Economic Principles
Study Unit 1
Glossary
• Capital goods are goods used in the production of consumer goods, example machinery.
• Ceteris paribus is a Latin term which means “all other things being equal”
• Choice exists in every decision made in the economy and refers to accepting one option over another.
• Consumer goods are goods purchased by households, example bread.
• Direct (positive) relationship shows two variables which are causally linked increasing or
decreasing simultaneously.
• Durable goods are goods that can be used repeatedly, example furniture.
• Economic goods are goods that fetch a price.
• Economic growth refers to an expansion in the productive economy.
• Equilibrium is a state of balance when opposing forces are balanced and there is no incentive for
change.
• Final goods are bought by the end user or household, example shoes.
• Free goods are goods that do not directly carry a price, example sea water.
• Graph is a visual representation of the relationship between two or more variables.
• Heterogeneous goods are different in the eyes of the end user.
• Homogeneous goods are exactly the same in the eyes of the end user.
• Intermediate goods are inputs into the production of final goods, example raw materials.
• Inverse (negative) relationship shows two variables which are causally linked increasing or
decreasing in opposite directions.
• Macroeconomics is the study of global or national aggregates, example inflation.
• Means are resources or inputs used in the production process, example natural resources.
• Microeconomics is the study of individual entities in the economy, example a firm.
• Needs are goods and services people cannot do without, example water.
• Non-durable goods are goods that have a single use, example food.
• Normative sciences are sciences based on subjective opinion, example politics.
• Opportunity cost is the cost of the next best alternative given up, or not chosen.
• Positive sciences are sciences based on objective fact, example chemistry.
• Production possibilities curve is a graphical representation of the maximum possible production
possibilities of a community or country.
• Public goods are provided by the government for everyone to use, example parks.
• Resources are means or inputs used in the production process, example human resources.
• Schedule is a table.
• Semi-durable goods are goods that can be used repeatedly for a short period of time, example
sports equipment.
• Services are non-tangible actions, example haircuts.
• Social science is a science that examines humans in the environment, example psychology.
• Wants are nice-to-haves but are not necessary for survival, example holidays.
What is economics?
Economics is the study of the use of scarce resources to satisfy unlimited human wants. This relative
scarcity of resources implies the existence of cost and the need for choice.
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.
,In order to elevate Economics to a scientific status, the approach should be positive (based on fact)
rather than normative (based on opinion).
In order to examine the effect of one variable on another, which can be proved through controlling the
environment and experimentation in the natural sciences, Economics as a human science must often ignore
or hold other influencing variables ‘constant’ or assume their autonomy. This condition is called the
ceteris paribus assumption. The theories derived in this way can be expressed in words, as
equations, as graphs or as tables (schedules).
Scarcity, choice, and opportunity cost
® Needs and particularly wants are not in short supply.
o This suggests that wants are never really satisfied, irrespective of how well off an
individual or country is.
® Demand for a good or service only if those who want to purchase it have the necessary means to
do so.
Resources are limited
• Natural resources
• Human resources
• Man-made resources
(FACTORS OF PRODUCTION)
Every country has a fixed stock of resources namely:
• Land
• Labour
• Capital
• Entrepreneurship
® These resources are combined to produce products that people need and want
Ñ Because the world’s population has unlimited wants, but resources are in short
supply, competition for existing resources develops.
Ñ Competition implies the existence of a cost and of choice. Individuals must choose what to
spend their limited time and income on, firms must choose which products to produce, and
governments must choose what to spend their limited revenue on.
Opportunity costs
& the value of the next best alternative foregone or given up when a choice is made.
- Example: The opportunity cost for you as a student is the money and satisfaction you could have
earned had you worked full time. The opportunity cost of working full time is however higher
than the opportunity cost of being a student, which is why you made the decision to study. The
long-term advantages will be greater.
® On a broader level, opportunity costs are borne by society and companies. Local governments have
to constantly decide on how best to spend taxpayer’s money. Should a new library be built, or
should the money and expertise be used to build a casino? A company may need to decide whether
to build a steel bridge or to use the steel to build power lines? Each time such a decision is made,
the opportunity costs are considered. The local government or firm will choose those options
where the opportunity costs are lowest. If the decision has some bearing on society, the
opportunity cost is known as a social cost.
,Production Possibility Curve
& Shows the different combinations of 2 goods that can be produced using full employment of resources.
® Illustrating scarcity, choice and opportunity cost using the production possibilities curve (PPC)
We begin by making three assumptions:
§ Only two goods are produced.
§ Each good is produced with the same amount of effort and resources.
§ Scarce resources are fully utilised and technology is fixed.
EXAMPLE:
® This graph represents the table and how one can use
their full employment of resources
® Where one is not using one’s full employment of
resources = INEFFICIENT.
® Only point in the curve which is tangible
® Can’t produce beyond the curve
® It is unattainable
How to get there:
• Increase resources
• Increase productivity
• Increase technology
Ñ Ultimately then the graph can move forward
® The PPC curve shifts outward, called economic growth, when:
• there is an increase in the size of the labour force,
• new resources are discovered,
• new inventions lead to greater efficiencies in both products.
, ® The PPC shifts inward:
• in times of war, famine, drought, or any national disaster.
Figure 1
The PPC can be extended to show the trade-off between the production of consumer goods and capital
goods for a country. See graph 2
Non-linear curve
Figure 2
• If this country chooses to use all resources to produce consumer goods only, it can manage to make
100 consumer goods per year. This represents labour-intensive production, since there will be no
capital equipment.
• If this country chooses to use all resources to produce capital goods only, it can manage to make 10
capital goods per year. Although capital equipment leads to greater production of consumer goods in
the future, the population would starve, since there is no production of consumer goods in the first
year.
• Production at point H requires a sacrifice of 20 consumer goods to produce 5 capital goods per year.
• Sacrificing current consumption to produce capital would increase consumption production in the
future. The result could be an outward shift of the PPC (growth) in the future as the country frees up
resources to produce greater quantities of consumer and capital goods.
Calculating the opportunity cost:
• A to D = 15 hats (30-15)
• B to C = 4 hats (29-25)
• E to D = 1 video
• C to A = 2 videos
