Paper 1 - (Sept- dec Notes)

●Topic : Nature of economics

What is Economics?

Economics is a social science that deals with human behavior. It is

the study of scarcity and choice and how humans allocate their
scarce resources to satisfy their needs and wants.

Economy

Economics recognises that resources are scarce. The economy is the

mechanism through which these scarce resources are organized for
the production of goods and services.

NB : Central or main economic problem is scarcity (limited

resources and unlimited wants)

The Three main groups in the economy (Economic Agents)

1. Household (consumers)
 2. Firm (Producers)

3. Government

Branches of Economics

1. Microeconomics is the study of individuals and business

decisions regarding the allocation of resources and prices
of goods and services

2. Macroeconomics - is the study of the decisions of

countries and governments. That is macroeconomics look
at the economy as a whole.

Needs - are items that are essential for life. Eg. Water, food, clothing
and shelter

Wants - are items that are desired but not essential for life
Examples - KFC, Ferrari, I-phone 13+
The concepts of scarcity choice and opportunity cost

Man’s wants are unlimited(infinite) while resources are limited

(finite). This results in scarcity. Scarcity is the main economic

problem /condition where there is not enough to completely satisfy

everyone’s wants/needs. As a result humans will have to make a

choice. Choice is the range of options available to individuals,firms

and government (economic agents). In making a choice something

has to be given up and this is known as Opportunity Cost.

➢ Opportunity Cost is the next best alternative forgone.

➢ Money Cost - involve what was actually paid for the inputs

used to produce a given good or service. The cost for the7

inputs that were used to produce a given goods or services

.Example paying $200 for a skirt.

➢ Trade off - giving up something for another

 ●Topic: Production Possibility
Frontier/Curve(PPF/PPC)

The production possibility frontier is a graphical representation of

the various combinations of two goods that an economy is capable

of producing given its fixed resources. It is drawn based on the

following assumptions;

1. The economy produces only two goods

2. The country’s resources is fixed

3. Each of the goods can be produced using

changing ratios of the factors of production.

This is called variable factor proportions.

The production possibility Frontier/Curve (PPF/PPC)

Nb :
On curve line - efficient
Inside curve - inefficient
Outside curve - unattainable
Inside curve - attainable

Factors that could cause the PPF to move or bow outwards

 1. Improvements in technology
2. Discovery of new natural resources/increase resources
3. Increase in population
4. Increase in labour productivity(eg. Training workers)
5. Economic growth

PPF Shifts/bow Outwards

Factors that could cause the PPF to move or bow inwards

1. Lack of technology
2. Reduce natural resources
3. Decrease in population
4. Brain Drain /decrease in labour productivity
5. Lack of economic growth

PPF shifts inwards

Increasing decreasing and constant opportunity cost
Pivot of the Production Possibility Fronteir

When technology or other variables (eg. new and improve fertiliser)

affects the production of only one good, the production possibility
frontier (PPF) pivots, which changes the opportunity cost for both
goods.
 Topic: Factors affecting decisions of
the economic agent

Households Firms Government

Personal Choice Cost of production Laws and grants

Size of Income Profits Taxes

Peer Pressure Resource base Setting up industrial

zones

Type of work Industrial relations Laws concerning the

employment of disable

Bandwagon effect Changing demand Provision of

infrastructure

Level of Education

Climate and weather

condition

Rate of interest

Price of Good
Topic: Factors of Production &
Types of Production

Production is the creation of goods and services.

Factors of Production refers to all the economic resources that are

used to create goods and services.

Factors of Production Reward

Land Rent

Labour Wages/Salaries

Capital Interest

Entrepreneurship Profit
 Types of production

1. Primary Production / Extractive Production

This is the extraction of raw materials from the earth. It involves the
use of the free gifts of nature.

Examples: mining, agriculture, fishing

Primary products: banana , sugar cane,tomato, yam,
water,bauxite,gold,diamonds,fishes.

2. Secondary Production/ Manufacturing /Construction

This involves the conversion of raw materials into finish or semi-

finished products.

Examples: Manufacturing and Construction sectors

Secondary products: sugar, yam smoothie/juice, molasses, aluminum,

rum, ketchup, diamond ring.

3. Tertiary Production / Service Production

Involves the provision of all types of services.

Eg of tertiary industries - schools,hospitals,banking and

finance ,transport,wholesale,retail and tourism.
Professions- teachers,doctors,lawyers,bank tellers,
hairdressers,garbage collectors,conductors,taxi operators
Levels of Production

1. Traditional / Subsistence level

This refers to production that is undertaken to meet the basics needs
of self and family.
Example: Backyard farming or gardening in the home for family
needs.

2. Domestic / local level production

This refers to production that is undertaken to meet the needs
of self and family as well as for the country
Example: Farmer Brown plants yam for his family as well as to
sell to the supermarkets/shops or at the markets in his
country,Jamaica.

3. Export production/Surplus level production

This refers to production that is undertaken to meet the needs
of self and family, the country as well as for other countries.
Example : Grace Kennedy sells its product not only in Jamaica
but to other parts of the world such as in the USA.
Topic : Cost of Production
Two time periods of the production Process

1. Short run

The period of time when it is not possible to vary the quantities of all
the factors of production.

2. Long run

The period of time when all the factors of production in the

production process are variable

Fixed cost

Fixed cost - Cost that remains unchanged, regardless of the level of

output or regardless of how much is produced.

Eg. Flow wifi bill is fixed as no matter how much wifi is used , at the
end of the month the bill will be the same. Some persons wages are
fixed, that is they get the same amount of wages every week or
month. Other examples of fixed cost;

1.Insurance

2. Rent

Nb. Fixed cost equal total cost at zero (0) output

Variable cost

This is cost that varies with the level of output. That is, variable cost
changes

based on the level of usage. Eg water bill,light bill, cost of raw

materials etc.

Total cost = Total Fixed cost + Total Variable cost

Marginal Cost

Marginal cost is the cost of producing one additional unit of output.

Eg. If total cost of producing 100 units of a good is $1000 and the

total cost of producing 101 units is $1009, then the marginal cost is $9

($1009-$1000) . Basically MC is the difference between total cost at

each level of output.

Average Cost

Average cost is the cost of producing a unit of product at a particular

output

Average cost = Total cost

Output

Summary

TC = TFC + TVC

TVC = TC - TFC

TFC = TC - TVC

At zero output TC = TFC

Topic: Economies of scale and
Diseconomies of scale

Economies of scale are the advantages of a larger firm

over a smaller firm, enabling it to produce larger
outputs at lower unit costs. Basically it is the benefits
that accrues to a firm as it increases in size.

Types of economies of scale

a)Internal Economies - are the benefits to the firm

that originates from the organization itself. These ar

1. Marketing economies -benefits received due to

bulk buying eg.trade discount as well as free
advertisement etc
 2. Financial Economies - able to get more loans at
lower interest rates,sell shares to the public to
obtain
3. Managerial Economies - able to hire managers
for different departments hence resulting in
efficiency
4. Research and development economies
5. Welfare economies - better working conditions
for its workers eg.fringe benefits(incentives)
6. Technical economies - large companies will
utilise more and better technology.

b)External economies of scale - are the benefits given

to the firm that originate from outside the firm,
especially from neighboring firms.

1, Improved infrastructure
2. Agglomeration
3. Labor
4. Use waste products become by products of another
Firm
Diseconomies of scale

This refers to the disadvantages that accrues to a firm

as it increases in size. The diseconomies of scale are

1. Loss of managerial control

2. Poor industrial relations
3. Overspecialisation

Diagram showing Economies and Diseconomies of

Scale
Law of diminishing returns

According to the law of diminishing marginal returns, increasing a factor

of production does not always lead to increased marginal productivity. The
point of diminishing returns can be identified by taking the second
derivative of the production function.

Division of labour and Specialisation

Division of labor is the concentration of workers on

specific specialist work task. When workers in a
production process specialize in doing a particular
task it is called division of labor . Specialization is
basically splitting up tasks where workers concentrate
on one particular activity.
Advantages

1. Increase in production/output
2. Work is completed faster and more efficient as
worker performs the task repeatedly
3. Workers skills improve as the task is perform
repeatedly
4. Increase profits for the firm due to increase
output

Disadvantage

1. Work may become monotonous or boring as the

worker repeats the same task each day
2. Workers may lose other skills he or she had as
they focus on doing one task.
3. The worker may feel unaccomplished as they are
only a part of the final product being produced.
Topic : Economic Systems

Resource allocation decisions

1. What to produce?
2. How much/ how to produce?
3. For whom to produce?

Free market economy/Capitalist economy/Laissez-faire

This is an economic system that is owned and controlled

by the private sector. Therefore what to produce, how

much to produce and for whom is determined by the

private sector/private individuals. There is therefore

little or no government intervention.

Example USA
Advantages

1. Freedom of choice for consumers. Therefore

consumers decide what to produce , what to

consume, where to work etc.

2. Producers are encouraged to produce as the profit

motive is in this system.

3. There is high competition in this system leading to

production of quality goods and lower prices for

consumers.
Disadvantages

1. Income is not evenly distributed. Therefore a

few are wealthy and majority being poor.

2. There is little government intervention in this

economy, therefore consumers are often

exploited , having to pay high prices for goods

and services.

3. Public goods(such as roads ,bridges,streetlights

etc) are not profitable ventures and therefore

are not produced by the private sector, even

though they are necessary.

4. Merit goods (healthcare, education) are not

produced and consumed in adequate amounts as

these do not yield high profits.

Planned/communist/controlled/command

This an economic system that is owned and controlled by

the government or state. Examples: Cuba and North

Korea

Advantages

1. Income is more evenly distributed

2. Public and merit goods are produced

3. As the state owns all the resources, any profits

belongs to the state.

4. Goods and services are priced so that everyone

can afford them.

Disadvantages:

1. No freedom of choice for consumers. The

government makes all the resource allocation

decision.

2. There is no incentive to produce as all profits

belongs to the state/ government.

3. Sometimes what is produce is not needed, hence

resulting in wastage of resources.

Mixed Economic System

A mixed economy is an economic system that is owned

and controlled by both private firms and the government,

that is, there is a public sector and a private sector.

Example of mixed economies;

Jamaica, Trinidad and Tobago, Barbadoes, and other

Caricom countries

Subsistence / Traditional economy

A traditional economic system is an economy that is self

sufficient. Basically in this system man’s needs are

satisfied through the production of goods or services for

himself and family.

- Ownership of resources is based on what is passed

on to you by your ancestors.

- Private ownership of resources

- Leadership is based on tradition and there is no

formal government.