ECONOMICS

The following are some of the different ways of defining the subject matter:

1) Economics is described as the study of how to efficiently utilise scarce resources to satisfy
unlimited desires of human kind.
2) Richard Lipsey defines economics as the study of the use of resources to satisfy unlimited
wants.
3) StanLake – The study of the ways in which human kind provides for its well being.
4) 4. Michel Parkin – The study of how people use limited resources to try and satisfy unlimited
wants.

THE TWO BRANCHES OF ECONOMICS

a) MICRO
 Is the study of individual sections of the economy
 It is concerned with the behaviour of particular units in an economy such as
- Behaviour of markets of particular goods
- Behaviour of individual firms
 Therefore it deals with the analysis of economic behaviour of individual economic agents
which are mainly households and firms.

b) MARCO ECONOMICS
 It is the study of whole economy.
 Macro analysis covers the entire economy.
 It deals with the analysis of the operations of the economy as a whole
 It focus on the production of all goods and services in the nation.
 It includes aspects such as inflation, unemployment etc.

OPTIMISATION
 Economics is a science subject of optimisation.
 Economics is a social science not a natural or hard science like biology.
 A social science means a study of behaviour of human nature in their everyday life.
 Optimisation refers to the behaviour of minimisation or maximisation, other term for
optimisation is rationalism.
 Rationalism is a guarding principal in decision making, it advocates that people generally
minimises things that are not desirable and maximise those that are desirable

AREAS OF MINIMISATION (undesirable variables) AREAS OF MIXIMISATION (desirable variables)

 Loss  Profits
 Cost  Sales and revenue
 Rate of inflation  Deflation or price stability
 Disutility or unhappy  Utility and satisfaction
 Pain  Happiness
 Unemployment  Employment
 Resource depletion  Resource endowment
 THE BASIC ECONOMIC PROBLEM
 By the basic economic problem economist mean scarcity of resources.
 It is called basic problem simply because it is from which all other economic problems arise
or emanate.
 All economies face challenges due to scarcity of resources
 The basic economic problem is explained but the concepts of scarcity, choice and
opportunity cost.

SCARCITY OF RESOURCES
 Refers to the fact resources are not in enough quantities and qualities to satisfy all of the
society’s desires, resources are scarce while needs and wants are unlimited.
 Scarcity is a problem that affects all societies, rich or poor, small or big.
 Many people would like to have more of many things or better of quality than they posses
but the available resources are themselves limited in supply.
ECONOMIC RESOURCES
 Refers to the factors of production which is goods and serves primarily needed to produce
other goods and services.
 We have 4 main categories:-
(a) LAND --------reward RENT
-Refers to all the goods provided by the nature.
-It covers items like soil farmland, forests, minerals, etc.
(b) LABOUR --------- reward Salaries or wages
-This refers to human effort both physical and mental helpful in the production of goods
and services.
(c) CAPITAL -------- reward INTEREST
-Consists of all the man made or manufactured inputs, all items needed in the
production process such as premises, equipment, vehicles, factories
(d) ENTREPRENEURSHIP-----reward PROFIT
-refers to skill or art of running a business
-enterprise is divided into 2
(i) The act of organising other factors of production to produce goods and services to
meet consumer needs and wants
(ii) Making risks associated with business or economic decisions

THE PRODUCTION PROCESS

LAND LABOUR CAPITAL

ENTERPRISE

PRODUCTION

GOODS AND SERVICES

SATISFY HUMAN NEEDS AND WANTS

 Resources are never sufficient to meet the unlimited needs and wants
 Economic agents cannot satisfy all the desires and therefore must make choices in resource
allocation.
 The basic economic problem of scarcity brings the basic economic questions, economic
agents should answer.
 Economic agents should make choices by answering the following questions:-
What to produce
o Individuals, firms and government cannot produce all the needs.
o They have to choose all the kind of goods they desire most and leave other goods
unproduced.
In what quantities
o They have to decide the quantities of each and every good and service produced.
o How to produce
o People need to consider the method of production
o The best outcomes can be attained by choosing the least cost methods of
production.
o When to produce
o It is important to decide the time to provide for goods and services.
o Timing is very important because it minimises wastages if not correctly handled.
o For whom to produce
o Limited resources cannot produce for all the needs and wants of the people.
o It is important to decide which of the needs and wants are to be satisfied.

 OPPORTUNITY COST
 Making choices results in another economic problem that is opportunity cost.
 Opportunity cost refers to the values of the next best alternative forgone.
 Opportunity cost can be called the resource cost of any economic activity.
 It is referred to as a cost because it represents what an economic agent would have lost as a
result of choosing.
 Economic agents must choose between one thing and another, the satisfaction of one want
involves going without something else.
 The next best alternative forgone is the opportunity cost.
THE PRODUCTION POSSIBILITY CURVE
 Is a diagram that represents the maximum combination of goods a country can produce in a
year. The production possibilities curve can be used to explain three economic concepts,
namely choice, scarcity and opportunity cost.
 ASSUMPTIONS
o Only two goods can be represented that is consumer goods or capital goods.
o There is a fixed supply of resources (highly mobile)
o Level of technology is fixed or constant.
o All resources are fully employed/efficiently used.
o All units of factors of production are homogeneous / identical.
PP SCHEDULE FOR A HYPOTHETICAL ECONOMY

PRODUCTION POSSIBILITY CAPITAL GOODS CONSUMER GOODS

A 1000 0
B 750 125
C 500 250
D 250 375
E 0 500

PPC / PPF FOR A HYPOTHETICAL ECONOMY

 The PPC shows the maximum combination of consumer goods and capitals goods a country
can produce.
 The curve stretches from point A to B.
 Any point on the curve from A to B indicates the resources are fully and efficiently used.
 It means being on the curve a country is using all the resources to maximum and there is
productive efficiency.
 Points on the curve represent points at which the economy is operating at full productive
capacity, that is, full employment of all available resources.

 A country has to make a decision of a combination of output that best satisfy its needs. It
can choose any point on the curve. Choice is explained by the attainable combinations on
the boundary, for example points B or C, in other words choice is represented by the
existence of many alternatives on the curve.
 The society has to choose its desired product mix from amongst the attainable points on the
curve. For instance it can choose optimal mix B and have more capital goods than consumer
goods or optimal mix C where consumer goods are preferred to capital goods.
 Points ABCD shows productive efficiency, thus a country can choose any point.

 Any point inside the curve represents that resources are inefficiently used. Resources are
lying idle.
 Points inside the curve, say, point F are attainable but imply under utilization of resources,
that is, point E mean that some resources are idle or not fully employed.
 This means that there is productive inefficiency.
 Any point outside (beyond the production boundary), represents unattainable production,
these points portray scarcity.
 Points lying outside the production possibilities curve, such as point G, would be superior to
any point in the curve, but such points are unattainable given the current supplies of
resources and level of technology.
  Points outside the curve can only be attainable if there is economic growth. (an increase in
capacity to produce more) this can be portrayed by an outward shift of the PPC as shown
below :-

FACTORS THAT CAN LEAD TO A SHIFT IN THE PRODUCTION POSSIBILITY OF A COUNTRY

 Technological development
 Discovery of new resources e.g. mineral deposits diamonds at Chiyadzwa
 Increase in education and training

Application: The PPC and economic efficiency

 Points on the production possibility curve represent points at which the society is operating
at full employment and full productive capacity.
 By full employment we mean that all the available resources are employed. On the other
hand, full production means that theemployed resources are used to make their most
valued contributions to output.
 This involves two kinds of efficiency - productive and allocative efficiency.

Productive efficiency or X-efficiency

 refers to a situation in which the existing resources are used in the best way in the
production process.
 It implies that goods should be produced at the least cost. By definition, points on boundary
of theproduction possibility curve are productive efficient while points inside are inefficient.

Allocative efficiency
 implies that resources are devoted to the production of products most wanted by society
(consumers).
 It refers to the actual position on the production possibility curve, and depends on the
society preferences.
 Of importance is to note that any point that lies on the boundary is productive efficient
while not all points on the boundary are allocative efficient.
 An example is when people desire more health services than defence services but yet more
of the country's resources are devoted to producing defence services, such as combination
though productive efficient is not allocative efficient.

Dynamic efficiency or economic growth

 is the ability to produce a larger total output - is reflected in a rightward shift of the
production possibilities curve, as indicated by movement from boundary AB to CD on the
following diagram.

Fig 1.4 Dynamic efficiency or economic growth

 An expanding resource supplies: labour force, stock of capital goods, and/or an increase in
technical knowledge which characterize a growing economy will move the production
possibilities curve outward and to the right.
 This permits more of both consumer and capital goods to be produced.
 Thus the economy will consume an increased quantity of the goods produced over time and
hence standards of living will improve.
 Precisely, economic growth or dynamic efficiency makes the problem of scarcity less acute.
THE OPPORTUNITY COST CONCEPTS

 Making of choices imply foregoing other alternatives. That is, sacrificing the other alternative
uses for resources.
 Opportunity cost refers to the next best alternative foregone when a choice is made. The
opportunity cost principle states the cost of making a choice in terms of the next best
alternative foregone.
 Therefore it’s the real cost and not monetary cost. For example, if a gardener decides to
grow carrots on his allotment, the opportunity cost of his carrot harvest is the alternative
crop that might have been grown instead (e.g. potatoes).
 The slope of the curve shows that is impossible to increase production of both the goods.
 It is concave and therefore an increase in the production of both goods is only possible at
the expense of the other.

INCREASING OPPORTUNITY COST

 A PPC that is concave to the origin indicates a case of increasing opportunity cost.
 The gradient is lower at the top left part of the curve and gets greater as one move down the
curve.
 It means that as one move from the left to the right.
 The units of one good have to be given up for each additional unit of the other.

 As shown by the diagram, the fairly flat part of the curve left side has a lower gradient and
the bottom part of the curve right side is steeper.
 It means a small increase in good X results in a small reduction in good Y on the flairly flat
part.
 However as one moves down along the curve the same small increase in good X induces a
greater reduction in good Y.
 Increasing opportunity cost means the loss gets greater and greater for each additional unit
of good X.

DECREASING OPPORTUNITY COST

 It means the loss gets smaller and smaller for each additional unit of one good.
 It is represented by a curve which is convex to the origin
 Its gradient is higher on the upper part than the lower part.

 As we move from A to B less and less units of good Y have to be given up for each additional
unit of good X.
 It means that the FOP, are mostly suitable to produce good X than good Y.
 CONSTANT OPPORTUNITY COST
 It is depicted by a straight line curve
 It means the ratio of the 2 goods concerned does not change throughout the curve.
 The same amount of one good, have to be given up for each additional unit of the other.
 One reason for this could be that resources are highly flexible and equally productive in the
production of both goods.
