What is Economics? Summary from Grade 11 CIE3M...
Economics: An Introduction: Unit One
What did we learn in CIE3M: Introduction to Economics?
 Economics is defined as the science of choice in a world of scarce
resources. It’s like you are stranded on an island – resources are
scarce because people have unlimited wants that are beyond the
capacity of the economy. We must choose what is important to us,
and sometimes we must base decisions on what we need versus what
we want.
 Therefore, the basic economic problem is that we can’t have
everything that we would like. People in the economy have basic
economic needs and wants, but there are only certain economic
resources that are available to use. The three basic types of
economic resources (or inputs) are: Labour, Capital Equipment,
and Natural Resources. In our island example suppose we only had
a few people, a few pieces of equipment and the land to work with.
Our “outputs” or simply, what kind of food we could make depended
on what was available on the island (i.e. fish and vegetables), our
capital equipment (pot, knife, fishing rod) and how much work we
were willing to do (labour). If we sat around all day and did nothing,
our output would be zero: that is, we would have no food or shelter.
 On a larger scale, if we think of a manufacturing facility (say a cookie
company – Oreo), the ability to make a large amount of cookies
depends on how many machines the company has (capital
equipment), how many workers they have (labour), and how large the
building is (land).
 The basic problem of economic scarcity implies that people cannot
have everything they want. This leads people to make choices, some
of which might be difficult. If we were stranded on an island, we
would have to decide if we were going to use our economic resources
(inputs) to make shelter or food. Both are important however, we
were limited in that we only had a few people on the island (labour).
This choice that we make has an economic cost – what economists call
“Opportunity Cost”. Opportunity Cost is another way to look at the
real cost of an item. For example, if we chose to use all of our
Mrs. Mancinelli, CIE3M
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What is Economics? Summary from Grade 11 CIE3M...
resources for food, then we would have to “give up” living in a cozy
shelter. So the “opportunity cost” of the food is the shelter.
 In a broader sense, the government always makes decisions on behalf
of people. The government collects tax dollars and decides how it will
spend our money. Say the government must choose between putting
the money towards a new hospital or towards a new school, for
example. It can’t do both. The government must make a difficult
decision, one that will not please everyone – some people want a
school; others want a hospital. If the government chooses to use the
money for a school, it has also chosen to forgo the hospital; therefore
the opportunity cost of building the school is the building of a new
hospital.
 In most cases, decisions are not “all or none”. That is, some of the
money that government collects goes to schools and some goes to
hospitals. If our class was stranded on an island, suppose we had a
choice to produce fish or to produce vegetables. We can choose to
produce all fish or all vegetable or a bit of both. This is where the
Production Possibilities Curve (PPC). The PPC shows the
economy’s potential output, assuming that all economic inputs are
fully employed and efficiently used.
 The PPC allows us to determine the opportunity cost of an item: The
opportunity cost of using economic resources to produce any item is
the amount of any other item that those same economic resources
could have produced instead.
 The PPC assumes that economic resources are used efficiently
and effectively. For example, if we divided our class of 16 people in
half to make cookies and computer web sites, we would allocate all
“techie” students to the web site job and all “good bakers” to the
cookies job. This is an effective use of resources. It would be
ineffective to allocate Nick to the web site job if he does not know
anything about computers. We would also ensure that all students
were adequately employed..that is, no one student would be allowed
to sleep, play video games or goof off during the work day – this
would be an inefficient use of time and resources.
Mrs. Mancinelli, CIE3M
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What is Economics? Summary from Grade 11 CIE3M...
 Finally, we touched on the Three Basic Questions of Economics:
What to produce?
How to produce?
How to divide the output?
 What to Produce: As a society, we need to decide: Do we produce
capital goods or do we produce consumer goods? Consumer
goods such as fuel and food can be enjoyed in the present but they
are used up quickly. On the contrary, capital goods (such as tools and
equipment) are seen as an investment for future use; they are not
used up today, but rather they will last for a long time. In economics
we say that capital goods increase future economic prosperity.
Many countries like Germany and Japan have put the production of
capital goods as a top priority because they believe it will increase
their countries’ future economic prosperity. Suppose you owned a
business – If you wanted to expand, you could take some of your
earnings and retain it in the business for future use – that is, you can
save up to buy that extra piece of machinery that will improve or
increase production. The money that you are saving, has an
opportunity cost – it could be the earnings that you take home as an
owner and spend it on consumer goods.
 How to Produce it: How should we combine our scarce inputs of
labour, capital equipment and natural resources to produce a product
or service? Should we use our economic resources to build capital
equipment? In our deserted island example, should we use labour to
build fishing nets because this might help us to catch more fish in the
future?...But this comes at a cost – if our labour is being used to make
equipment, we will not be able to use our labour to catch as much fish
as we want today. Again, we want to use our inputs efficiently and
effectively in order to avoid wasting our scare economic resources
and increase our economic prosperity (wealth and satisfaction).
 How to Divide the Outputs: This means who will receive what?
Should everyone receive an equal share? Or should some people
receive more than others? How can we be FAIR? How wide a gap
between the rich and the poor are we willing to accept? This question
of how to divide the outputs or the “economic pie” is certainly the
Mrs. Mancinelli, CIE3M
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What is Economics? Summary from Grade 11 CIE3M...
most controversial since it largely depends on a person’s INCOME. Is
it fair that NHL players make more money than doctors? All difficult
questions to answer! (are you a capitalist or a socialist?)
Questions:
1. What is the definition of Economics?
2. What is the difference between a need and a want?
3. List and describe the three main questions that economics tries to
answer?
4. Define opportunity cost?
5. What is the relevance of the Production Possibilites Curve in
Economics? List the inherent assumptions of the PPC?
6. Define efficiency and effectiveness in terms of their importance to
economic decision making.
Mrs. Mancinelli, CIE3M
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