1.1 UNDERSTANDING THE NATURE OF ECONOMICS
Scarcity is the situation in which available resources, or factors of production, are finite,
whereas needs are infinite. There are not enough resources to produce everything that
human beings need and want
Sustainability refers to maintaining the ability of the environment and the economy to
continue to produce and satisfy needs and wants in the future. Sustainability depends
crucially on sustainable resource use, referring to preservation of the environment over time.
The problem of sustainability arises because resources are scarce
Opportunity Cost is the value of the next best alternative that must be sacrificed to obtain
something else, results from scarcity that forces choices to be made
Factors of Production
Ø Land—consists of all natural resources, including all agricultural and non-agricultural
land, as well as everything that is under or above the land (e.g. minerals, oil reserves,
ground water)
Ø Labor—includes the physical and mental effort that people contribute to the
production of goods and services
Ø Capital—a manmade factor of production used to produce final goods and services,
such as machineries and tools
Ø Entrepreneurship—a special human skill possessed by some people, involving the
ability to innovate by developing new ways of doing things, to take business risks and
seek new opportunities for opening and running a business. Entrepreneurship
organizes the other three factors ·of production and takes on the risk of success or
failure of a business
1.2 THE THREE BASIC ECONOMIC QUESTIONS
1) What/how much to produce
2) How to produce
Ø Economies must make choices on how to use their resources in order to produce goods
and services
3) For whom to produce
Economic systems:
Ø Free Market Economy
n Based on market approach—based on supply and demand with little or no
government control
Ø Planned Economy
n Based on command approach—government or ruler makes most or all important
decisions about the production and allocation of resources
Ø
Mixed Economy
n Combination—allows a level of economic freedom in the use of capital, but also
allows governments to interfere in economic activities
1.3 UNDERSTANDING THE WORLD BY USE OF MODELS
PPC represents all combinations of the maximum amounts of
two goods that can be produced by an economy, given its
resources and technology, when there is full employment of
resources and efficiency in production
To produce somewhere on the PPC, two conditions must be met:
Ø All resources must be fully employed
Ø All resources must be used efficiently
Because of scarcity:
Ø The economy cannot produce outside its PPC
Ø The economy must make a choice about what particular combination of goods will be
produced
Ø Choices involve opportunity costs
Shape of the PPC:
Ø Specialization of factors of production, which makes them not equally suitable for the
production of different goods and services
Actual growth:
Ø Reduction in unemployment
Ø Increases in efficiency
Growth in production possibilities:
Ø Increases in quantity of resources
Ø Improvements in quality of resources
Ø Technological improvements
Equality: the state of being equal with respect to something (being the same)
Equity: being fair or just