ECONOMICS IS THE ONLY PROFESSION IN

WHICH ONE CAN GAIN GREAT EMINENCE

WITHOUT EVER BEING RIGHT

Unit 1
Introduction to Economics
 OBJECTIVES

Upon completion of this unit you will be able to:

explain what economics is all about.
distinguish between microeconomics and
macroeconomics.
identify the four main factors of production.
explain how the concept of scarcity relates to the
concept of opportunity cost.
develop a production possibilities curve.
identify the causes of economic growth.
 CLASS ACTIVITY 1

a) Write down all your needs

b) Write down all your wants
c) Write down all the resources available to your
d) What would you do to satisfy your needs and wants
 WHAT IS ECONOMICS?

Is economics about money: How people make it and spend it? Is it about business,
government, and jobs?

Is economics about why some people and some nations are rich and others poor?

Economics is about all these things, but its core is the study of choices and their
consequences.

Your life will be shaped by the challenges you face and the opportunities that you
create.

But to face those challenges and seize the opportunities, you must understand the
powerful forces at play.

The economics that you’re about to learn will become your most reliable guide.
 DEFINITION OF ECONOMICS

•All economic questions arise because we want more than we can

get.
•Our inability to satisfy all our wants is called scarcity.
•Because we face scarcity, we must make choices.
•Economics is the social science that studies the choices that
individuals, businesses, governments, and entire societies make as
they cope with scarcity and the incentives that influence and
reconcile those choices.
• Social science - studies human actions, activities and behaviour.
•Economics divides in two main parts:
• Microeconomics
• Macroeconomics
 MICROECONOMICS AND
MACROECONOMICS

Micro means small and microeconomics studies the individual

entities in the economy, such as households and businesses, the
choices they make and their interaction in specific markets and
industries.
 Microeconomics helps one to understand how markets work
and we can use it to make personal or managerial decisions.
Macro means large and macroeconomics studies the economy
as a whole.
 It focuses on the total level of economic activity such as the gross
domestic product, inflation, unemployment, economic growth and
many more. We study macroeconomics to understand how the
entire economy works.
 2. THE PROBLEM OF SCARCITY

 Scarcity means that there are not enough goods and services to satisfy the wants
and needs of everyone.
 Economic resources are scarce or limited in supply, while our needs and
wants are unlimited. This means that the amounts of goods and services that
can be produced are also limited.
 Scarcity governs our lives. Because we cannot have everything, we are forced
to make choices.
 Because these resources and goods and services are scarce, they are not free,
but we have to pay a price to get them.

• What is a need and what is a want?

 Wants - are the things that we as human beings desire and they are unlimited.
 Needs - basic things we need for survival such as food, water, clothes, shelter
and jobs. After basic needs other needs e.g. education and self-improvement.
There is only a demand for goods and services if we have the money to pay
for them.
 CLASS ACTIVITY 2

• In groups of five discuss some of the choices

Namibia as a whole had to make due to scarcity
eg. Upgrade the Hosea Kutako airport road
instead of the mariental-keetmanshoop road
 LIMITED RESOURCES

• Resources are known as inputs or factors of production

 Natural resources (land) are inputs into the production process
obtained from nature such as raw materials, land, water, marine
resources, coal, oil, minerals, our flora and fauna as well as our
climate. Payment = rent.
Labour is the human resource and refers to the physical and
intellectual effort of people engaged in the production of goods and
services. Payment = wage.
Capital is the man-made resource and includes all the
manufactured goods that are used as inputs in the production
process such as capital, buildings, tools, computers, trucks and
machines. Payment = interest.
Entrepreneurship represents the act of organising and assuming
the risk of a business venture. Entrepreneur is the driving force
behind production and combines the other resources to produce a
product or service. The reward is profit.
 CLASS ACTIVITY 3

 Would the study of the following be classed under macroeconomics or

microeconomics?
I. Government purchases of good and services.
II. Your purchase of a new pair of jeans.
III. The price of phone calls charged by Vodacom and MTN.
IV. The profitability of all Namibian firms as a group
V. The impact of an interest rate increase on the decision to buy a car
VI. The impact of an interest rate increase on the total spending by consumers.
 UNLIMITED WANTS AND NEEDS

Human wants and needs are infinite and may vary from basic
necessities such as food, clothing and housing to the desire for
luxury items such as TVs and video recorders.
Mostert , gives two classifications of human needs. The first
one classifies needs according to four categories: Physical,
social, mental and spiritual needs.
 ABRAHAM MASLOW CLASSIFICATION OF
NEEDS

Maslow classified needs into five categories:

 Physiological needs include basic needs like food, clothes and a place to live.
 Security needs comprise the need for physical and financial security. It can include things
like a burglar alarms in your home, life insurance, a pension fund or to own your own
property.
 Social needs comprise the need for love and contact with other people.
 Status needs reflect the need to be recognised and respected by others.
 Self-actualisation needs refer to the desire for personal development and self-
advancement.

According to Maslow the lower level needs, such as

physiological needs, must first be satisfied before the higher
level needs can be fulfilled.
 THE ECONOMIC WAY OF
THINKING
• What you Must Give Up
Opportunity cost is the value of the next best alternative that
must be sacrificed when you make a choice. Every time we
make a choice, there is an opportunity cost.
The opportunity cost of a choice is the value of the best foregone
opportunity.
We must make choices on an individual level, on the level of
the firm and also at government level.
That means opportunity cost applies everywhere. For
example, if you decide to enrol for a qualification at the
Polytechnic, you may not be able to buy the new car that you
need. It is the same with studying - you have a limited amount
of time to spend on studying Economics or any other subject,
sleeping or partying.
If a firm decides to produce more of one product, they can
only do that by producing less of another product.

A decision by the government to build more schools could

mean that the building of a new hospital will have to be given
up.
 PRODUCTION POSSIBILITIES CURVE
(PPC)
A production possibilities curve shows the different combinations of
two goods that society can produce by fully employing all of its
resources with the best technology available.
It also indicates how much of one commodity must be given up to
release enough resources to produce more of a second commodity.
A production possibilities curve illustrates graphically the maximum
combinations of two goods that an economy can produce, given its
available resources and technology.
To illustrate the PPF, we focus on two goods at a time and hold the
quantities of all other goods and services constant.
That is, we look at a model economy in which everything remains the
same (ceteris paribus) except the two goods we’re considering.
 PPC ...CONTINUE
We drawing a PPC the following assumptions are made:
All resources are fixed.
All resources are fully employed.
Technology remains unchanged.
• Table 1: Production possibilities schedule illustrating Namibia’s
production of houses and food.
Choice Y-axis Houses X-axis Food
A 50 0
B 47 1
C 42 2
D 32 3
E 20 4
F 0 5
FIGURE 1: PPC FOR HOUSES AND FOOD
 FIGURE 1: PRODUCTION POSSIBILITIES
CURVE FOR HOUSES AND FOOD

 The production possibilities curve is not a straight line but is

bowed outward. Because some resources are better suited
for the production of houses than they are for the production
of food.
 Therefore, the opportunity cost of producing food increases
as more food is produced. This is known as the law of
increasing opportunity costs.
 The law of increasing opportunity cost states that in order to get
more of something, one must give up ever-increasing quantities of
something else.
 Points ABCDEF means more and more houses
must be given up to produce an extra ton of food.
 To increase food production from 0 to 1 ton, the opportunity
cost is 3 houses (50 – 47 = 3).
 FIG 1: CONT...........
 All the points on the curve (A, B, C, D, E and F) indicate
maximum use of available resources and technology.
 Point H, indicate that Namibia is not using all resources fully
and efficiently. This means Namibia is producing less than it is
capable of. Known as attainable.
 All points outside the curve, e.g. Point G, are unattainable with
the resources and technology currently available.
 Scarcity is illustrated by the fact that all points outside the
PPC are unattainable with the available resources.
 Choice is illustrated by the need to choose among the
available combinations along the PPC.
 Opportunity cost is illustrated by the negative slope of the
PPC. More of one good can only be obtained by sacrificing
increasing quantities of the other good. There is thus a trade-
off between the two goods.
 ECONOMIC GROWTH

Economic growth means that there is an increase in the quantity of

goods and services that a country produces over time. Economic
growth is illustrated by an outward shift, i.e. a shift to the
right, of the entire production possibilities curve.
There are certain factors that may be responsible for
economic growth:
 Technological change such as computerisation that may make all sectors more productive.
 Labour force growth due to natural population growth or immigration.
 Increase in the quantity of capital goods such as machines, tools and other equipment.
 ECONOMIC GROWTH

Economic growth means that there is an increase in the quantity of

goods and services that a country produces over time.
Economic growth is illustrated by an outward shift, i.e. a
shift to the right, of the entire production possibilities curve.
Economic growth is illustrated in Figure 2. Suppose the
original PC is AB and Namibia produces consumer goods and
capital goods. An increase in the quantity or productivity of
resources will shift the production possibilities curve from AB
to EF.
FIGURE 2: ECONOMIC GROWTH
 CAUSES OF ECONOMIC GROWTH

 Technological change such as computerisation that may make

all sectors more productive.
 Labour force growth due to natural population growth or
immigration.
 Increase in the quantity of capital goods such as machines,
tools and other equipment.
The factors listed above deal with the production capacity of a
nation, but there must also be an increase in the total demand
for goods and services. A growing demand for goods and
services will stimulate economic growth.
Suppose Namibia develops a new technique for producing
consumer goods while the resources and techniques for
producing capital goods remain the same. What will happen
to my PPC?
FIGURE 3: IMPROVED TECHNIQUE FOR
PRODUCING CONSUMER GOODS
 CLASS ACTIVITY 4

1. Suppose Namibia develops a new technique for producing

capital goods while the resources and techniques for
producing consumer goods remain the same. Illustrate such
effect using a PPC.
2. What is the effect of such change? Economic growth or
decline? Why?
 ECONOMIC DECLINE

Economic decline: Any reduction of the resources of a

country will reduce the production capacity of that country
and shift the PPC inwards to the left.
Economic decline is illustrated in Figure 5. Suppose the
original PPC is EF. A decrease in the quantity or productivity of
resources will shift the PPC from EF to AB.
FIGURE 5: ECONOMIC DECLINE
 CAUSES OF ECONOMIC DECLINE:

 A war can cause economic decline because factories, roads, bridges, railway
networks and other types of capital goods are often destroyed.
 Natural disasters such as earthquakes, floods, droughts, etc. can reduce an
economy’s output.
 Economic sanctions against a nation place restrictions on international trade and
foreign investment and shift the PPC to the left.
 3. BASIC AND DERIVATIVE ECONOMIC
PROBLEMS:

 What and how many goods and services should be produced?

Known as the problem of how to allocate the scarce resources.
 How should these goods and services be produced? This decision
involves choosing the best production methods. Production
methods can be capital intensive or labour intensive. The quantity,
quality and cost of the various factors of production will influence
this decision.
 For whom should these goods and services be produced? This
question is also referred to as the distribution problem. People use
their income to buy goods and services and therefore the
distribution of income will influence this decision.
 How do we solve these problems? In each country the community
will choose an economics system
 KEY POINTS

 Capital goods: Man made goods that are used in the production
of other goods and services.
 Consumer goods: Goods that are produced for final
consumption by individuals or households.
 Economy: The institutional structure through which individuals in
a society coordinate their diverse wants or needs.
 Economic growth: An increase in the quantity of goods and
services produced in a country.
 Means or resources: The four factors of production (land, labour,
capital and entrepreneurship) that are used as inputs in the
production process. They are limited in supply.
 Opportunity cost: The value of the consumption that we
sacrifice......
END OF UNIT 1