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Chapter 1:
What economics
is all about
Learning outcomes
Once you have studied this chapter you should be able to explain
what economics is all about
• define economics
•
define the important concept of opportunity cost
•
describe a production possibilities curve or frontier
•
distinguish between microeconomics and macroeconomics
•
distinguish between positive and normative economics
•
explain why economics is a social science
•
identify some common mistakes in reasoning about economics
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What is economics?
“Economics is the study of how our scarce productive resources are
used to satisfy human wants”
- George Leland Bach
“Economics is the study of how society manages its scarce
resources”
- N. Gregory Mankiw
“Economics is the study of how individuals, firms, governments and
other organizations within our society make choices and how those
choices determine how the resources of society are used”
- Joseph Stiglitz
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Microeconomics vs
Macroeconomics
Microeconomics
• Focus is on individual parts of the economy
• Individual elements of the economy are put under a microscope
and examined in detail
Macroeconomics
• Study of the nation as a whole i.e. looking at the ‘big picture’
• Develop an overall view of the economy and study aggregate
economic behavior
Scarcity, choice and opportunity cost
• Scarcity refers to a situation whereby the resources that are
available at a particular point in time are not enough to satisfy
all the needs of individuals, let alone all their wants
• Because of scarcity, choices have to be made
• Every time a choice is made, opportunity cost is incurred
• Opportunity cost – the value to the decision maker of the best
alternative that could have been chosen but was not chosen
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Scarce Resources: Factors of Production
Factors of production – scarce resources that are used to produce
goods and services
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Natural resources (land)
Labour
Capital
Entrepreneurship
Money is not a factor of production!
Classification of Goods and Services
(1) Consumer goods are utilised or consumed by
individuals/households to satisfy wants e.g. food, clothing.
- Classified as durable, non durable, semi-durable
Capital goods are not consumed in this manner, but are utilised in
the production of other goods e.g. machinery, equipment.
- Choice between present and future consumption
Classification of Goods and Services
(2) Final goods are used or consumed by individuals, households
and firms i.e. end products, such as a loaf of bread.
Intermediate goods are goods that are purchased to be used as
inputs in producing other goods e.g. flour.
(3) Private goods are excludable products, consumption by others
can be excluded e.g. motor vehicles.
Public goods are used or consumed by communities or societies at
large e.g. traffic lights. These goods cannot be excluded.
Classification of Goods and Services
(4) Economic goods are items produced at a cost from scarce
resources. Most goods are thus economic goods.
Free goods are goods that are not scarce and therefore have no
price attached e.g. sunshine, sea water.
(5) Homogenous goods are goods that are exactly alike.
Heterogenous goods are differentiated products; these are goods
that are available in different varieties, qualities or brands.
Illustrating scarcity, choice and opportunity
cost: the production possibilities curve
Scarcity, choice and opportunity cost can be illustrated by means of the
PPC curve.
• The PPC curve indicates the combinations of any two goods or services
that are attainable when an economy’s resources are fully and
efficiently employed.
Consider a community which survives on two products, fish and potatoes:
• If all resources are concentrated on fish, they will produce 5 baskets of
fish. If all resources are concentrated in potatoes they will produce 100
kgs of potatoes.
• However to achieve a balance diet they may choose a combination of
the two products.
• However it is impossible to produce more of one good without
decreasing the production of the other.
Illustrating scarcity, choice and opportunity
cost: the production possibilities curve
Table 1-1 Production possibilities for the Wild Coast community
(Textbook page 6)
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Illustrating scarcity, choice and opportunity cost: the production possibilities curve
Figure 1-1 A production possibilities curve for the Wild Coast
community (Textbook page 6)
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Illustrating scarcity, choice and opportunity
cost: the production possibilities curve
Fish production is measured along the horizontal axis and potato
production on the vertical axis.
The different combinations are represented by points A, B, C, D, E and F
in the diagram.
Joining the different combinations gives us the curve, the Production
Possibility Curve.
Moving along the PPC from A to B through to point F, the production of
fish increases, whilst the production of potatoes decreases.
Illustrating scarcity, choice and opportunity
cost: the production possibilities curve
To produce the first basket of fish, the community has to sacrifice 5 kgs
of potatoes (100 to 95).
To produce the second basket of fish the sacrifice is an additional 10
kgs of potatoes (95 less 85).
The opportunity cost of each additional basket of fish increases as we
move along the PPC.
The PPC bulges outward from the origin because of increasing
opportunity cost.
Illustrating scarcity, choice and opportunity
cost: the production possibilities curve
Points A, B, C, D, E and F represents attainable and efficient
combinations of potatoes and fish.
Point H in the diagram denote 70 kgs of potatoes and two baskets of
fish.
-This is attainable but inefficient because more potatoes (85
kgs) can be produced at C without sacrificing any production of
fish.
Points such as G are desirable but not attainable.
Illustrating scarcity, choice and opportunity
cost: the production possibilities curve
The PPC can therefore illustrate scarcity, choice and opportunity cost.
Scarcity- all points to the right such as G are unattainable.
The PPC forms a frontier or boundary between what is possible and
impossible.
Choice – Is illustrated by the need to choose among the available
combinations along the curve.
Opportunity cost – is illustrated by the negative slope of the curve which
means more of one good can be obtained only by sacrificing the other
good.
In other words opportunity cost involves a trade-off between the two
goods.
Further applications of the production
possibilities curve
Box 1-2 Goods and services (Textbook page 7)
Figure 1-2 Improved
technique for producing
capital goods
(Textbook page 9)
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Further applications of the production possibilities curve
Figure 1-3 Improved technique for producing consumer goods
(Textbook page 10)
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Further applications of the production possibilities curve
Figure 1-4 Increase in the quantity or productivity of the available
resources (Textbook page 10)
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Further applications of the production possibilities curve
Table 1-2 The production possibilities curve (PPC): a summary
(Textbook page 10)
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Positive and normative economics
Positive economics - includes statements of fact, which can be
proved or disproved by looking at the facts. Concerned with
“what is”.
- e.g. Kaizer Chiefs won the PSL in 2014
Normative economics – statements about how things ought to
or should be, and are based on individual values or opinions.
These statements are subject to debate.
- e.g. Bafana Bafana can play much better than they did
against Brazil in March 2014
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A few points to note
• The blinkered approach (or biased thinking)
• Fallacy of composition
• Post hoc ergo propter hoc
– Correlation and causation
• Levels and rates of change
Box 1-5 Percentages and percentage changes
(Textbook page 16)
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Important concepts
•
Wants and needs
•
Durable goods
•
•
Means or resources
Scarcity (unlimited wants and
•
Services
•
Final goods
limited resources)
•
Intermediate goods
•
Choice
•
Private goods
•
Opportunity cost (or trade-off)
•
Public goods
•
Production possibilities curve
•
Economic goods
•
Potential output
•
Free goods
•
Economic growth
•
Homogeneous goods
•
Consumer goods
•
Heterogeneous goods
•
Capital goods
•
Non-durable goods
•
•
Resource allocation
Social science (versus natural
•
Semi-durable goods
science)
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Important concepts
•
Explanation
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Correlation and causation
•
Prediction
•
Levels versus rates of change
•
Policy
•
Theory
•
Ceteris paribus
•
Simplification
•
Microeconomics
•
Schedule
•
Macroeconomics
•
Graph
•
Positive economics
•
Equilibrium
•
Normative economics
•
Direct (positive) relationship
•
Biased thinking
•
Inverse (negative) relationship
•
Fallacy of composition
•
Intercept
•
Post hoc ergo propter hoc
•
Slope
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