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Summary Varsity College BCOM Year 1 Economics Ch 1
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PMIC – Economics Ch 1Ch1 – What Is Economics?
1.1 What is Economics?
Economics is the science of household management and is concerned w the ordinary business of life. It
studies the decisions of businesses, government, and ordinary business of life.
The central elements of economics are scarcity and choice. Without scarcity, it would not be necessary to
make choices. Wants are plentiful, but means are scarce, therefore we must make choices all the time.
Elements of the basic economic problem:
1. What – what kind of goods and services to produce
2. How – how should goods and services be produced.
3. For whom – for whom should goods and services be produced
1.2 Scarcity, choice, and opportunity cost.
Wants are unlimited but means to satisfy wants are limited.
Note that wants are not the same as needs and demand:
- Wants are human desire for goods and services - unlimited.
- Needs are necessities - essential for survival.
- Demand differs from wants, desires or needs. There is a demand for goods and service only if those
who want to purchase it have the means to do so.
There are 3 types of resources (factors of production)
1. Natural resources (land, minerals, and fishing resources);
2. human resources
3. man-made resources.
Resources are limited therefore; goods and services are also limited. Everyone is confronted by the problem of
unlimited wants and limited means – therefore they must make choices.
A decision to produce more of one good means that less of another good can be produced. Because resources
are scarce, the use of resources can never be costless. “TANSTAAFL” – there aint no such thing as a free lunch.
Someone always must pay.
When we are faced with a choice, we can measure the cost of the alternative we have chosen in terms of the
alternatives that we have to sacrifice. This is called opportunity cost.
The opportunity cost of a choice is the value to the decision maker of the best alternative that could have
been chosen but was not chosen. In other words, the opportunity cost of a choice is the value of the best
forgone opportunity.
Every time a choice is made, opportunity costs are incurred, and economists always measure costs in term of
opportunity costs. For the economist the cost of something is what you have to give up to get it.
1
, PMIC – Economics Ch 1
1.3 Illustrating scarcity, choice, and opportunity cost: the production
possibility curve
Scarcity, choice, and opportunity cost can be illustrated with the aid of a production possibilities curve, also
called a production possibilities frontier or boundary.
Example
If a isolated rural community along the coast whose main foods are potatoes and fish. The people have found
that by devoting all their available energy and time to fishing, they can produce 5 baskets of fish per day. On
the other hand if they spend all their production time gardening then they can produce 100kgs of potatoes per
day.
The only way they can enjoy both is by splitting their resources between the two. Resources must be shifted
from one production possibility to produce another. By experimenting the find it possible for them to produce
any of the combinations shown in the table. These combinations represent maximum amounts that can be
produced with the available resources.
Fish (baskets per day) Potatoes (kg per day)
A 0 100
B 1 95
C 2 85
D 3 70
E 4 40
F 5 0
The opportunity cost of producing the 40kg of potatoes is 1 basket of fish. The opportunity cost of producing 4
baskets of fish is the 60kgs of potatoes that must be forgone. The opportunity cost of each additional basket of
fish therefore increases as me move along the production possibilities curve. This is why the curve bulges
outwards from the origin.
The different alternatives can be illustrated graphically in a production possibilities curve as the graph below.
The curve shows the possible levels of output in an economy w limited resources and fixed production
techniques. Note that we have joined the different points to form a curve this implies that there are also other
possible combinations apart from the six that are given.
The production possibilities curve indicates the combinations of any two goods or services that are attainable
when the community’s resources are fully and efficiently employed.
The production possibility curve is a useful way of illustrating scarcity, choice, and opportunity cost. Scarcity is
illustrated by the fact that all points to the right of the curve (G) are unattainable. The curve thus forms a
boundary between what is possible and what is not possible. Choice is illustrated by the need to choose
among the available combinations along the curve. Opportunity cost is illustrated by the negative slope of
the curve. Opportunity cost therefore involved a trade-off between the two goods. Point H shows how
something can be obtainable but inefficient – as more potatoes can be produced at C without sacrificing the
production of fish.
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