What is Economics?

• Economics is a current-affairs related

subject.
• It helps you understand what is going on in
the country you live in, and also in the wider
world.
• So, if you are studying Economics and you
want to do well, start reading about current
affairs in newspapers or on web pages such
as BBC News.
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 What is economics?

• Economics is a social science which looks

at human behaviour.
• Economics studies the economic behaviour
of both individuals and groups of people,
and the economic relationships between
individuals and groups.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 What is economic
behaviour?
• One is consumer behaviour: what
quantities a consumer buys when price
changes?
• It is really all about choices – why we
make choices, the choices we make and
the consequences of those choices.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 What is economic relationship?

• We also look at how consumers interact

with firms or producers.
• We look at how consumers and producers
respond to government policies.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 1.1 The basic economic
problem

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 The basic economic problem

The basic economic problem is that there are

limited resources and unlimited wants.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Needs and wants

• A need is a good or service that is

necessary for survival.
• Examples: ………………………………..
• A want is a good or service that is not
necessary for survival.
• Examples: …………………………………

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
Resources/Factors of
production
• Resources are used to produce goods and
services to satisfy needs and wants.
• There are 4 resources or factors of production:
1. Land : all natural resources
2. Capital: all man-made resources
3. Labour: all human resources- physical or mental
effort of workers
4. Enterprise: the services of the entrepreneur who
brings together all the other factors so that production
of goods and services can take place.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Examples of land

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Examples of labour

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Examples of capital

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Examples of enterprise

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Renewable and non-renewable
resources
• Renewable resources are those that can be replaced as
they are used to produce goods and services.
• Examples are trees, fish, grain and meat.
• However, if we use these resources faster than they are
being renewed or replaced, then they will eventually run
out. For example, if fish are caught in too large numbers,
then there will not be enough fish left in the oceans to
replace those caught. This is why it is so important today
that resources are replaced as we use them. New trees must
be planted as we cut trees for timber.
• Non-renewable resources are those that are not or
cannot be replaced as we use them.
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Production

Production involves using inputs (resources) to make

outputs (goods and services) to satisfy the needs and
wants of consumers.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Consumption

Consumption means using up goods and services

(products) to satisfy consumers’ needs and wants

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Scarcity
• Resources are limited or finite or
scarce.
• Because there are not enough resources
to satisfy all our wants, there is a
problem of scarcity.
• Scarcity implies insufficient resources.
• So, the question is: how to solve the
economic problem of scarcity?
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Resource allocation

There is a limited amount of resources such as raw materials,

machines, factories and skilled workers. But there are a number
of different ways in which they can be used.

CHOIC CE
E C HOI

Resource allocation therefore involves deciding how best to use

scarce resources to satisfy as many needs and wants as possible.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Choice

• All economic agents (consumers,

producers, workers and governments)
face scarcity.
• Because of scarcity, people cannot
satisfy all their wants.
• So, they make choices.
• They choose the most important wants
and sacrifice the least important ones.
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Choice

• Consumers, producers and governments only have a limited

amount of money but have many needs and wants to satisfy.

$100bn
$100

Food? Entertainment? Defence? Health care?

Roads?
Clothing?

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Opportunity cost

• Opportunity cost is the next best alternative

sacrificed or foregone.
• For example, you have Rs.100 and want to buy both a
pizza and a chocolate. If you buy the pizza, then the
chocolate is your opportunity cost.
• What would you buy with Rs.1000?
• How should the government spend Rs.250 million?
• What occupation will you choose when you finish your studies?
• How should a new business invest Rs. 10 million?
• Should we conserve more natural resources?

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Task

• Think of examples of choices

that consumers, workers,
producers and governments
might make.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Economic goods and free goods

• An economic good has a price and a cost.

• Most of the goods we consume are
economic goods because they cost money
to make them and they also have a price.
We pay to buy them.
• A free good is a good that has no cost and
no price. It is a free gift of nature.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Economic goods and free goods

• Examples of economic • Examples of free

goods: goods:

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Factors of production

• You want to build a wooden house for your

younger brother or sister to play in. What
resources will you need to do this?

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Factors of production

• A person wants to start his/her own

business making ice cream. What resources
will they need to do this?

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
Factors of production needed to
produce ice cream
Land: Labour:

Capital:
Enterprise:

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Rewards of factors of production

• Land: Rent (payment made for using land

as part of the production process)
• Labour: Wages (payment made to
workers)
• Capital: Interest (payment made for
borrowing money to buy capital)
• Enterprise: Profit (payment or reward of
the entrepreneur)
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Mobility of the factors of
production
• The transfer or movement of
factors of production from
one industry to another is
known as mobility of factors of
production.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Labour mobility

• Labour is usually mobile.

• There are 2 types of labour mobility:
1.Occupational: when workers change jobs;
i.e. they move from one occupation/job to
another.
2.Geographical: when workers move from
one place to another.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 The mobility of capital, land and
enterprise
• Capital — mobility: When compared to labour, capital
has less mobility. But the capital goods are used for
producing different types of goods and services.
• Land —mobility: Land has no mobility. It is immobile in
the sense that we can’t shift a portion of land of a
particular area to the other area. But the yield coming from
land may be shifted to different areas. Also land can be
adapted for different uses.
• Enterprise – mobility: An entrepreneur can move to an
alternative industry or even to another area or country.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Discuss

• What happens to the factors of

production when a business closes?
• Can the factors of production be sold
and transferred to another industry?

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Discuss
Factor of production Is it mobile? Why?
Yes/No
Power station

lorry

Field used for growing

rice

Manager of a factory

computer

shop

electrician
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Determinants of mobility
• Invention of new machinery and their use in industries,
education, training, changes in wages, etc., lead to the
increase in the occupational mobility of factors of
production.
• Several factors like improvement in the means of
communication and transport, education and literacy
programmes, attachment to family or homeland, etc. are
responsible for the geographical mobility of factors of
production.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Causes of changes in the quantity and
quality of the factors of production
• Land: the quality of land can be increased by using capital
goods, fertilizers, etc.
• Labour: the quantity of labour increases with increases in
population. The quality of labour increases with education
and training; working with capital goods, etc.
• Capital: the quantity and quality of capital increase with
more investment, technical progress, etc.
• Enterprise: the quantity and quality of enterprise depend
on the enterprise culture in a country (whether people are
risk-takers); on government schemes to promote
entrepreneurship, the cost and availability of loans,
education, training, etc.
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Economic Growth

• Economic growth refers to an increase

in the amount of goods and services
available to people (output).
• Economic growth is due to an increase
in the quantity and quality of the
factors of production.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Production possibility
curves/frontiers
• Production possibility curves
(PPCs) show the maximum
amounts of two goods that can
be produced by a country with
the given resources and
technology.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Production possibility curves
• A farmer can use his fields to grow wheat and rice.
• The options or possibilities are shown below:
Output of 100 75 50 25 0
wheat

Output of 0 50 100 150 200

rice

Opportunity
cost of
producing
more rice

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Production possibility curves
• Draw the PPC for rice and wheat.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Production possibility curves
• The PPC for rice and wheat is a straight line.
• This shows that the opportunity cost for the
farmer remains the same all the way along the
PPC.
• This implies that the land is equally suitable for
growing both crops.
• But this is not always the case.
• Some fields will be more suitable for growing
wheat and others for growing rice.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Production possibility curves
• A farmer can use his fields to grow wheat and rice.
• The options or possibilities are shown below:
Output of 100 90 75 55 30 0
wheat

Output of 0 60 90 120 140 150

rice

Opportunity
cost of
producing
more rice

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Production possibility curves
• Draw the PPC for rice and wheat.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Production possibility curves
• The PPC for rice and wheat is now drawn as a
concave curve.
• This shows that the opportunity cost for the
farmer changes and increases.
• This implies that the land is not equally suitable
for growing both crops.
• Some fields will be more suitable for growing
wheat and others for growing rice.
• The PPC/PPF is useful to illustrate a
number of economic concepts.
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Choice

• All points/positions on and

inside the PPC show choice.
• A country can choose which
point it will be at (which
combination of goods it will
produce).
• All points on the PPC indicate
an efficient resource allocation.
• All points inside the PPC
indicate inefficiency or a
wastage of resources.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Scarcity

• All points outside the

PPC show scarcity.
• They are unattainable
because resources are
scarce.
• They become
attainable if the
country’s resources
increase or if there is
technical progress.
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Opportunity Cost

• Because resources
are limited,
producing more of
one product means
producing less of
another.
• A movement along
the PPC shows
opportunity cost.

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Shifts in the PPC – outward
shift
• A PPC shifts outwards or
to the right when an
economy can produce
more of both goods.
• This is caused by:
 Additions to resources
/economic growth (more
land, labour,
capital/investment, etc.)
 Education and training of
labour
 Improvements in
technology
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Shifts in the PPC – inward
shift
• A PPC shifts inwards
or to the left when an
economy can
produce less of both
goods.
• This is caused by:
 Wars
 Natural disasters
 Labour migrates to
other countries
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Test yourself

A firm is producing cars and trucks.

What is the opportunity cost of producing 20 more trucks?

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 Test yourself

An economy is producing
consumer goods and capital
goods.
What is the opportunity cost of
producing 15 more tonnes of
consumer goods?

© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute