DEMO

INTRODUCTION TO ECONOMICS

By the end of the subtopic the learners should be able to:
  1. Define economics
  2. Explain the nature and scope of economics, citing differences between microeconomics and macroeconomics as well as positive and normative statements
  3. Explain scarcity and choice concepts and how they are related
  4. Explain the concept of opportunity cost
  5. Use the production possibility frontier to explain scarcity, choice and opportunity cost concepts

Definition Of Economics

  • Economics is the study of how people use available scarce resources to satisfy their unlimited needs and wants.
  • Economics can also be defined as the study of how limited factors of production are allocated to unlimited needs and wants.
  • These factors of production are the scarce resources.
  • Economics is mainly concerned with the production, distribution as well as consumption of goods and services.
Scarce resources are;
  1. Land: Comprises of resources that are provided by nature, for example, land, water, trees and animals.
  2. Labour:  It is the human effort and it can be physical effort or mental effort.
  3. Capital: Involves man-made resources used for production of other goods and services.
  4. Enterprise: Involves knowledge and skills that are required in-order to organize production.

Nature And Scope Of Economics

  • This covers the two different branches of economics as well as the positive and the normative statements.
  • It also explains economics as a social science.

Economics as a Social Science

  • Social science studies how individuals or humans behave and interact in a society.
  • Economics is regarded as a social science as it examines how humans behave with regard to allocation of scarce resources.
  • It tries to explain the behaviour of humans which arises when resources are exchanged in the market.

Microeconomics

  • It is the study of the economic behaviours of individuals, households and firms.
  • It is mainly concerned with individual economic decisions which are affected by income, price and output.
  • Concepts that are covered under microeconomics include theory of demand and supply, theory of the firm and factors of production.

Macroeconomics

  • A branch of economics that focuses on the performance of an economy as a whole.
  • It looks at national income, inflation, growth rate and unemployment rate of an economy.
  • Its main concern is on the nature, the causes and the consequences of each concept.
  • It also focuses on ways to improve a nation’s economy, for example, ways to have a favourable inflation rate, an increase in growth rate, reduction in unemployment rate and an increase in national income.

Positive Statements

  • Positive statements are statements that are objective and fact based.
    Examples of positive statements;
    • Unemployment rate in Zimbabwe is at 30%.
    • If the government of Zimbabwe raises the duty on imports, this will lead to a fall in imports in the country.
  • These examples are based on facts and they can be tested, proven or disproven to check whether they are correct or not correct.
  • If correct, it means that the statement is consistent with theory.

Normative Statements

  • They are based on value judgment.
  • These statements are based on people’s opinions, expressions and individual preferences rather than facts.
  • They usually use the terms ‘might’ or ‘should’
  • Examples of normative statements:
  • a) Pollution ought to be the most significant economic problem in Zimbabwe.
  • b) It ought to rain this year.
  • This statement is an expression of an individual’s opinion but it is not based on facts.
  • If there are disagreements on normative statements, votes are usually done to settle the disagreements.

Scarcity

  • Scarcity is the basic economic problem and all activities in an economy try to solve this economic problem.
  • Scarcity means that there are limited resources available to produce unlimited needs and wants as shown in the above diagram.
  • The unlimited needs and wants are outweighing the available resources indicating that there is scarcity
  • This economic problem affects individuals, firms and government.
  • This economic problem of scarcity only applies to economic goods.
  • Economic goods are those goods that are scarce in supply and these goods usually have a value placed on them hence can be traded using money.
  • People are willing to pay for economic goods and it is scarcity that leads to the willingness to pay for those goods. 
  • Economic goods can be traded on market places for example, food and clothes.

Choice

  • Scarcity of resources to produce unlimited needs and wants will force people to make choices.
  • Since resources are scarce, individuals, firms and government should make choices on how to use the available resources to meet their needs and wants.
  • Choice tries to address the three economic questions;
  • What to produce and in what quantities? - based on the allocation of resources and the quantities to be allocated.
  • A choice is made on which needs and wants to satisfy first, for example, whether to build schools or hospitals.
  • How to produce? - based on the methods of production after a decision of what to produce has been made.
  •  It involves choices on the tools required for production, number of workers needed and land required for production.
  • For whom to produce? - relates to distribution of income.
  • Due to scarcity people may not be able to get all their needs and wants hence the distribution techniques determines whom to produce for.
Examples of situations where choices are to be made
  1. A man can afford to purchase either a pair of shoes or a suit but, not both.
  2. A business may want to either open a new branch in another town or to use the money to buy new staff buses.
  3. A school may be faced with a decision, whether to build a library or a dormitory for girls.

Opportunity Cost

  • Opportunity cost is the next best alternative foregone.
  • When a choice is made between two options, opportunity cost is then explained as the value of the lost opportunity.
  • It is the cost of what was given up in order to get your choice.
  • Take for instance bricks used to build a house could have been used to construct a classroom block.
  • Therefore, the opportunity cost of building a house is the classroom block that could have been built with the same resources.
  • Opportunity cost only applies to economic goods.
  • Free goods do not have an opportunity cost since they are in abundant supply.

How the economic problem arise

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Combination of scarcity, choice and opportunity cost

  • The problem of scarcity, choice and opportunity cost can be explained using a production possibility curve (PPC).
  • Production possibility curve shows the maximum combinations of goods that a nation is able to produce given available resources.
  • The production possibility curve assumes that a nation produces only two goods in an economy, ceteris paribus.

Production Possibility Curve

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Assumptions of the PPC (curve gf) are;

  • Only two goods are produced, that is good X and good Y.
  • There are limited factors of production.
  •  All its resources are being used efficiently.
  • There are no changes in technology and production techniques.

Explanation of the PPF

  •  The curve, from g to f, shows the maximum combinations of good X and good Y that an economy can produce thus explaining the element of scarce resources that are available for allocation.
  • Points a, b and c show the best possible combination of output that can be produced when all resources are fully employed.
  • They are the attainable points.
  • Point e is unattainable.
  • Point d is attainable but, there is under utilization of resources and the economy is not efficiently allocating its resources.
  • Points f and g are the extreme combinations whereby all resources will be used to produce only one good.
  • At point f only good X will be produced and at point g only good Y will be produced.
  • The element of choice is then explained by a point that is selected either inside the PPC, outside or on the PPC.
  • Therefore, points a, b, c, d, e, f and g explain different choices that are made.
  • Opportunity cost is what is foregone when a point of allocation is selected.

Explaining the concept of opportunity cost using the PPF

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Production possibility curve

  • If an economy produces 110 units of food then it would mean 0 units of clothes will be produced.
  • The opportunity cost of producing 110 units of food is the 125 units of food foregone,
  • If we are to produce 125 units of clothes, 0 units of food will be produced.

Production Possibility Food (Tons/Day) Clothing (Garments/Day) A 50 100 B 75 80 C 100 40

  • From the table above, the opportunity cost of one good increases as the production of another good increases.
  • Producing 75 units of food will increase the opportunity cost of clothes by 20 units.
  • When producing 100 units of clothes, opportunity cost of food will be 50 units forgone.