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ECS1500NOTES 2021
ECONOMICS
TUTOR
ECONOMICS (ECS1500 NOTES)2021
ECS1500 NOTES
,LEARNING UNIT 1
THE ECONOMIC PROBLEM
ECONOMICS DEFINITION
Economics is the study of how man attempts to satisfy his unlimited wants and
needs by way of limited resources. This relative scarcity of resources implies the
existence of cost and the need for choice.
ECONOMIC PROBLEM
Refers to the tension that exists between all the needs and wants we have as a
society versus the resources we have available to satisfy these wants and needs.
We try to find a solution to the basic economic problem by answering to the
following questions?
1. What should be produced in the economy?
2. How should these goods and services be produced?
3. For whom should the various goods and services be produced?
UNLIMITED WANTS VS. LIMITED MEANS
❖ The essence of economics lies in the fact that wants are unlimited while the
means that are available to satisfy those wants are limited.
❖ Needs refer to necessities – those things man needs in order to survive, e.g.
food, clothing & shelter.
❖ Wants refer to human desire for goods and services. These can be individual,
e.g., cars, or social, e.g., schools (also called collective wants).
❖ Wants are unlimited – man is never satisfied and continually strives for maximum
satisfaction. This means that scarcity is a relative concept, because man is never
satisfied and therefore always experiences scarcity.
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,❖ The basic fact of economic life is scarcity and anyone confronted with scarcity
has to make choices.
Although wants are unlimited, the means or resources to satisfy those wants are
limited. There are three types of resources:
❖ Natural resources, such as mineral wealth, fertile soil and fishing resources
❖ Human resources, in the form of brain power and muscle power, that is,
labour resources
❖ Manufactured resources, like machines, equipment and tools
Economic resources may be labelled as the inputs that are used in the production
process. In Economics, these different resources or inputs are called factors of
production and can be classified into four main categories. The four factors of
production are:
(1) Labour, which refers to all intellectual, physical, or other human productive effort.
Labour therefore refers not only to manual labour but includes the services of those
who follow a profession (e.g., doctor, lawyer, teacher).
(2) Capital goods, which are produced means of production from the past. These
include the entire range of durable equipment from hammers, saws and other simple
tools to machines and computers. If economists refer to capital, they mean “real”
capital equipment and not money. Money is not a resource that can be used in
production.
(3) Land or natural resources, which are the gifts of nature and include factors such
as climate, mineral resources, and the quality of soil.
(4) The entrepreneur (from the French word entreprendre which means “to
undertake”), who combines natural resources, labour and capital in the production
process.
❖ Without the vision of the entrepreneur, labour and other resources would remain
largely unrealised potential.
❖ The entrepreneur is also the innovator who comes to the fore with new goods or
new production techniques. That is why the entrepreneur is at the same time the
bearer of risk - the entrepreneur’s time, effort, reputation and own funds and
those of others are at stake should the innovation or business venture fail.
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, ❖ The entrepreneur is also responsible for taking non-routine decisions in the
management of the enterprise.
CHOICE AND OPPORTUNITY COST
❖ People have unlimited wants which they strive to fulfil. The individual is
continually confronted with choices – the problem of choice arising from
unlimited wants that have to be satisfied with limited means.
❖ An individual must decide which wants must be satisfied immediately and which
can be postponed or cannot be satisfied at all. One will have to be satisfied with
less of one thing if one wants more of another.
❖ It is not only the individual who is forced to make choices due to scarcity – every
business firm must decide between various alternatives. It has to decide how
many labourers or other inputs have to be employed in order to produce goods
and services s (i.e., the output of the firm)
❖ The South African government also has to decide how to spend money, for
example on reconstruction and development projects. It strives to provide
houses, electricity, running water, public health services and infrastructure to all
South Africans. But, because resources are limited, it will have to decide what
must be done first and what will have to be postponed until later.
❖ The existence of choice implies a cost. Cost can be explained in terms of Rands
and cents, but also in terms of opportunity given up, e.g. choosing one alternative
means something else was sacrificed (foregone). This cost is called opportunity
cost.
DEFINITION OF OPPORTUNITY COST
❖ It refers to the value of the next best alternative foregone or given up when a
choice is made. Opportunity costs can be individual, social, company or
government in nature. Every single choice involves an opportunity cost.
❖ Opportunity cost measures the cost of obtaining (producing) a certain quantity of
a good in terms of the quantity of another good (or other goods) that could have
been obtained (produced) in its place, in other words, opportunity cost is the
value of the best forgone opportunity.
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