ECO1010F – Unit 1 Notes
In economics the focus is on scarcity, on the fact that resources (money and time) are in
limited supply, and that we must make choices between alternatives.
BASICS
What is economics –
- Traditional – “A social science that looks at how societies make efficient use of scarce
resources to maximise satisfaction of people’s unlimited material wants.”
- What makes a problem an economic one? – A problem of scarcity and choice, Needs
and Wants.
Scarcity –
- Society also has wants/needs that derive from the fact that people live together.
Societies desire clean air, recreational areas, security, a functioning government, a
feeling of belonging, recognition by other societies, etc.
- Some people might purposefully choose to live a life of poverty and deprivation,
possibly because of religious or other reasons, but we exclude these people from the
discussion – they do not fit the typical profile of Homo Sapiens.
- Opposed to these needs and wants is the reality that goods and services, and the
resources to make them, are scarce. At an individual level, we do not have sufficient
money to buy all the things that we want and need. *Scarcity of time - super-rich
people are subject to the forces of mortality.
- Most people are not super-rich and as a result they cannot buy everything that they
want. They must make choices which is the essence of economics.
-
How to make choices -> Three basic economic questions –
- 1. What to produce? This is also known as the output question.
2. How to produce? Also known as the input question.
3. For whom to produce? Also known as the distribution question.
- In a capitalistic system, AKA a market economy, the output question is answered by
the forces of supply and demand.
o If demand for a product increases, this increases the price of the product,
which creates an incentive for businesses to produce more of that product.
Demand for goods and services is determined by people, more specifically
people with money. Without money I do not have any influence on what will
be produced. My “money votes” informs the producers what to produce.
- In a command economy the output question is solved by the government.
o Government officials decide what will be produced and in what quantities.
Whether people like/want the things that are produced, is immaterial.
, *Sensitive officials might try to align the planned production with what they
think consumers need or want, but that is no guarantee.
- The input question is about the production process. How should the goods and
services be produced? Economics typically focuses on the combinations of labour
and machinery:
o Eg) One can produce cars in relatively more labour-intensive way (like in
South Africa, more workers, less quality machinery) or in a more capital-
intensive way (like in Japan, fewer workers, higher quality machinery).
- The “for whom?” question is about how goods and services are distributed among
consumers.
o People with more money can buy more than people with less money. Some
might think this unfair, but this is the essence of the market/capitalist system.
- Government can influence the distribution question.
- The most common method used is taxation and government spending.
o The South African government, like nearly all governments, imposes income
tax on its citizens. People with greater incomes pay a larger tax percentage
than people with lower incomes.
o The government provides services to the population with the money they
collect. In principle, People who pay a greater tax do not get more/better
services from the government, people who pay less/or no income tax do not
get fewer or poorer services.
o Government has an extended grants programme, more than 17 million
people in South Africa receive a monthly grant. The combined effect of the
tax system and the grants system changes the distribution of income, which
changes the way that people can vote with their “money votes”.
Goods and Services –
- Sometimes goods are classified into three components: durable goods, semi-durable
goods, and non-durable goods. (1/3 of output).
- Durable/investment goods last for many years like cars, refrigerators, lounge suites.
They provide us with a service for a long time - yield a return in the form of a service.
- Semi-durable goods last for a reasonably long time: clothing, shoes, toothbrushes.
- Non-durable goods are gone once you consume them: food, cleaning liquids,
personal hygiene products). For most families, the biggest proportion of their income
is spent on non-durable goods. The poorer a family is, the greater the percentage
that is spent on non-durables (especially food).
- (70% of output in SA) Services are things that we experience: grocery stores,
hairdresser, university. Most people are likely to work in a service industry, where
one’s contribution will be intangible, but still real.
- Services – Financial, Personal, Transport/Logistics, Wholesale/retail.
- More people used to work in producing goods rather than services.
Input/factors of production –
, - Goods and services produced are outputs of the production process. To produce
these outputs, we require inputs.
- In economics we identify four inputs: (1) land (which includes natural resources), (2)
labour, (3) capital and (4) entrepreneurship.
- Land produces rent, Labour, wages, Capital, interest, and Entrepreneurship, profit.
- For many years entrepreneurship, was not seen as a separate factor of production. It
was regarded as a special kind of labour. Over the past number of decades this
thinking has changed as an entrepreneur is not like any other worker. This is a person
with ideas and initiative who is willing to take risks. They take the other inputs and
combine them to create a new product/service or to improve on existing
products/services.
ECONOMIC SYSTEMS
What are they -
- Communities developed economic systems to address the three basic economic
questions that have been around since the beginning of civilisation.
- Capitalism and Socialism/Communism are economic systems, while Democracy,
Authoritarianism and Dictatorship are political systems.
- In 1979, China began switching to a capitalist system, though it is politically run by
the Communist Party. The capitalist revolution in China has been hugely successful
and has pulled millions of people out of extreme poverty. Over the past two decades
China has become the biggest economic and political competitor to the US.
- With the exceptions of North Korea and Cuba, all countries have some form of
capitalist (market) system. There are very substantial differences between countries,
but at the core, market forces are important, and define economic relations between
citizens.
- The capitalist system has been widely criticised, and battered by several events, but
has adapted and survived well.
o E.g.) the Financial Crisis of 2008 and much earlier, in the 1930s, the Great
Depression posed a similar risk to the capitalist system.
- Economic systems define the way in which people relate to each other in an
economic sense.
- The two most important characteristics of an economic system are (1) how property
rights are defined, and (2) how decisions (especially regarding the three fundamental
economic questions) are made.
- Property rights concern ownership of things: e.g.) Do you own the land that you
farm, or does it “belong” to society and you simply use the land? If property rights
are secure, ownership can be legally enforced by the courts. If not secure, then
people who may have thought that they had ownership, may find that their property
taken away from them.
