PRELIMINARY TOPIC ONE: INTRODUCTION TO ECONOMICS
The Nature of Economics
* Economic problem: wants, resources, scarcity
Relatively unlimited wants
Relatively limited resources
Scarcity → need for choice
Three basic economic problems:
WHAT/ HOW MUCH g + s should be produced?
HOW should the g + s be produced?
FOR WHOM should g + s be produced?
* Economic problem: how a society can satisfy the unlimited wants (of individuals or the community) with the limited resources available.
* Our wants are unlimited
* Resources are scarce – that is, the resources we have to satisfy our wants are limited * Since we cannot satisfy all our wants with our limited resources, we must choose between them * Therefore, we need to rank our preferences – we will choose our highest preference wants first, and leave some wants unsatisfied.
* The need for choice by individuals and society
Wants: the material desires of individuals or communities which provide pleasure or satisfaction when consumed. Needs: the basic human necessities for life.
Utility: the level of satisfaction or pleasure obtained from consumption. Individual wants: the desires of each individual, based on amount of income and personal preferences (environment). Collective wants: the wants of a whole community, which are provided by the government. Unlimited wants: the concept that we have endless wants, and must choose between them, due to limited income. Recurrent wants: wants that need to be met over and over again. Complementary wants: wants which need to be consumed with the purchase of another want.
* Wants change over time. Factors that affect these changes include: age, income [based on employment status and relationship (eg. marital status)], technology, fashion and lifestyle [environment].
* Opportunity cost and its application through PPFs
Opportunity cost: something which is sacrificed in order to gain something else. In economics, all costs are opportunity costs. * The real cost of satisfying our want is not the money we pay for it, but the alternative want that we have to forego.
Production Possibility Frontier (or Curve): used to demonstrate how opportunity costs arise when individuals or the community make choices. * Based on a number of simplifying assumptions, including:
(1) The economy produces only 2 goods: foods + clothes
(2) The state of technology is constant
(3) The quantity of resources available remains unchanged (4) All resources are fully employed
* Shift to right shows future production: what it would look like if there were increased resources [land, labour, capital or inputs for production], or technological advances. * Shift to left shows that allocation of resources is inefficient, or the economy is experiencing unemployment. ** NB: Practice finding opportunity cost.
* Future implications of current choices by individuals, businesses and governments Choices made today → economic outcomes of the future
An economy as a whole… makes the choice between producing capital or consumer goods.
* In L.R. prod’n K goods → ↑ level of economic growth in the future. This principle is true for:
* individuals [eg. investing money in shares, or saving up to pay off mortgage, instead of going on a holiday] * businesses [eg. predicting which area is likely to be most successful in L.R. instead of choosing to operate where other businesses have already been successful] * government [eg. it may be more politically popular to satisfy immediate wants such as increased welfare benefits and health care, than to plan for future needs, such as education, infrastructure and research and development]
* Economic factors underlying decision-making by:
* Spending/saving → influenced by level of Y, age, expectations of future Y...