

• Economic theory states that the main objective of firms is to maximise their
profits.

• Profit is the positive difference between revenue and costs. (A negative

difference is a loss.)

• However, a firm may also have other objectives, e.g. survival, increasing
market share, environmental or ethical objectives.
The purpose of economic activity
• Governments

• Governments are assumed to want to maximise the economic welfare of the

citizens of their country or locality as they are more likely to stay in power if
their citizens believe that their economic circumstances are improving.

• This means their aim is to achieve rising living standards, increased disposable
income, etc.
The concept of supply
• Supply is defined as the quantity of goods and services that will be
sold at any given price over a period of time.

• The law of supply states that

• A rise in the price will lead to an increase in the quantity supplied of a good,
or
• A fall in the price will lead to a decrease in the quantity supplied of a good
The concept of supply
Supply curve

Anderton: pg. 61, figure 1

Where demand and supply curves intersect:
the equilibrium
• Equilibrium is the intersection of
demand curve and supply curve

• Equilibrium price (market-clearing

price) is the price at which every buyer
willing to pay for that price finds a
seller willing to sell

• Equilibrium quantity is the quantity

bought and sold at that corresponding
price Anderton: pg. 69, figure 1
5. Free and economic goods, consumer
and capital goods, needs and wants

Anderton: unit 3, pgs. 12-16

Powell: unit 1.2, pgs. 6-7
Needs and wants
Needs Wants
• Human needs are a finite group • Human wants are infinite and
of necessities that sustain human change over time.
life: • E.g. smartphones (did not exist 40
• E.g. food, water, shelter, warmth, years ago)
etc.
• However, deciding whether
• Some economists think the something is a need or want can
government should ensure the involve a value judgement
supply of needs, but others • E.g. is access to broadband a need
disagree. or a want?
Capital and consumer goods
Capital goods
• Capital goods are goods that are
used to produce final goods and
services.
• E.g. machinery, equipment
Consumer goods
• Consumer goods are goods that
are bought for final consumption
• E.g. computer games, fashion

• Some firms make and sell capital

goods.
Free and economic goods
Free goods Economic goods
• Free goods are goods that are • Economic goods are goods that
unlimited in supply and therefore are scarce because their use has
have no opportunity cost. an opportunity cost.
• E.g. air (nowadays there are very • E.g. almost any good you can think
few examples of free goods left) of
6. Factors of production

Anderton: unit 3, pgs. 12-16

Powell: 1.2, pg. 7
What do you need to produce something?
• You need resources. Specifically, the four factors of production:

• Land
• Labour
• Capital
• Enterprise

• The factors of production are economic resources.

Factors of production – land
• As an economic resource, land includes
everything natural that is in and on it –
crops, minerals, etc.

• It also includes the sea (and oil, fish, etc.).

Factors of production – labour
Factors of production – capital
• Capital refers to goods or
infrastructure that are
used to produce other
goods or provide
services.
Factors of production – enterprise
• An entrepreneur draws together the first three factors of production.
7. Production possibilities frontier
8. Inward and outward shifts in PPF

Anderton: unit 4, pgs. 17-21

Powell: 1.5, 1.6, pgs. 11-16
Production possibilities frontier
• A PPF
• Shows the maximum
potential output of a firm/ an
economy.
• Shows the trade-off facing a
firm/ an economy between
two types of goods. Firm: 2 goods: wheat and/or corn?
• Trade-off involves making a
choice – giving up alternatives
for one option.

Economy: manufactured vs
Non-manufactured goods?
Production possibilities frontier
• On this diagram, points A, B, C, D, F and
G represent possible combinations of
quantities produced of non-
manufactured and manufactured
goods.

Anderton, pg. 17, figure 1

Production possibilities frontier
• Points A, B, C and D lie on the PPF
• The PPF curve represents the maximum
that can be produced with the resources
currently available.
• An economy could decide between points
A, B, C and D by choosing to produce
different quantities of non-manufactured
and manufactured goods.

Anderton, pg. 17, figure 1

Production possibilities frontier
• Point F lies inside the PPF.
• The economy is not producing its
maximum possible output. Some
resources are unemployed.

• Point G lies outside the PPF.

• This point is unobtainable with the
resources currently available.

Anderton, pg. 17, figure 1

PPF for computers and textbooks
• Can you find:
• Two efficient output levels?
• An inefficient output level?
• A currently unobtainable output
level?
PPF for beef and mutton
• The PPF diagram shows a change in a
farmer’s use of his resources to
produce a different combination of What if farmer
goods. Sheep wants to sell
more mutton?:
They have to shift
resources from
• Initially the farmer has S1 number of S2 B
rearing cows to
sheep on his land, and C1 number of rearing sheep!
cows, from which he produces A
S1
mutton and beef. He uses his
resources efficiently, and produces on
the PPF at point A. C2 C1 Cows
PPF for beef and mutton
• He then decides to increase the amount Sheep

of mutton he sells, perhaps because the

price of mutton has risen. The number
of sheep he has rises to S2. S2 B

A
• As his resources (e.g. land) are scarce, he S1
must give something up: he must reduce
the number of cows to C2.
C2 C1 Cows

• He continues to use his resources

efficiently, and now produces at point B.
Shifts in the PPF resources output

PPF shifts outward

• When a PPF shifts outward,

• This shows an increase in possible
output levels following an increase
in resources.

• The opposite is also possible: an

inward shifting PPF…
• … following a reduction in
resources.
PPFs and opportunity costs
• The opportunity cost of this
farmer’s change in his use of his
resources is C1C2 number of cows.
Sheep

S2 B

S1 A

C2 C1 Cows
9. Opportunity cost

Anderton: unit 4, pgs. 17-21

Powell: 1.4, pgs. 9-10
Opportunity cost and choice
• If a garden decides to grow carrots, his/her
opportunity cost is the alternative crop that
might have been grown instead (potatoes,
tomatoes, etc.)

• A choice between two options must be made.

• The opportunity cost of a choice is the value

of the best alternative foregone.
What is the opportunity cost of:
• Going out with friends tonight?
• Having pizza for lunch?
• Wearing shorts?
• Studying economics?
What is the opportunity cost of,
• assuming efficient use of
resources,
• Increasing production of
textbooks from 20 to 60?
• Increasing production of
computers from 1 to 5?
Summary
• Production possibility diagrams illustrate different features of the
fundamental economic problem, such as:
• Resource allocation;
• Opportunity cost;
• Unemployment of economic resources;
• Economic growth
Economic systems
Economic systems
• There are three kinds of economic systems:
• Free (pure) market economies
• Command (planned) economies
• Mixed economies

• Different economic systems allocate resources between different uses

in different ways.
Economic systems – free (pure) market
economies
• In a pure market economy, markets allocate resources
through the price mechanism, and there is a limited role
for the government.

• The supply of and demand for goods and services are

negotiated through markets.

• E.g. in the real world, none. The pure market economy is

an extreme on a spectrum, and its opposite is a planned
economy.
Economic systems – pure market economies
Economic systems – command (planned)
economies
• In a planned or command system, scarce resources
are owned by the government.

• The state allocates resources, and sets production

targets and growth rates according to its own view of
people’s wants.

• Market prices play little or no part in informing

resource allocation decisions.

• E.g. socialist or communist countries such as North

Korea, the USSR, and Maoist China.
Economic systems – command (planned)
economies
Economic systems – mixed economies
• A mixed economy is an economy system consisting of a mixture of
• Markets and economic planning, or
• Public ownership and private ownership, or
• Free markets and economic intervention.

• E.g. western countries such as the UK. Since the end of the 1970s, the
UK has moved strongly along the spectrum towards the pure market
economy model.
Economic systems – mixed economies

The John Radcliffe hospital in Oxford – The Manor hospital in Oxford –

public healthcare private healthcare