1.1 Introduction & Nature of Economics

1.1 Introduction & Nature of Economics

What is economy & what is economics?

• An economy is a system of interrelated production and consumption activities that ultimately determine the allocation of resources within a group.

• Economics is a social science that focuses on the production, distribution, and consumption of goods and services.

Topic 1: Introduction to Economics - Nature of Economics

• The economic problem & the role of choices

• Opportunity Cost and the Production Possibility Frontier (PPF)

• The future implications of choices

• Economic factors underlying choices

The fundamental Economic Problem is:

• Unlimited Needs (basic essentials to survive) and Wants (individual desires)

• Scarcity of Resources (Limited Resources)

• Choice is needed since all wants cannot be satisfied with limited resources.

• Rank the preferences of wants.

Wants can be classified as:

• Individual wants: desires for each person depending on the preferences and income. E.g. clothing, housing, food.

• Collective wants: desires by the community or society. E.g. roads, education, health care.

• Recurring wants: wants that must be continually satisfied. E.g. food, water

• Complementary wants: wants that are derived by other wants. E.g. cars with petrol, phone with phone case.

Resources are used in the production of goods & services, hence, resources are referred to Factors of Production (or Factor Markets).

There are 4 major Factors of Production, remember as LLCE:

• Land: natural resources like trees, coal, fish. The income from land is Rent.

• Labour: human effort to product goods & services. The income is Wages.

• Capital: goods to produce other goods & services. E.g. machine, factory. The income from Capital is Interest.

• Enterprise: entrepreneurs take risks to operate their businesses. The income is Profit.

Due to scarcity of resources, economics is trying to solve the following questions:

1. What to produce?

2. How much to produce? Not over/under produce

3. How to produce? The most efficient method of production with the least amount of resources used.

4. How to distribute production? Equitable or uneven distribution of resources