What is economics

Chapter 1
Lesson objectives

• Differentiate between needs and wants

• In teams, making a miniature zoo model using scarce resources
and understanding the concept of opportunity cost
• Linking the zoo activity to the basic economic problem
• Explore how are scarce resources allocated in different economies
• To construct and interpret production possibility curves and
calculate opportunity cost
• Understand the circular flow of income model works
Needs and wants

• Needs are essential goods and services required for human survival
such as food, clean water, housing, clothing, safety and access to
healthcare
• Wants are goods and services that are not deemed to be necessary
for survival but are human desires (unlimited) such as cell-phone,
vehicle, designer clothes etc.
The economics of zoo keeping

• You are the manager of a new, profit-seeking zoo that will charge
an entry fee to visitors sing provided resources draw up a plan for
a miniature zoo model
• You need to decide which animals to include in the zoo which has
a limited space of 25 acres
• Each animal requires a different amount of space
• Categorize the zoo into different sections based on animals and
give it a suitable name
Animals
Animals
Animals
Animals
The problem of choice

Unlimited Limited
Wants Resources Scarcity

Choice
Opportunity Cost
Scarcity and opportunity cost

• Scarcity refers to the finite resources (limited in supply) of an

economy relative to the unlimited wants and needs of individuals
and society
• Opportunity cost are costs of an economic decision measured in
terms of the next best choice forgone e.g. the opportunity cost of
building an airport may be at the expense of forgoing the chance
to build a hospital
Economic goods

• Goods are tangible items that can be produced, bought and sold
such as furniture, toothpaste, clothes etc.
• Services are intangible items provided by individuals and firms
and paid for by customers such as haircuts, bus journey, education
etc.
• Products collectively, goods and services are called products or
economic goods and are limited in supply
Economics

• Economics is the study of how resources are allocated to satisfy

unlimited needs and wants of individuals, government and firms in an
economy
• Microeconomics is a category of economics concerned with the
behaviour of individuals and firms in distinct markets and segments of
the economy e.g. how prices are determined in a particular market
• Macroeconomics examines the operations of the economy as a whole
e.g. what determines long-run economic growth
• Economic agents are decision-makers in the economy comprising of
the government, firms, workers and consumers
Factors of production (resources)

• Land (natural capital) refers to natural resources used in the

production process such as crude oil, coal, wood, cattle etc.
• Labor (human capital) refers to human resources (physical and
intellectual input) required in the production process such as
accountant, chef, estate agent etc.
• Capital (physical capital) refers to manufactured products used in
production process such as machinery, tools, equipment etc.
 Enterprise (entrepreneurship) refers to skills, creativity and risk-
taking ability of a businessperson
The reward for the factors of production

• The reward for land is called rent which is paid by the user of the
land to the owner
• The rewards for labour are wages which are paid by the employers
to their workers
• The rewards for capital is interest. If interest rate is low, it
becomes worthwhile for firms and households to borrow money for
production and consumption purposes and vice versa
• The reward for enterprise is called profit, it is the return for the
entrepreneur’s business risk-taking in starting and running a
business
The basic economic questions

• What to produce is about deciding which products should be

provided in the economy e.g. is it better for the economy to have
more roads or hospitals?
• How to produce is about the processes used to produce products
desired by individuals and societies e.g. which resources should be
used in the production process and whether capital or labour
intensive techniques should be used?
• For whom to produce is about which economic agents receive
these products e.g. should the government provided free
healthcare to everyone including non-taxpayers
Surviving on an island

You are the only survivors of global catastrophe and it is up to you to

develop a new society. The island is tropical (average temperature
80°F), it has many sources of food (fruit trees, fish, land for
agriculture), and it has a steady wind from the West of about 15
mph
• What will be produced?
• How will it be produced?
• For whom will it be produced?
• How will your island government be involved in the economy?
Generating energy for survivors

Your ship was a nuclear ship and the equipment could be adapted
for the production of nuclear power. You also have oil reserves right
off your western coast that you can tap and internal combustion
engines from the ship. You have the capability to build windmills,
solar collectors and steam generators. You have your forests and you
have a student that has studied energy efficient architecture.
• What are the benefits and limitations of each energy source?
• For what purposes will you need energy?
The battle for survival

It is rumored that not far from you is an island of people who are
very dangerous. Of all your time and resources, what percentage
are you willing to devote to preparing to defend yourselves?
• What services and luxuries may be cut to provide for defense?
• Would you want an army, armed and ready to fight?
• Who would serve in an army if needed?
Psychological well-being of people

Some of the members of your group had various social problems,

such as drug addiction and mental illness when you arrived. These
people do not work very hard, at least for now, and need special
medical care and psychological help.
• Will the other members of the society provide for these
individuals' needs?
Sectors of the economy
Public sector
• The government produces or supplies
certain goods and services in the
public sector e.g. the government
may provide education and
healthcare for general public
• The government’s main objective is
social-welfare maximization
Private sector
• Firms and individuals contribute to
economic activity in the private
sector of the economy by producing
goods and services to meet the
needs and wants of customers
• Businesses look to maximize their
profits
• Consumers look to maximize utility
Planned (command) economy

In this economic system, the government (public sector) allocates

scarce resource such as Cuba, North Korea and Venezuela
• All factors of production are owned controlled by the government
• The main objective is to maximize social welfare
• The government regulates prices and wages
• There are limited product choices for consumers
Free market economy

This economic system relies on market forces of demand and

supply to allocate resources via the private sector of the economy
e.g. Hong Kong, Singapore, New Zealand etc.
• Laissez faire approach
• Efficiency lead to lower cost of production
• Competitive prices for customers along-with variety of products
• Market economies tend to outperform others in terms of economic
growth, healthcare, education and protection of the environment
Mixed economy

This economic system is a combination of the planned and market

economies, with some resources being owned and controlled by
private individuals and firms while others being owned and
controlled by the public sector e.g. Belgium, France, Pakistan etc.
• Many decisions are made by private individuals
• The government intervenes in economic activity to correct
perceived market imperfections and failures
Making choices between videos and hats

A
30
B
29 A B C D E
Hats Videos 0 1 2 3 4
C
25 Hats 30 29 25 15 0

15 D

1 2 3 4
Videos
Production possibility curve (PPC)

A graph that represents the different combinations of two goods or

services that an economy can produce efficiently with the available
resources, also known as the production possibility frontier (PPF)
• PPC is downward sloping and concave to the origin
Assumptions of the model

• The model assumes only two goods are being produced in the
economy
• There is a limited and fixed amount of resources in economy. As
there is a trade-off between two goods on the PPC which illustrates
scarcity
• Production techniques and technologies are considered constant as
the economy has only a certain level of technology at any point
• All resources are fully utilized in an efficient way, meaning no waste
and maximum output. This does not mean all the production is
desired by consumers
Features of the model

• Scarcity
• Trade-off (choice) A
• Opportunity cost
B
• Efficiency
Hats Unattainable
• Actual growth and growth in Inefficiency
production possibilities

Videos
Practice question

• Draw a PPF from the following data

___Production Alternative______

­Types of Production A B C D E

Tanks 0 10 20 30 40

Bread 75 68 54 47 0
Increasing versus constant opportunity cost
Increasing opportunity cost
• The PPC is downward slopping but
concave to the origin
• The opportunity costs of producing
additional units of a good increases
as more resource are allocated
towards its production that were
better suited to produce the other
good
Constant opportunity cost
• The PPC is a downward slopping
linear line
• The rate of substitution (slope)
between two products is the same,
so there is constant opportunity cost
• Such products use similar resources
in their production process
Actual growth and growth in production
possibilities
Improvements in quality or quantity
of resources leads to an outward
shift of the PPC and vice versa
• Technological progress and improved
production techniques
• Greater population growth and influx
of skilled migrant workers
• Improved education and training of
the workforce
• Investment in research and
development
• The discovery of new resources or
reclamation of land
• Freer and fairer international trade
• Innovation of new products
Practice question

A farmer land on which carrots and corn are grown. The production possibilities
are in the table below
Carrots (000) kg Corn (000) kg
2 4
6 10
10 16
14 20

• Calculate the farmer’s opportunity cost of producing 1 kg of carrots in terms

of kg of corn
The circular flow of income model

• A model used to explain how

Resource
Land, labour, economic activity and national
capital,
market Rent, wages, income are determined based on the
interest, profit
enterprise interaction of economic agents
• Income
Households Firms • Expenditures

Expenditure on Goods and

goods and Goods services
services
market
 Interdependence between economic decision
makers

Resource
market Foreign sector

Households Government Firms

• Leakages (red arrows) money
withdrawn from the circular
flow
Financial sector • Injections (white arrows)
Goods money entering the circular
market flow
Leakages and Injections

A leakage decreases the flow of An injection increases the flow of

income income
• Taxes • Government spending
• Spending on imports • Exports
• Savings • Investment by firms
Leakages and Injections
Closed economy
• It is part of the circular flow of
income model comprising domestic
economic decision-makers i.e.
households, firms, and the
government
• The income flow is numerically the
same value as the expenditure flow
and output flow
Open economy
• It is part of the circular flow of
income model comprising domestic
and foreign economic decision-
makers i.e. households, firms, the
government and the foreign sector
• If injections are great than leakages,
then economic activity increases and
vice versa
The 9 concepts (WISE ChoICES)

• (Economic) well-being refers to economic prosperity and standards of

living. Economic agents interact with each other to improve well-being.
The choices made by them have impacts on well-being of individuals and
societies
• Interdependence refers to growing interaction and reliance on others in
order to achieve economic goals. Globalization has led to a highly
interdependent world economy, so decisions made in one part of the
world has economic consequences in other parts of the world
• Scarcity refers to the fact that resources are finite while wants are
unlimited, so there is a shortage of resources. Hence rational choices
need to be made on what, how and for whom to produce
The 9 concepts (WISE ChoICES)

• Efficiency refers to maximum output using minimum resources.

Efficiency generates an optimal level of goods and services, thus
improving economic well-being
• Choices when economic agents make choices, they face
opportunity costs. Economists study the opportunity costs and
consequences of choices. These choices need to be made in an
efficient and sustainable way
• Intervention involves public sector involvement when markets in
the private sector fail to allocate scarce resources efficiently, thus
jeopardizing well-being, efficiency, sustainability and equity
The 9 concepts (WISE ChoICES)

• Change the world is ever changing, and economic agents need to

be aware of such changes and adapt accordingly. This change can
occur due to social, economic, structural or institutional factors
• Equity refers to fairness (normative concept), and is about the
challenges faced by individuals and societies in terms of fair access
to scarce resources
• Sustainability refers to meeting needs and wants of the current
generation without jeopardizing those of future generations. As we
strive for economic well-being, damage has been done to the
earth’s scarce resources and its environment