This document provides a clear explanation of the aspects of economics from the PPC (opportunity costs and scarcity) to demand and supply and circular flow to price elasticity and perfect competition. It also provides questions to test your knowledge.
CHAPTER 1: ECONOMICS AND THE PPC CURVE
Definitions:
Study of how scares productive resources is used to satisfy human wants
Study of how individuals & Society choose to use scares resources that nature and
previous generations have provided
Study of how scares resources are allocated among various uses
Study of scares resources to satisfy unlimited human wants
Study of how society manages scares resources
What is economics
about? Deals with the choices people have to make
Science of household management and such;
o Concerned with business of life
Studies decisions of Business, Government and other decision makers in society
o Example: Should Toyota expand production of vehicles?
Business and Government must also make choices everyday
Assumptions in
Economics Economics is a social science
What is Science?
o In order to meet scientific property of being TRUE in all instances, we make
assumptions
Example:
o If Price of coke increases, quantity demanded in decrease (ceteris paribus)
MICROECONOMICS MACROECONOMICS
* Focus on Individual Participation in Economy *Concerned with economy as a whole
Producers Stability of general price levels (Inflation)
Employers Maintenance of full employment
Workers Economic Growth
Firms Distribution of Income
Government Spending
Nation’s money supply
EXAMPLES
MICROECONOMICS MACROECONOMICS
Price of single Product Consumer price index (Group of products)
Change in price of product, e.g. Mangoes Inflation, e.g. Increase of general level of prices
Production of wheat Total outputs of all goods & services in economy
Market on individual goods, e.g. maize Total demand for all goods & services in economy
An Individuals decision to export its products Total Exports of goods & services to other countries
A Firms decision to import from abroad Total imports of goods & services from other
countries
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Unlimited wants:
o Cannot be met with Limited Resources
o Choices need to be made, as resources are limited
Scarcity
Resources
o Used in the production of goods & Services
o Resources are limited
Wants
Human Desires, can live without these, e.g. fancy car
Wants is unlimited we all want everything
Example:
You have R100 = Resource
You want to by for much more than R100 = Wants
Wants, Needs and
You have to choose between the things you want because you only have R100
Demands
Needs
Essential for survival, e.g. Food, water, clothing
Demands
For there to be a demand for goods & services, those who wants to buy them,
must have the means and the purchasing power.
* The Opportunity cost of choice is:
Value of the best alternative that could have been chosen but was not chosen
The value of the best forgone opportunity
1 of the post important concepts in Economics
Captures the essence of the problems of scarcity and choice
Economist do not only consider monetary costs
Economist also consider “implicit” cost – asking how scares resources could
Opportunity Cost have been used In alternative way
(Make Choices)
*Implicit Cost: Cost of self-supplied Factors of Products
**The value of the best alternative sacrificed when a choice is made**
** Economics uses Opportunity costs to measure the cost incurred in choices - With
Every choice comes Opportunity costs
Example:
Jack has to choose between going to the movies or study
The Opportunity cost of studying is to visit the movies that he forgo
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RESOURCES Because Resources are scares, there is always a cost involved
(ALSO CALLED Resources are limited, therefore goods & services to satisfy our wants are also
FACTORS OF limited
PRODUCTION Individuals & Society: Confronted with Unlimited wants and limited resources
Time is a limited resource
Scarcity – affects everyone, therefore NOT poverty
Economic Problem
Society must make difficult choices between different alternatives
Factors of Natural Resources (Land)
Production Labour
Capital
Entrepreneurship
FACTORS OF PRODUCTION
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PRODUCTION
POSIBILITIES CURVE MOVEMENT ALONG PPC CURVE
(PPC) – or
PRODUCTION The PPC Illustrates
POSSIBILITIES Scarcity - Resources
FRONTIER (PPF) Choice – how much to produce of each product
Opportunity cost – With resources available decide how much of one product you
can produce and forgo, in order to produce another product
Potential Output: Maximum attainable combinations of 2 goods or services
Shows: When resources are fully utilized
Example:
PRODUCTION POSSIBILITY SCHEDULE
Possibility Fish (baskets per day) Potatoes (kg per day)
A 0 100
B 1 90
C 2 80
D 3 70
E 4 40
F 5 0
Opportunity cost: Example
To produce 3 baskets of fish,
H: Resources not fully utilised –
forgo 30 kg of potatoes
should produce at “D” with
available resources
G: Unattainable with available
resources
Outward Bulging:
Increasing Opportunity Cost
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