This document provides an overview of foundational economic concepts in 17 sections. It defines key terms like scarcity, factors of production, and opportunity cost. It explains that economics studies how limited resources are allocated to meet unlimited wants. It also introduces production possibility frontiers to illustrate scarcity and trade-offs. The document distinguishes between positive economics, which objectively analyzes the economy, and normative economics, which makes value judgments.
This document provides an overview of foundational economic concepts in 17 sections. It defines key terms like scarcity, factors of production, and opportunity cost. It explains that economics studies how limited resources are allocated to meet unlimited wants. It also introduces production possibility frontiers to illustrate scarcity and trade-offs. The document distinguishes between positive economics, which objectively analyzes the economy, and normative economics, which makes value judgments.
This document provides an overview of foundational economic concepts in 17 sections. It defines key terms like scarcity, factors of production, and opportunity cost. It explains that economics studies how limited resources are allocated to meet unlimited wants. It also introduces production possibility frontiers to illustrate scarcity and trade-offs. The document distinguishes between positive economics, which objectively analyzes the economy, and normative economics, which makes value judgments.
This document provides an overview of foundational economic concepts in 17 sections. It defines key terms like scarcity, factors of production, and opportunity cost. It explains that economics studies how limited resources are allocated to meet unlimited wants. It also introduces production possibility frontiers to illustrate scarcity and trade-offs. The document distinguishes between positive economics, which objectively analyzes the economy, and normative economics, which makes value judgments.
Economics What comes to your mind when you hear the word SCARCE?
1 •People have unlimited wants but resources are limited. •Scarcity is a naturally occurring limitation on the resource that cannot be replenished •Because of scarcity, various economic decisions must be made to allocate resources efficiently. •A shortage occurs whenever quantity demanded is greater than quantity supply at the market price. •Over time, the good will be replenished and the shortage condition resolved.
2 What is Economics? –“A science that deals with the allocation, or use, of scarce resources for the purpose of fulfilling society’s needs and wants.” –It studies how we allocate the limited resources to satisfy unlimited wants
3 What is Economics?
• So then the big two concepts are that:
–Resources are scarce! –Society has unlimited needs and wants! Economics decides the “best” way of providing one to the other
4 Scarcity and Individual Choice • There are an unlimited variety of scarcities, however they are all based on two basic limitations – Scarce time – Scarce spending power • Limitations force each of us to make choices • Economists study choices we make as individuals, and consequences of those choices
5 Factors of Production • There are 4 factors that must all be used to produce anything – Natural Resources (also referred to as “land”) – Labour – effort of a person for which they are paid – Capital – human-made resources used to create other goods – Entrepreneurship>ability and willingness to combine the other resources into a productive enterprise 6 Factors of Production – 3 Kinds of Capital • Physical Capital – also called Capital Goods, objects that are used to produce other goods • A baker needs his oven. A lawyer needs computers , an office building, etc • Human Capital–knowledge or skills workers get from education and experience • Financial capital is used to buy and invest in the Physical Capital and even to help pay for the Human capital.
7 The 3 basic economic problems • What goods and services should a country produce? – should the emphasis be on agriculture, manufacturing 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? • Who should get the goods and services produced? – even distribution? more for the rich? for those who work hard?
8 Making Economic Decisions • Every decision we make involves trade-offs – alternatives that we must give up when we make a choice –Example – “I could stay up for 3 hours playing pool table, study, or sleep.”
9 Opportunity Cost • Definition – the cost expressed in terms of the next best alternative sacrificed • Helps us view the true cost of decision making • Implies valuing different choices • Opportunity cost is the highest-valued option forgone
10 Production Possibility Frontiers • Show the different combinations of goods and services that can be produced with a given amount of resources • No ‘ideal’ point on the curve • Any point inside the curve – suggests resources are not being utilised efficiently • Any point outside the curve – not attainable with the current level of resources • Useful to demonstrate economic growth and opportunity cost
11 Production Possibility Frontiers
Capital Goods
Ym
Yo A
Y1 B
Xo X1 Xm Consumer Goods
12 Production Possibilities • Any point along the line shows the economy operating at maximum efficiency • Any point below the line is underutilization – they are not getting all that they could • Any point above the line is impossible, until new resources are available
13 Production Possibilities • Why does the graph curve instead of making a straight line? –Law of Increasing Costs – as production increases for one item, more and more resources are necessary to increase production of the second item! The OPPORTUNITY COST increases…
14 Production Possibilities • Every resource is best suited for certain types of goods – Farmland and cows make butter – Metals and factories make guns and many times you hear about butter vs. guns due to military spending on weaponry using resources … – To convert butter production to guns, you must sell the cows and build new factories on the land 15 Positive Economics • Study of how economy works • Statements about how the economy works are positive statements, whether they are true or not • Accuracy of positive statements can be tested by looking at the facts—and just the facts • E.g removing fertilizer subsidies will make farm produce expensive
16 Normative Economics • Study of what should be – Used to make value judgments, identify problems, and prescribe solutions – Statements that suggest what we should do about economic facts, are normative statements • Based on values – Normative statements cannot be proved or disproved by the facts alone – E.g Fertilizer subsidies ought to be maintained
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