Nature of Economics

Definition

Economics is seen as a social science that investigates

how economic resources that are scarce can be utilized

in order to maximise the production of goods and

services so that the needs and wants of individuals are

maintained and fulfilled.

Branches of Economics

Micro-Economics

A narrow concept focusing on the decision making of a single

economic variable. E.g. Demand and Supply.

Macro-Economics

This focuses on factors that impact the local, regional, national or

overall economy. E.g. Inflation, Unemployment and GDP.

Economic Resources

These are described as factors of production.

Factors of production can be classified as human and non-human. The four factors of

production are:

LAND: Naturally occurring free gifts of nature (marine resources, physical land,

minerals, etc)

LABOUR: The physical and mental effort of man in the production process.

CAPITAL: All goods used to produce more goods (tools and machinery, factories, etc)

ENTREPRENEURSHIP: An entrepreneur is one who is willing to take on substantial

financial risks to begin or organise a business (business owner).

The Central Economic

Problem

SCARCITY

This is seen as the central economic problem as all economies face scarcity.

This occurs when the demand for resources is high, and the availability of

resources is limited.

Causes of scarcity include:

Over consumption of resources.

Rising demand when supply remains the same.

Reduction in supply resulting from economic or environmental reasons.

Government interventions.

Needs vs Wants

Needs are things necessary for survival. E.g. food,

water, shelter, clothing.

Wants are things that we desire. E.g. KFC, PS5,

Xbox, iPhone, Subway, etc.

Demand & Supply

Demand refers to the ability and willingness of consumers to purchase goods and

services.

The first principle of the Law of Demand states that an increase in price will lead to

a decrease in demand and vice versa, ceteris paribus.

Supply refers to the total amount of a specific good or service that is available to

consumers.

The first principle of the Law of Supply states that an increase in price will lead to

an increase in supply and vice versa, ceteris paribus.

The Economy & Economic

Activity

Economy: A mechanism through which scarce economic resources are

organised to produce goods and services. It is a distinct region where

economic activity takes place (production and consumption).

Economic activity refers to the production and consumption of goods and

services.

Economic Activity

Resources

Goods & Services

Needs are met & wants are

satisfied

Production

Consumption

Resources Used In Production

How to

produce?

Machinery & Equipment

Telecommunication

Raw Materials

Skilled Labour

Physical Labour

Electricity

Factories

Transportation

Buildings

Agricultural Land

Choice & Opportunity Cost

Choice: The act or opportunity of choosing one thing over another, or

the thing chosen.

Opportunity Cost: The value of the next best alternative foregone as a

result of choosing one thing over another.

NB: Because resources are scarce and the economy is unable to produce

all human wants, choices must be made. Opportunity cost comes about

because of choice.

The Production Possibility Frontier (PPF)

This is a curve used to demonstrate the possible combinations

of two goods that an economy can produce from its given or

fixed resources.

It is drawn on the assumption that only two goods can be

produced, and the amount of resources is fixed.

Example of a

PPF

Interpretation of the PPF

The curve is downward sloping from left to right. This indicates that it is only

possible to produce more of one good by giving up some units of the other

good.

The PPF is bowed out or concave to the origin. As resources are moved away

from the production of cotton, more and more cotton must be given up to

produce wine.

Points along the curve (A, B and C) as well as inside the curve (X) are attainable

combinations. However, points inside the boundary (X) indicate that there are

idle resources (inefficient use of resources.

Interpretation of the PPF

Points outside of the boundary (Y) are unattainable.

Points on the boundary or curve (A, B and C) are efficient combinations.

The PPF shows scarcity: An economy cannot produce outside of the curve because

resources are not available.

The PPF shows choice: The economy cannot produce at all combinations. It can only

choose one.

The PPF shows opportunity cost: To obtain more of one good, the economy must

give up some of the other good.

Factors that can cause an outward shift of the

PPF

Economic Growth

Discovery of new natural resources

Growth in population

Technological progress

Improvements in labour productivity

NB:

A Labour-intensive industry: Uses a high proportion of labour.

A Capital-intensive industry: Uses a high proportion of capital.

Increasing

Opportunity Cost

The PPF’s Concave shape

to the origin implies that

as more resources are

used in the production of

a particular good, the

opportunity cost

increases.

Constant

Opportunity Cost

When opportunity

cost is constant

(does not change),

the PPF will be a

straight

downward sloping

line.

Decreasing

Opportunity Cost

The firm’s opportunity

cost is reduced when

the production

declines. When the cost

of producing one

product reduces, the

cost of making the next

unit is also reduced.

Economic Efficiency

When an economy is producing on its production

possibility frontier, that economy is said to be

efficient. All resources are being used to produce

one of the maximum possible combinations of

goods.