Chapter 1: What is Economics about?
• Economic Problem: how a society can satisfy the unlimited wants with the limited resources available.
• Opportunity Cost: represents the cost of satisfying one want over an alternative want. Also known as economic cost/real cost.
• Wants: are the material desires of individuals or the community. They provide utility/satisfaction/pleasure when consumed.
○ Needs: are wants, but are basic necessities of life such as food and shelter.
○ Recurrent Wants: some wants will need to be satisfied over and over again
○ Complimentary Wants: a wants that naturally follows after an initial satisfaction of another want.
• Individual wants: are the desires of each person. Will depend on personal preference, ability to purchase goods and services (level of income). The lesser the income a person has, the fewer the wants that they are able to satisfy.
• Collective Wants: are the wants of the whole community.
○ Usually provided by the government by using taxation revenue
§ Local government provide waste services
§ State Government provide police force
§ Federal Government provide defence force
○ What is desired will depend on the community as a whole
• Factors affecting changes in wants:
○ Age: 11 year old wants a bike, 21 year old wants a car
○ Income: as income increase, you are able to afford more luxurious goods, and you increase the range of wants you can satisfy.
○ Technology: introduces new wants that people seek to satisfy, new computer are being wanted
○ Fashion: new clothes and new music change due to trends in fashion over time.
• Key economic issues
1. What to produce?
§ Due to limited resources, no economy is able to satisfy the all individual and collective wants.
§ An economy must decide what wants to satisfy first, hence deciding what goods and services to produce.
2. How much to produce?
§ To efficiently utilise resources and maximise the satisfaction of wants.
§ Producing too much means that resources will be wasted. Producing too little means that some individuals will be left unsatisfied.
3. How to produce?
§ An economy must decide on ho t allocate its resources in the production process
§ Economy must use the most efficient method of production, that uses least amount of resources
□ Greatest number of wants satisfied at any one point in time
4. How to distribute production?
§ Economy must decide on the distribution of the product amongst the population.
§ Each person's share depends on their level of income, in modern economic times.
§ Economies can with have equitable (even) or inequitable (uneven) distribution of production.
§ Conflict between equity and efficiency, more efficient systems may produce less equitable outcomes.
• Opportunity Cost
○ When we satisfy a want, we give up the opportunity to satisfy another alternative want.
○ Therefore the 'real' cost of satisfying a want in the alternative want we have to forego.
○ Can be applied to individuals, businesses and the government
§ Individuals- with limited resources (income), may have to choose between a desire for a car, or a holiday. If she chooses car, the real cost is the holiday.
§ Businesses- must make a choice in allocation of scarce resources. If a businesses produces shoes, it gives up opportunity to produce furniture
§ Government- has limited resources to satisfy community wants. Allocation of resources for construction of a motorway, may be at the expense of new hospital. 1.2
• Production possibility frontier: is a graphical representation of all the possible combinations of two goods or services that the economy can produce at any given time.
○ can be used to demonstrate how opportunity costs arise
○ Shows the upper limit of what an economy can produce at any giveen point in time...