The Foundation of Economics

Wants, needs & the

difference.
Goods & services
Economic resources
Scarcity, Choice and
opportunity costs
Economic goods Vs free
goods
The 3 basic economic
problems
Transitional economies
Privatisation vs
nationalization

Utility
Ceteris paribus
Normative and positive
statements
Production possibilities
frontiers
Economic growth &
economic development
Sustainable
development
Efficiency vs equity
Rational decisionmaking

Wants Vs Needs
What is a want and what is a need?
A need is defined as, something that we
must have in order to remain alive. These
are,
Wants are defined as, the things we desire
but which we dont need. They simply
make our lives better. Examples of a want
are,

Goods and Services

Our wants and our needs can be categorised
as either a GOOD or a SERVICE.
A good . a good is a product that can be
used to satisfy some desire or needs. They
are TANGIBLE. eg
A service is anything purchased by a consumer
but which does not have physical
characteristics. That means you cannot see,
touch, taste them. They are INTANGIBLE. eg

Wants and Needs

Why do people WANT so many things and
yet they only NEED a few things?
Why cant people have EVERYTHING
they want?

Why cant we have everything we

want?
Because our wants are UNLIMITED. We
want almost everything. Unlimited means
there is no end to what we want.
But, we dont have the MEANS to
have/produce all our wants.
Since our means (resources) are limited
and yet our wants are unlimited, what do
we do? We have to choose.

Choice
Defined as, the act of deciding on what is
wanted most.
Because we are forced to choose, there are
some things we want but which we may not
have.
In other words, we have to sacrifice (forego)
some things in order to have the things we
want most.
To sacrifice means we give up one thing for
another. Eg??????????

Choice and concept of Opportunity

Cost
Since we cant afford to have everything
we want, we are forced to choose what to
have and leave out the ones we cannot
have.
Every INDIVIDUAL, ORGANISATION AND
GOVERNMENTS have to choose
because we are all faced with limited
means (Scarce resources).

Opportunity Cost
Opportunity cost is defined as the cost
or value of the next best alternative
not taken/forgone.
Therefore, the OC of a decision is what must
be given up as a result of that decision.

Economic resources?
A resource is anything that people
use to make things or to do work.
The 4 types of resources are: Land,
Labour, Capital and Enterprise.

Types of Resources?
Land is any natural resource found on earth. Eg
The payment made (fee) to owner of land is known
as RENT.
Labour is human effort used in production. This
include physical and mental contributions. Labour is
work that is paid for. Payment for labour is WAGES.
Capital is a man-made productive asset (something
of worth)...The fee for use of capital is INTEREST.

 Enterprise/entrepreneur/management is a
human factor whose task is to organise the
other 3 factors. He is the owner of the business.
Without him, the other 3 factors would not
produce anything.
He is the risk-taker who combines land, labour
and capital to produce goods. Without him,
nothing would be produced.
If he is successful, the entrepreneur gains
PROFIT. Otherwise, he makes a LOSS.
All these resources are SCARCE (Limited)

Scarcity
Defined as..
Something is scarce only if the demand for it is
greater than the quantity available.

Quantity Available
Cars
1,000
Water 2billion
Gold
0.01

Quantity required
500
5billion
0

In short, something can be found in very large

quantity but would still be scarce. On the other
hand, something can be found in very small
quantity but be not scarce. It all depends on
whether quantity demanded is GREATER than
the quantity available.

What is Economics?

 Economics only concerns itself with scarce

goods.
All things that are scarce are known as
ECONOMIC GOODS. The scarcer the good, the
higher its price.
Things that are not scarce are known as FREE
GOODS. Free goods can become economic
goods if they become scarce.
Owners of economic goods have property rights.
This means they can charge a fee for the use of
these goods.

Basic Economic Problem

Because of scarcity, we are all forced to
make choices regarding how we are going
to use our scarce resources.
The 3 basic Economic questions we face
are:
- What to produce?
- How to produce?
- For whom to produce?

Task
Describe the 3 basic economic problems

Transitional economies
Describe some of the problems faced by
the transitional economies.

Economic Systems
Define economic systems.
Describe and give example of:
Traditional economies
Free market economies
Planned economies
Mixed economies
List some advantages and disadvantages of :
(a)Planned economies
(b)Free market economies

Over the last 20 years, most of the

countries that were centrally planned and
with resources publicly owned have been
restructuring towards market and private
ownership (PRIVATISATION). Examples
of such are former USSR countries, China
etc.
These economies are in transition and are
referred to as transitional economies.

Other Economic Terms

Utility
This is the satisfaction you get from owning or
consuming goods.
The more you consume, the more satisfaction
you get. But, the additional satisfaction
(marginal utility) you get when you consume
additional goods reduces as you consume
more of that good. This is known as the law
of diminishing Marginal Utility.

Economic Modelling
Economists build simplistic models to explain
the real world situation by setting up
hypotheses and predictions. When designing
models, holding other factors constant
(ceteris paribus) is a must in order to single
out the determinant factors behind human
behaviour.
Eg, How does rain affect the demand for
umbrella?

 Economists would hold other factors that

affect the demand for umbrellas constant
(assume that they do not change as well)
and concentrate in investigating the
influence of rain on the demand for
umbrellas, and conclude that, ceteris
paribus, the more the rainfall, the greater
the demand for umbrellas.

 In real life though, there are many other factors

other than rain that affect the demand for
umbrellas. Those factors could also be
changing at the same time. Therefore, we
cannot be certain that the change in the
demand for umbrellas was caused ONLY by
rainfall.
Because economic models are based on
ceteris paribus is a major reason for lack of
certainty in economics because in the real
world, many factors are at play at any given
time.

Normative & Positive economic

Statements.
The statements economists make can be
classified as either normative or positive
statement.
Using examples, distinguish between a
normative and a positive economic statement.

 Normative or positive statements?

The sky is blue.
On the average, Chinese men are shorter than
Chinese women.
Women should not work.
Brazil is in Latin America.
Wages should be increased.
The inflation in China is lower than that in
Japan.
Spending on education should be greater than
spending on defense.

Production Possibility Frontier

(PPF)
The PPF is also known as Production
Possibility Curve (PPC)
A PPF/PPC shows..
Therefore, a PPC shows the full output
potential of the economy.

 Supposing a country allocates all its resources

to the production of cars and food.
Possibilities Table and its PPC.
Cars

Food

 PPC
C
B
cars

PPC

food

Any point along the PPC is possible combination of output

 The PPC is CONCAVE due to the principle of

diminishing returns. We produce less and less
output as we allocate more and more resources
to that product. This is because not all factors
are equally suitable for the production of all
goods and as we allocate more resources to
the production of a good, we end up using
resources that are less suitable for producing it.

 Concave PPC implies increasing Opportunity

Costs (OC). The OC of producing 50 units of
food is 10 machines. This means the OC of 1
unit of food is 10/50=0.2 machines.
As we increase production of food from 175
units to 180 units, we have to sacrifice 50
machines. This means the OC of one unit of
food at this point is 50/5=10 machines.
This is because we are now using resources
that are less suitable for producing food. After
using all the fertile land, to produce more food,
you start using less fertile land. The yield is
lower.

A Straight-line PPC
A straight line PPC shows a constant OC
between 2 products. This is because the
resources available are equally suitable for the
production of the 2 goods. Resources that can
be used to produce Ferrari can equally be
suitable for producing Honda cars.
Thus, products that are similar have a straightline PPC.

 Straight-Line PPC
cars

food

 Different Output Levels of the PPC

(a) Attainable output levels

(b) Inefficient output Levels
(c) Efficient output levels
(d) Un-attainable Output levels.

 Attainable levels- (area inside the curve and all

the points on the PPC)

cars

Attainable output

food

 Inefficient level- (producing below the PPC)

cars

Food

Not all the resources are being used and

therefore, the output of both can be increased
at same time and at no OC by using some of
the idle resources.

 Efficient Output levels. Producing on the

PPC. All resources are being used efficiently.
This means that the output of one good can
only be increased at the expense of the other
good.
cars
B

80

35

The OC of the 45 cars

Is the 20 units of food

Higher levels
Of cars

A
OC

80
food

100

Economic efficiency is only achieved when

we produce on the PPC, that is, when it is
not possible to produce more of one good
without reducing the production of other
goods.

 Unattainable output levels. These output are

above the PPC. The amount of available
resources are not enough to produce these
output levels.
cars

Unattainable output

food

Shifts in PPC
The PPC can shift both outward and inward. An
outward shift shows an increase in the potential
and can result from:
(a) An improvement in productivity and
efficiency due to introduction of NEW
technology or improvement in the techniques of
production.
(b) more resources being used in production.
Eg, an increase in labourforce or an increase in
the amount of capital available.

In both of the above cases, the PPC will shift

outwards to the right, meaning, MORE of
BOTH goods can now be produced. This
shows a potential Growth of the economy.

cars
65
50

B
15

35
60
food

95

 If the resource base reduces in quantity and or quality,

the countrys productive capacity (potential) will
decline. The PPC shifts INWARD, meaning that this
country can now produce less of each good. This
economy is declining (shrinking).

cars
A

230

189

75

100

food

Partial shift in PPC

If for example, there has been a discovery of
new efficient technique in the production of only
ONE of the two goods, the PPC will shift
outwards in favour of this particular good only.
There will be an increase in the output of that
good only
cars

200
food

400

 Explain the possible reasons why the PPF

would shift inward.
Using example on page 17, can you find
other recent examples for this situation?

Economic Growth & Development

Economic growth is an increase in national
output (goods and services). The countrys
PPC shifts outwards.
Guns

Food

Only if the increase in output (economic

growth) leads to a reduction in poverty by
improving nutrition, healthcare, education can
economic DEVELOPMENT occur.
Thus, economic development occurs when
economic growth increases the provision of
goods and services that raise the living
standards of the country.
QUIZ: Can a country grow economically and yet
not develop?

Growth vs Development
Cars/

There is economic growth

but without development. WHY?

Food, medicine, schools

Cars
This shows
Economic growth
& development. Why?

Food, medicine, schools

Sustainable development
Development that meets the needs of the present
without compromising the ability of future generations
to meet their own needs.
Sustainable development should include preserving
the environment for other species as well as for
people.
Sustainable development is maintaining a delicate
balance between the human need to improve lifestyles
and feeling of well-being on one hand, and preserving
natural resources and ecosystems, on which we and
future generations depend.

Efficiency & Equity

Productive Efficiency.
A country is said to be productively efficient
when it is producing on its PPC. It is therefore
producing maximum output for a given amount
of resources or producing a given output at the
least cost.

Productive efficiency therefore relates to How to

produce. How can we produce on our PPC?

Allocative Efficiency.
This is achieved when the particular
combination of goods produced maximizes the
utility of the consumers.
It therefore relates to our problem of What to
produce (where to locate on the PPC).
Cars

Food

Should we
produce at A
Or B? Where
Can we achieve
Allocative efficiency?

EQUITY
Equity means fair distribution. It therefore
relates to our basic problem of For whom to
produce. How can resources be allocated in
a way that is fair (equitable). How can we
produce for everybody and not just for those
who can afford?
There are times when allocative efficiency is
achieved but the result is not fair. In such
cases, the government would intervene in
and move the economy towards a more
desirable point. (move from C to D)

Governments intervention
To achieve equity.

Cars
D

Food
Note that both C and D are Productively Efficient since they are
On the PPC. They could also be Allocatively efficient. But the society might feel that
Point C (more cars) is not fair.

PPF & Trade

A country producing on its PPC can still
consume beyond the PPC (eg at X) by
specialising its production and trading some of
it for other products from other countries.
Guns
60

40

Specialise in producing
chocolate

20

50 55
5

Chocolate

Rational Decision-Making
This is the process of weighing-up the
Opportunity costs of any decision and the
benefits from that decision.
Only when the decision brings more benefits
than the cost can we say the decision is
RATIONAL.(MC<MB)
Lack of full information concerning all the costs
and all the benefits limit our ability to make
rational decisions.

Tasks
Draw a diagram to show a country that has
become more efficient at producing one
product.
Describe TWO ways by which a country which
is already producing along its PPC can
increase its productive capacity. Use a PPC to
illustrate this.