Summary Ecs1501-study-notes.

Study Unit 1: About Economics Economics in Brief Economics is the study of how our scarce productive resources are used to satisfy human wants. Economics is a discipline studying how people choose to use resources (cash, land, buildings etc.) to satisfy their daily needs/ wants. It involves the production, distribution and consumption of goods and services. Economics is primarily concerned with the choices that are made in seeking to use scarce resources efficiently. As long as the marginal benefit (i.e. additional benefit) is greater than or equal to the marginal cost, then a consumer’s choice would be rational. Wants, Needs and Demand Wants: Human desires for goods and services, unlimited. Needs: Necessities, essential for survival. Demand: The amount of a good or service that a consumer wants to purchase at a given price. A want is something you would like to have. It is not absolutely necessary or essential for survival, but it would be a good thing to have. Human wants are unlimited or insatiable. A need is something you can't do without. A demand for goods and services is only a demand, if those who want to purchase them have the ability to do so. Real life examples: A baby needs milk but wants candy. Humans need food for survival You can demand a cellphone, if you have the money to buy it. Basic Economic Problem 1. Scarcity 2. Choice 3. Opportunity cost Scarcity is the basic economic problem that arises because people (society) have unlimited wants, and the resources to satisfy them are limited. Hence, people have to make choices among these limited resources and decide which satisfies their needs. Opportunity cost of a choice is the value of the best alternative that could have been chosen but was not chosen. The Concept of Opportunity Cost Opportunity cost is the cost expressed in terms of the next best alternative sacrificed. © 2013 Together We Pass. All rights reserved. Ecs1501-study-notes. lOMoARcPSD| Opportunity cost of a choice is the value of the best alternative that could have been chosen but was not chosen. Everything involves a trade-off, i.e. 'something is given up in favour of something else'. Opportunity cost measures the cost of the best alternative to the decision taken. With every choice made by a consumer, opportunity costs are incurred and economists always measure costs in terms of opportunity costs – what was given up to as a result of the choice. Opportunity cost is illustrated by a negative slope of the curve, which means that more of one good can only be obtained by sacrificing the other good. As we move along the production possibilities curve from point A to point B through to point F, the production of pencil increases while the production of books decreases. To produce 1 pencil, 5 books have to be sacrificed (from 100 to 95). To produce the second pencil, an additional 5 books (95 -90) have to be sacrificed, and so on. The opportunity cost of each additional pencil therefore increases as we move along the production possibilities curve. I have a number of alternatives of how to spend my Saturday afternoon: I can go to the Kirstenbosch music concert; I can stay home and watch a movie on TV, or go out for drinks with friends. If I choose to go to the music concert, my opportunity cost of that action is what I would have chosen if I had not gone to the concert - either watching the movie or going out for drinks with friends. Note that an opportunity cost only considers the next best alternative to an action, not the entire set of alternatives. lOMoARcPSD| Production Possibility Curve Production Possibility Curve (PPC) is a curve that illustrates the production possibilities of an economy--the alternative combinations of two goods that an economy can produce with given limited resources and technology. Producing on any point on the curve (A, B or C) means resources are fully employed, while producing inside the curve (D) means resources are underemployed and producing outside the curve (E) is unattainable as resources are insufficient. Suppose an economy produces two goods, wine and wheat. If all resources are allocated to wheat production, the economy’s output will be 200 tons of wheat and no wine. Conversely, if all resources are allocated to wine production, the output will be 100 barrels of wine and zero tons of wheat. Clearly, it will not be in the society’s interest to produce any output within the PPC, either through adopting inefficient production techniques or through having some resources unemployed as shown in Figure. Economics as a Social Science Social Science relates to actual experiences, value judgments or opinions, it studies human behaviour. Economics is a social science because it studies human environment; there is no specific (physical) laboratory involved