Chapter 1:
What economics
is all about
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Chapter outlineChapter outline
LEARNING OUTCOMES
1.1 WHAT IS ECONOMICS?
1.2 SCARCITY, CHOICE AND OPPORTUNITY COST
1.3 ILLUSTRATING SCARCITY, CHOICE AND OPPORTUNITY COST
1.4 FURTHER APPLICATIONS OF THE PPC
1.5 ECONOMICS IS A SOCIAL SCIENCE
1.6 MICROECONOMICS AND MACROECONOMICS
1.7 POSITIVE AND NORMATIVE ECONOMICS
1.8
ECONOMICS FOR SOUTH AFRICAN STUDENTS
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
LEARNING OUTCOMES
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
LO: Explain what economics is all about
LO: Define economics
1.1 What is economics?
Economics is the study of how our scarce productive resources are used to
1.1 WHAT IS ECNONOMICS?
satisfy human wants.
George Leland Bach
Economics is the study of how people use their limited resources to try to
satisfy unlimited wants.
Michael Parkin
See Box 1-1 Some definitions of economics (Textbook page 3)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
What is economics? continued
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
LO: Explain what economics is all about
LO: Explain what economics is all about
1.2 Scarcity, choice and opportunity
cost1.2 SCARCITY, CHOICE AND
OPPORTUNITY COST
•
Wants – human desires
•
Needs – necessities
•
Demand – wants, but backed by necessary means to buy
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
LO: Explain what economics is all about
Scarcity, choice and opportunity cost continued
See Box 1-2 Goods and services (Textbook page 7)
•
Goods and services
• Consumer goods
–
Non-durable goods
–
Semi-durable goods
–
Durable goods
• Capital goods
• Services
• Final goods & intermediate goods
• Private goods & public goods
• Economic goods & free goods
• Homogenous goods & heterogeneous goods
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Scarcity, choice and opportunity cost continued
LO: Explain what economics is all about
Scarcity
The state in which the resources available are insufficient to
satisfy people’s wants. In other words, a state of unlimited wants
and limited resources.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Scarcity, choice and opportunity cost continued
LO: Explain what economics is all about
Choice
The act of making a decision between two or more possibilities.
We all want many things, but because our resources or means
are scarce, we have to make choices.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
LO: Explain what economics is all about
Scarcity, choice and opportunity cost continued
LO: Define the important concept of opportunity cost
Opportunity cost
The value of the best alternative forgone in making any choice. It
involves sacrificing something in order to gain something
else.
•
Because of scarcity, choices have to be made.
•
Every time a choice is made, opportunity cost is incurred.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
LO: Explain what economics is all about
LO: Describe a production possibilities curve or frontier
1.3 Illustrating scarcity, choice and
the production
1.3opportunity
ILLUSTRATINGcost:
SCARCITY,
CHOICE
possibilities
curve COST
AND OPPORTUNITY
The PPC is an illustration of the combination of any two goods or
services that are attainable when a community’s resources are
fully and efficiently employed (in other words, the maximum
attainable combinations of those two goods - potential output).
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Illustrating scarcity, choice and opportunity cost: the
production possibilities curve continued
LO: Explain what economics is all about
LO: Describe a production possibilities curve or frontier
Table 1-1 Production possibilities for the Wild Coast community
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Illustrating scarcity, choice and opportunity cost: the
production possibilities curve continued
LO: Explain what economics is all about
LO: Describe a production possibilities curve or frontier
Figure 1-1 A production possibilities curve for the Wild Coast community
On the next few slides Table
1.1 and Figure 1.1 are
explained in more detail.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Illustrating scarcity, choice and opportunity cost: the
production possibilities curve continued
LO: Explain what economics is all about
LO: Describe a production possibilities curve or frontier
The production possibilities curve is a very useful way of illustrating scarcity, choice and
opportunity cost.
Potatoes (kg per day)
110
100
95
Scarcity is illustrated by the fact that all points to
the right of the curve (such as G) are unattainable.
The curve thus forms a frontier or boundary
between what is possible and what is not possible.
unattainable
G
A
B
C
85
attainable and
efficient
Choice is illustrated by the need to choose among
the available combinations along the curve.
D
70
H
E
40
attainable but inefficient
0
F
1
2
3
4
5
Fish (baskets per day)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Opportunity cost is illustrated by what we refer to as
the negative slope of the curve, which means that
more of one good can be obtained only by
sacrificing the other good. Opportunity cost therefore
involves what we call a trade-off between the two
goods. Also note point H in the diagram. This point
denotes 70 kg of potatoes and two baskets of fish.
Such a combination is obtainable but inefficient.
Why? Because more potatoes (85 kg) can be
produced at C without sacrificing any production of
fish.
Alternatively more fish (3 baskets) can be
produced at D without sacrificing any production
of potatoes.
LO: Explain what economics is all about
LO: Describe a production possibilities curve or frontier
1.4 FURTHER APPLICATIONS OF THE
1.4 Further applications of the
PPC
production possibilities curve
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Further applications of the production possibilities
curve continued
LO: Explain what economics is all about
LO: Describe a production possibilities curve or frontier
Economic growth
• Illustrated by outward movement of PPC
Figure 1-2 Improved
technique for producing
capital goods
Figure 1-3 Improved
technique for producing
consumer goods
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Figure 1-4 Increase in the
quantity or productivity of
the available resources
Further applications of the production possibilities
curve continued
LO: Explain what economics is all about
LO: Describe a production possibilities curve or frontier
Table 1-2 The production possibilities curve (PPC): a summary (Textbook page 10)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
LO: Explain what economics is all about
LO: Explain why economics is a social science
1.5 ECONOMICS IS A SOCIAL SCIENCE
1.5 Economics is a social science
The purpose of economic theory:
•
Explanation
•
Prediction
•
Economic policy
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
LO: Explain what economics is all about
LO: Distinguish between microeconomics and macroeconomics
1.6 Microeconomics and
1.6 MICROECONOMICS AND
macroeconomics
MACROECONOMICS
•
Microeconomics – focus is on the individual parts of the economy
•
Macroeconomics – focus is on the economy as a whole
See Box 1-3 Microeconomics versus macroeconomics: some examples (Textbook page 12)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
LO: Explain what economics is all about
LO: Distinguish between positive and normative economics
1.7 Positive and normative economics
1.7 POSITIVE AND NORMATIVE
Positive economics ECONOMICS
The branch of economics that deals with objective statements of fact and
cause-and-effect relationships. Involves the description and explanation
of economic phenomena as well as the development and testing of
economic theories. “What is” as opposed to “what ought to be”
(normative economics).
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Positive and normative economics continued
LO: Distinguish between positive and normative economics
Normative economics
A branch of economics that expresses opinions or value
judgments about economic fairness. “What ought to be” as
opposed to “what is” (positive economics).
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Positive and normative economics continued
LO: Distinguish between positive and normative economics
Positive or normative?
Kaizer Chiefs won the PSL in 2014.
Nelson Mandela was the South African
Newsmaker of the Year in 2013.
Tiger Woods won the US Open in 2014.
In 2013 the average South African inflation
rate, based on the consumer price index, was
5,7 per cent.
The rand appreciated against the euro in 2013.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Positive and normative economics continued
LO: Distinguish between positive and normative economics
Positive or normative?
The South African inflation rate is too high.
Black Panther is one of the best movies
ever made.
Louis Oosthuizen is a better golfer than
Charl Schwartzel.
Bafana Bafana can play much better than they
did against Brazil in March 2014.
Economic policy in South Africa should be primarily
aimed at reducing unemployment.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Positive and normative economics continued
LO: Distinguish between positive and normative economics
Why economists disagree
•
They might make different value judgements.
•
They might not agree on the facts.
•
They might be biased.
•
They might hold different views about how the economy operates.
•
They might have different time perspectives.
See Box 1-4 Why economists disagree (Textbook page 13)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
LO: Explain what economics is all about
LO: Identify some common mistakes in reasoning about economics
A few points to note
•
The economic way of thinking
•
The blinkered approach (or biased thinking)
•
Fallacy of composition
•
Post hoc ergo propter hoc
•
Correlation and causation
•
Levels and rates of change
1.8 A FEW POINTS TO NOTE
See Box 1-5 Percentages and percentage changes (Textbook page 16)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Important concepts
•
Wants and needs
•
Means or resources
•
Scarcity (unlimited wants and limited resources)
•
Choice
•
Opportunity cost (or trade-off)
•
Production possibilities curve
•
Potential output
•
Economic growth
•
Consumer goods
•
Capital goods
•
Non-durable goods
IMPORTANT CONCEPTS
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Important concepts continued
•
Social science (versus natural science)
•
Explanation
•
Prediction
•
Policy
•
Ceteris paribus
•
Microeconomics
•
Macroeconomics
•
Positive economics
•
Normative economics
•
Biased thinking
•
Fallacy of composition
ECONOMICS
FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Question 1
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Questions 2
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Questions 3
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Questions 4
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Questions 5
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Questions 6
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Questions 7
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Questions 8
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Questions 9
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT
Questions 10
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT