INTRODUCTION TO

ECONOMICS
The Economic Problem
Opportunity Cost
Production Possibility Frontiers
The Economic Problem
UNLIMITED
WANTS

SCARCE
RESOURCES

CHOICE
 LIMITED RESOURCES

LAND • RENT

LABOUR • WAGES

CAPITAL • INTEREST

ENTERPRISE • PROFIT
Opportunity Cost
the cost expressed in
terms of the next best
alternative sacrificed
 • What goods and services should an economy produce?
– should the emphasis be on agriculture, manufacturing
WHAT or services, should it be on sport and leisure or housing?

• How should goods and services be produced? – labour

intensive, land intensive, capital intensive? Efficiency?
HOW

• Who should get the goods and services produced? –

even distribution? more for the rich? for those who work
WHOM hard?

The Economic Problem

 ECONOMIC SYSTEMS

FREE PLANNED MIX

MARKET ECONOMY ECON
ECONOMY
 Production Possibility Frontiers

IfIf
If
itthe
Assume country
it devotes
reallocates
a its is
all
country
Capital Goods resources to capital
at point
resources
can produce A on
(moving
twothe
goods it could
round the PPF from A
PPF
types It can
Ym to B) it of
produce cangoods
aproduce
maximum
produce
with
of Ym.
more the goods
its resources
consumer
combination
–Ifcapital
but only the allof
at goods
it devotes itsYo
and
capital
expense consumer
resources ofgoods
fewer
to and
Yo A capital
goods
consumergoods. The it
goods
Xo consumer
opportunity
could produce cost aof
goods
producing
maximum anofextra
Xm Xo
– X1 consumer goods
is Yo – Y1 capital
Y1 B goods.

Xo X1 Xm Consumer Goods
 Production Possibility
Frontiers
Capital Goods
It can only produce at
Production
points outside the PPF
ifinside
it finds the
a wayPPF
of
expanding its
– e.g. point B
resources or improves
means the of
Y1
C the
those
productivity
country is not
resources it
already
using has. This will
all its
A

.
Yo push the PPF further
resources
outwards.

Xo X1 Consumer Goods
What makes the PPF move outwards?
TRAINING THE WORKFORCE

INVESTMENT IN CAPITAL GOODS

INCREASE IN POPULATION

IMPROVEMENT IN TECHNOLOGY
 Positive and Normative Economics
• Health care can be improved • Positive
with more tax funding
• Pollution control is effective
Statements:
through a system of fines – Capable of being verified
or refuted by resorting to
fact or further
investigation
• Society ought to provide homes
for all • Normative
• Any strategy aimed at reducing Statements:
factory closures in deprived – Contains a value judgement
areas would be helpful which cannot be verified by
resort to investigation or
research
 Micro & Macro economics
• The field of economics
• The branch that studies the
of economics that behavior of the
analyzes the market aggregate economy.
behavior of Macroeconomics exami
individual consumers nes economy-wide
and firms in an phenomena such as
attempt to understand changes in
the decision- unemployment, national
making process of income, rate of growth,
firms and gross domestic product,
Economic Development
• Economic development is a measure
of welfare, a measure of well-being.
• Commonly used measure is Human
Development Index (HDI).
• Measures national income power
head, adult literary rate, average
years of schooling, life expectancy
 Category HDI Value
High Human development .800 and above
Medium human development .500 -0.799
Low human development Less than .500
 Sustainable Development
• Development that meets • Countries should not
the needs of the present use up resources too
without compromising the quickly and should not
ability of future harm the environment
generations to meet their since this will stop
own needs. growth taking place in
the future.