Foundations of Economics

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Lesson 1
FOUNDATIONS OF ECONOMICS

Lesson 1- Economic System & Opportunity Cost

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Learning Objectives
By the end of this unit, you should be able to:
give an overview of Economics deal with the Economic Problem discuss the Methodology in Economics differentiate between Microeconomic Issues and Macroeconomic Issues

Lesson 1- Economic System & Opportunity Cost

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Lesson 1- Foundations of Economics

Lesson 1-pg1

What is Economics?
Economics is the study of how people and society choose to use scarce productive resources to produce goods and services and to allocate them in such a way as to satisfy the unlimited wants of the various persons and groups in a society. Three economic problems: Microeconomic deals with the economic choices of the individual producer, or consumer: what to produce how to produce for whom to produce Lesson 1- Economic System & Opportunity Cost 3

Scarcity, choice
People use goods and services to satisfy their wants. The act of producing commodities is called production and the act of using these commodities is called consumption. Our wants may be unlimited but our resources are limited in supply. This result in the problem of scarcity.

We face scarcity in : a) natural resources b) time and energy c) factors of production The basic function of any economic system is to provide the framework for choice. Resources —in this case represented by their respective incomes—are insufficient to buy all the goods and services they desire. Lesson 1- Economic System & Opportunity Cost 4

Lesson 1- Foundations of Economics

Lesson 1-pg2

Factor of Production
These resources are called the factors of production –
1)

2)

3)

4)

land (natural resources e.g. agricultural land, minerals, gases, products of forests and oceans); labour (human resources both physical and mental abilities); capital (man-made resources called producer goods which was mentioned earlier); enterprise (supplied by entrepreneurs who take the risk to organ se production)

Lesson 1- Economic System & Opportunity Cost

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Opportunity cost
Opportunity cost can be defined as the next best alternative foregone, i.e., something which must be sacrificed in order to obtain something else.

For example:
Whether to go to college or to work? Whether to study or go out on a date? Whether to go to class or sleep in?

Lesson 1- Economic System & Opportunity Cost

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Lesson 1- Foundations of Economics

Lesson 1-pg3

Scarcity, Choice & Opportunity Cost

Lesson 1- Economic System & Opportunity Cost

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Microeconomics vs. Macroeconomics
2 category of Economics: Microeconomics & Macroeconomics

Economics
(how society manages its scarce resources efficiently)

Microeconomics
• focuses on the individual parts of the economy. • How households and firms make decisions and how they interact in specific markets Consumers

Macroeconomics
• looks at the economy as a entire/ whole. • Economy-wide phenomena, for e.g. inflation, unemployment, economic growth, budget & national savings 8

Lesson 1- Economic System & Opportunity Cost

Lesson 1- Foundations of Economics

Lesson 1-pg4

Production Possibilities Curve -1/2
Production Possibilities curve (PPC)
The production possibility curve can be defined as a curve which show the various possible combinations of two goods that an economy can produce given a limited amount of resources.

Production possibilities frontier
a graph showing different combinations of output for a given amount of inputs More of one good ⇒ less of another Illustrates opportunity costs in production Lesson 1- Economic System & Opportunity Cost 9

Production Possibilities Curve -2/2

40 Soybeans 30 20 10 0

A
B Attainable region

Unattainable region C D E
Production Possible Curve

10

20

30 38

52 60 65

Wheat
10

Production Possible Frontier

Lesson 1- Economic System & Opportunity Cost

Lesson 1- Foundations of Economics...
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