Unit 1
WHAT IS ECONOMICS ALL ABOUT?
Learning outcomes
• 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
Definition of 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 people use their limited resources to try to
satisfy unlimited wants.
Michael Parkin
Many other definition available. See study guide or textbook
Central Economic Problem
SCARCITY, CHOICE AND OPPORTUNITY COST
• Wants – human desires
• Needs – necessities
• Demand – wants, but backed by necessary means to buy
Type and Classification of Goods and
Services
• 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
• See Box 1-2 Goods and services (Textbook page 7)
SCARCITY, CHOICE AND OPPORTUNITY COST
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.
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.
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 must be made.
• Every time a choice is made, opportunity cost is incurred
ILLUSTRATING SCARCITY, CHOICE AND OPPORTUNITY COST:
THE PRODUCTION POSSIBILITIES CURVE CONTINUED
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).
ILLUSTRATING SCARCITY, CHOICE AND OPPORTUNITY COST:
THE PRODUCTION POSSIBILITIES CURVE CONTINUED
Table 1-1 Production possibilities for the Wild Coast community
ILLUSTRATING SCARCITY, CHOICE AND OPPORTUNITY COST: THE PRODUCTION
POSSIBILITIES CURVE CONTINUED
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.
ILLUSTRATING SCARCITY, CHOICE AND OPPORTUNITY COST: THE PRODUCTION
POSSIBILITIES CURVE CONTINUED
The production possibilities curve indicates the combinations of any two goods or services that are
attainable when the community's resources are fully and efficiently employed.
Potatoes (kg per day)
110
10
950
As we move along the production possibilities curve from point A to
point B through to point F, the production of fish increases while the
production of potatoes decreases.
A
B
To produce the first basket of fish the community has to
sacrifice 5 kg of potatoes (from 100 to 95).
C
85
D
To produce the second basket of fish the sacrifice is an
additional 10 kg of potatoes (the difference between 95
and 85).
70
E
To produce the third basket of fish an additional 15 kg of
potatoes have to be forgone (the difference between 85
and 70).
40
F
0
1
2
3
4
Fish (baskets per day)
5
The opportunity cost of each additional
basket of fish therefore increases as we
move along the production possibilities
curve. This is why the curve bulges
outwards from the origin.
ILLUSTRATING SCARCITY, CHOICE AND OPPORTUNITY COST: THE PRODUCTION
POSSIBILITIES CURVE CONTINUED
The production possibilities curve is a very useful way of illustrating scarcity, choice and
opportunity cost.
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
Potatoes (kg per day)
110
100
95
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
Fish (baskets per day)
5
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.
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
Figure 1-4 Increase in the
quantity or productivity of
the available resources
Table 1-2 The production possibilities curve (PPC): a summary (Textbook page 10)
Summary of factors
THREE factors that will cause the PPC to shift outward:
1. An increase in available resources
2. Iimprovements in current production techniques (improved technology)
3. An iincrease in productivity levels.
THREE factors that will cause the PPC to shift inward:
1. A decrease / destruction in / of available resources
2. A deterioration in current production techniques
3. A decrease / deterioration in productivity levels
MICROECONOMICS AND 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)
Positive and Normative Economics
Positive Statements
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).
Normative Statement
A branch of economics that expresses opinions or value judgments about
economic fairness. “What ought to be” as opposed to “what is” (positive
economics).
Positive Statements
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.
Normative Statements
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.
Why Economist 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)
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
• See Box 1-5 Percentages and percentage changes (Textbook page 16)