<1.1 WHAT IS ECONOMICS?>

--PLEASE DEFINE 'ECONOMICS'--

--A BIG OL PROBLEM!--

--UNLIMITED WANTS--

First things first, we can all agree that our WANTS ARE UNLIMITED, you may tell yourself otherwise but the fact that you have 5 old phones at home and 200 pairs of trainers tells another story ;)
Now how is this related to economics you may ask? Well economics only exists because the wants of society are never-ending, and clearly, SOME PEOPLE'S WANTS ARE MORE ABLE TO BE SATISFIED THAN OTHERS, but WHY CAN'T ALL WANTS BE SATISFIED?

--LIMITED RESOURCES--

...the answer to this question is related to the fact that most of these UNLIMITED WANTS require PRODUCTIVE RESOURCES to be used, however, these RESOURCES ARE LIMITED.

--'FACTORS OF PRODUCTION'--

The productive resources that an economy possesses can be categorised into 4 factors, AKA 'The factors of production':

1. LAND: This factor refers to the natural resources needed in production and includes, rivers, lakes, coal deposits, timber etc...
2. LABOUR: This factor refers to the human resources, needed in production such as factory workers, and doctors....
3. CAPITAL: This factor refers to man-made aids/tools used in the production process. They are often referred to as 'Capital goods' and when combined with land and labour produce more units of output.
4. ENTREPRENEUR: This factor carries out two functions. First, the enterprise factor organises the other three factors of production. Second, enterprise involves taking the risk of production, which exists in a free enterprise economy.

--SCARCITY--

With UNLIMITED WANTS + LIMITED PRODUCTIVE RESOURCES, we have a situation called 'SCARCITY'.
As such we can say that due to scarcity, CHOICES about how these limited resources are used ('ALLOCATED') must inevitably be made.
Thus every economy must find ways to answer THREE ECONOMIC QUESTIONS.

--3 BIG QUESTIONS--

--Q. WHAT TO PRODUCE?--

Given an economy's FACTOR ENDOWMENTS, what GOODS or SERVICES should be made?
- - Questions raised include:
    - - "Should we produce goods or services?",
      - "What quantities of each?",
      - "Which ones are the most important?",
      - "What to give up?"

--OPPORTUNITY COST--

As an obvious consequence of allocating scarce resources to the production of any particular good or service, there will inevitably be something that has to be given up ('foregone').
In other words, the cost of producing 'Good A', is not producing 'Good B'.
In Economics we refer to the VALUE OF THE NEXT BEST ALTERNATIVE USE FORGONE ('Good B') as the OPPORTUNITY COST of the decision.

--Q. HOW TO PRODUCE?--

In order to SATISFY AS MANY WANTS AS POSSIBLE given the LIMITED RESOURCES, they must be used in the LEAST WASTEFUL (most EFFICIENT) WAY.
Questions raised include: "Which production method is best?", "Labour-intensive or Capital-intensive?", etc...

--Q. FOR WHOM TO PRODUCE?--

Finally, as we cannot satisfy all wants, decisions have to be taken concerning WHOSE WANTS TO SATISFY, and also WHOSE WANTS TO IGNORE.
This raises questions such as:
- - - "Should we give to the highest bidder?",
    - "Should we give women and children first?",
    - "Should we be allowed to keep what we produce?"

--TASK--

Go to https://onlinevideoconverter.pro/en19/youtube-video-downloader
Paste in the following youtube url: https://youtu.be/pGQmwJvZHJc.
Download as a MP4.
Go to https://clideo.com/add-subtitles-to-video
Upload the video file, then CREATE SUBTITLES that explain how the following concepts are illustrated in the clip:
- - - 1) The economic problem
    - 2) Choices
    - 3) Opportunity cost
    - 4) The 3 economic questions
    - 5) Factors of production
For example. "Due to scarcity all economies are faced with three economic questions....

--DECISION MAKERS--

--THE FREE MARKET--

In a FREE-MARKET ECONOMY, the HOUSEHOLDS are the main owners of productive resources, and together they will create FIRMS that produce goods and services. Therefore the three economic questions are answered WITHOUT GOVERNMENT INTERVENTION.
- - - - WHAT TO PRODUCE, is determined by CONSUMERS who guide producers about how to allocate their productive resources through their DEMAND and WILLINGNESS TO PAY*.
      - HOW TO PRODUCE, is determined by PRIVATE-SECTOR FIRM'S desire to MAXIMISE PROFITS*, which is achieved by MINIMISING WASTE and thus using the most appropriate production methods.
      - FOR WHOM TO PRODUCE, is determined by PRICE RATIONING, which only allows those consumers WILLING & ABLE TO PAY* THE MARKET PRICE to get to consumer the good.

* Clearly all decisions are made using what is known as the PRICE MECHANISM, which we will discuss later.

--THE GOVERNMENT--

In a PLANNED ECONOMY, the government is the main owner of productive resources, and as such all three economic questions are ANSWERED BY THE GOVERNMENT.
- - WHAT & HOW TO PRODUCE, is determined solely by THE GOVERNMENT, who base their decisions on CENTRALISED DECISION MAKERS.
  - FOR WHOM TO PRODUCE, is determined using NON-PRICE RATIONING methods, again determined by GOVERNMENT PLANNERS.

--A MIX OF BOTH--

As the name suggests this type of economic system involves aspects of BOTH a FREE MARKET and a PLANNED system.
Those productive resources controlled by the government are part of the PUBLIC SECTOR, while those owned by private owners are part of the PRIVATE SECTOR.

--MODELLING THE ECONOMY 1--

--THE PPC--

--DEFINITION--

The PRODUCTION POSSIBILITY CURVE (PPC) (Also known as the PRODUCTION POSSIBILITY FRONTIER (PPF)), is a very basic economic model used to illustrate the economic concepts of FACTOR Of PRODUCTION, SCARCITY, CHOICE, and OPPORTUNITY COST.

--THE PPC STORY Pt I--

Fleeing from a war-ravaged homeland a group of weary drifters landed on a deserted island in the middle of the Pacific Ocean. The island was covered in COCONUT trees and surrounded by beautiful FISH-filled seas.

--THE PPC STORY Pt II--

Among the new arrivals, there were a total of 10 PEOPLE OF WORKING AGE that could catch fish and climb trees. It was assumed that PER DAY they could either CATCH 2 FISH OR PICK 3 COCONUTS EACH. In addition, before they left their homeland, they brought tools that could be used to catch fish and collect coconuts for all the workers.

--THE PPC STORY Pt III--

When they arrived, the SENIOR MEMBER of the group 'Chiefy' took stock of the resources available and decided on WHAT TO PRODUCE? (Coconuts and fish), HOW TO PRODUCE? (Combine workers and tools) and FOR WHOM TO PRODUCE?, (Workers, dependents etc....)

--TASK 1--

From what we know so far can you IDENTIFY the FACTORS OF PRODUCTION for this new economy?

--TASK 2--

Chiefy now wants to know ALL the possible production combinations of coconuts and fish that the island can produce in one day if ALL 10 workers produce to their maximum assumed capabilities (CATCH 2 FISH or PICK 3 COCONUTS EACH). Complete the table below, and plot these combinations with Fish on the vertical axis and coconuts on the horizontal axis, then answer the following question:
1) "How many fishes and coconuts are produced if the resources are divided equally between both products?" (5 workers per activity)
2) "Explain how this model illustrates the concepts of 'CHOICE', 'OPPORTUNITY COST', and 'SCARCITY'.

--CONSTANT vs INCREASING OPP. COST--

So far we have assumed that each person possesses equal productivities in both goods, and thus the OPPORTUNITY COSTS are CONSTANT, in our example for every fish caught the opportunity cost for each worker is 1.5 coconuts and for every coconut picked the opportunity cost for each worker is 2/3 of a fish.
This constant slope results in a STRAIGHT LINE PPC.
However, in reality factors of production, are not equally productive and we have some workers who are better climbers and collectors of coconuts and other workers who are better fishermen.
Thus if we were to produce more and more of say coconuts we would eventually have to employ those who are poor climbers but good fisherman
and greater production of one good results in changing amounts of goods forgone, hence OPPORTUNITY COSTS are NOT THE SAME.
Indeed when you ask a

--TASK 3--

Let's now look at some new data. Imagine that Chiefy assumes that each worker can produce either 10 fish or 10 coconuts per hour now draw the PPC.
At the end of the day, Chiefy was left disappointed as the total output was only 40 fish and 40 coconuts when the 5 best fishermen caught fish and when the 5 best tree-climbers cut coconuts. This was due to the fact that each worker was NOT EQUALLY PRODUCTIVE, some workers were better at catching fish whilst others were better at picking coconuts.
Given the data below Complete the table, and plot the combinations. Then explain the shape of the PPC using the concept of INCREASING OPPORTUNITY COSTS.

--TASK 4--

Now that you have a PPC drawn, indicate the following on your diagram from 'TASK 3',

An OUTPUT COMBINATION that is currently unattainable.
An OUTPUT COMBINATION when some workers are sick.
A PPC curve when NEW WORKERS arrive on the island
A PPC curve when some of the TOOLS BREAK.

--TASK 5 [HL only]--

Complete the past paper 3 question below.

--MODELLING THE ECONOMY 2--

--THE CIRCULAR FLOW MODEL--

In all economies, THREE ECONOMIC ACTIVITIES take place, namely: PRODUCTION, CONSUMPTION, and EXCHANGE.
Generally speaking, the owners of the FACTORS OF PRODUCTION (Called 'HOUSEHOLDS') supply their resources to FIRMS that produce OUTPUT.
These factor owners will receive an INCOME which they will, in turn, SPEND (Though maybe not 100%) on the output.
The overall size of this 'ECONOMIC ACTIVITY' determines the amount of wants that are satisfied. We can model this activity using the CIRCULAR FLOW OF INCOME.

--TASK--

Sketch the 2-sector Circular flow of income and explain how each of the flows are interconnected, then briefly explain why it is likely that incomes will be unequal in this type of market system.

--VIDEO RESOURCES--

--3 BIG QUESTIONS--

--WHY IS ECONOMICS A 'SOCIAL SCIENCE'?--

A SOCIAL SCIENCE is defined as "any branch of academic study or science that deals with HUMAN BEHAVIOUR in its social and cultural aspects" (https://www.britannica.com/topic/social-science)
We will soon learn that ECONOMICS studies the behaviour of the owners of scarce productive resources as they must make choices and decisions regarding how they allocate their resources.

--'MICROECONOMICS' vs 'MACROECONOMICS'--

As mentioned above, economics studies decision-making:

MICROECONOMICS studies the behavior of INDIVIDUALS and FIRMS in making decisions regarding the allocation of scarce resources.
MACROECONOMICS studies the performance, structure, behavior, and decision-making of an ECONOMY AS A WHOLE.

Page updated

Google Sites

Report abuse