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ECS1500 Exam Prep 2023
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4Exam Preparation Notes
Study Unit 1
What Economics is all about
Economics is a social science that studies how people use scarce resources to satisfy their
unlimited wants. Microeconomics looks at this at an individual, household or firm level while
Macroeconomics is a broader look which is an aggregate of all the individuals, households and
firms in a given economy. The main aspects in Microeconomic theory are supply, demand,
scarcity, choices and opportunity cost.
The Economic Problem
Every individual has a set of needs and wants that they seek to satisfy. Some are important for
day-to-day living, such as food, water, clothing, shelter and health care. In Economics these are
termed needs. Some of the things that the human being wishes to accumulate are not really
necessary for a living. He/she can do without. Examples include sports cars, jewellery, fancy
clothing and luxurious accommodation. These are termed wants. Our needs and want are
never ending, yet the means to satisfy them are limited in supply. Hence the economic problem,
“how to satisfy these never ending wants and needs, given limited resources”. This is the basis
of Economics.
Scarcity
Almost every resource on this planet comes in limited supply. Money, housing, time, food,
labour, machinery, cars all come in limited quantities such that we can`t all get everything that
we need to satisfy our needs and wants. This limit in supply and availability brings another
important principle in Economics, that of scarcity.
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Opportunity Cost and Choice
Opportunity cost is one of the very important concepts in Economic theory. It`s very important to
note that opportunity cost depends on individuals as people value alternatives differently.
Opportunity cost is the value of the next (second) best alternative forgone or sacrificed when a
certain choice is made. The existence of scarcity brings up the concept of opportunity cost when
a choice is made. Because our wants and needs are unlimited/endless, and the resources to
satisfy them are limited, this leaves us with no option but to make choices between competing
alternatives. For example, consider money, a resource which is available in very limited supply,
yet used to satisfy an endless list of unlimited needs and wants. If let’s say you have R1 000 for
use and you choose to use R500 on airtime, it automatically leaves you with R500 for use on
other competing needs. When determining opportunity cost of any choice made it is very
important to rank your alternatives in order of preference, from the most preferred to the least
preferred. Take Tebogo for example. On a Saturday morning he has the following options that
he ranked in order of preference:
1) Work
2) Study
3) Do Laundry
4) Chat
5) Watch Soccer
6) Do Shopping
7) Sleep
Based on the above, Tebogo`s opportunity cost of Work will be Studying. His opportunity cost of
Studying will be Laundry, and that of Laundry will be Chatting. The opportunity cost of Chatting
will be the Soccer forgone. Note that every time the opportunity cost will be the value of the next
best alternative forgone, not the values of all the alternatives forgone.
The Economic Problem
All authorised decision makers are faced with the questions to do with what to produce
amongst the (limited) competing goods and services that satisfy unlimited needs and wants.
Should we erect more hospitals or build more schools, use the land to construct factories for
production of cars and computers or instead use that land for farming to produce maize, wheat
and milk? After the what question has been answered, the how to produce question has to be
addressed. Should we employ more labour or more capital? Now that we have decided to use
that land for farming, how should we produce that maize, wheat and milk? After we have
answered that, we have one more question to answer, for whom to produce? Should we
produce the maize, wheat and milk according to the people`s needs. Say a family of 4 gets
100kg of maize, 50kg wheat and 20 litres of milk per month while a family of 6 gets 150kg of
maize, 70kg wheat and 8litres of milk or should we produce only for those who can afford?
, 6
Production Possibility Curve/Frontier
A production possibility curve is a graph/boundary line that emphasizes the concept of
opportunity cost and choice further. It shows the various combinations of two
goods/commodities that can be produced in an economy using the same fixed amount of
input/resources with a given level of technology. This schedule shows that there are limits I
production so an economy must decide the combinations of goods and services to be produced
to achieve efficiency. It follows from the premise that (because of scarcity), allocation of
resources to the production of one good will automatically reduce the amount of resources left
for production of the other good.
Take an example of an economy that can produce only wine and cotton. All the points on the
PPF (points A, B and C) represent efficient use of resources. Point X represent an inefficient
use of resources, while point Y represent unattainable production levels (with the given
resources) at least in the short run.
➢ All points on the curve show efficiency and represent full utilization of resources, while
those under the curve/frontier indicate inefficiency represent underutilization use of
resources. Those points above the curve are in-achievable or simply not feasible.
Production Possibility Frontier
As can be seen, for the economy to produce more wine, it must give up (sacrifice) some of the
resources it uses to produce cotton. If it decides to produce more cotton, it must divert some of
the resources from wine production and consequently reduce the amount of wine produced. If
more wine is in demand, the opportunity cost of producing those extra units of wine will be
proportional to the decrease in cotton production
, 7
Shifts and Swivels of the PPC (Production Possibility Curve)
Supposed there in an increase in technology in the economy, and the time taken to pick up the
grapes and cotton has been significantly reduced. This means more grapes and cotton can be
produced (with a given level of land, labour and capital). This will cause the PPC to shift
outward as shown by the new dotted PPC. When this happens, we know there is growth in the
economy, as point Y (which earlier had been impossible) will now be attainable and represent
efficient use of resources. More output, reduced unemployment (increased employment), better
living standards. A movement of the PPC inwards would represent a dwindling economy and
this will result in a fall in output.
The Production Possibility Curve will shift outwards under the following scenarios:
• Improvements in Productivity and Efficiency from the available factor resources
• Increases in the productive potential following improvements in technology. This may
emanate from a specific industry, but the effects may be felt in several related industries
(positive spill-over effect).
• Exploitation of more factors of production (Capital and Labour) available for the
production process
The PPC will swivel outwards if the society learns to get better at producing (increase
productivity) only one of the two goods. This would swivel the curve out along the axis of that
good.
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