central economic problem (h2 and h1) set 1 (18 feb 2013)

8/13/2019 Central Economic Problem (H2 and H1) Set 1 (18 Feb 2013)

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JC1 H2 Economics, Syllabus 9732

Central Economic Problem


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What is Economics?

Economics is a social science. It seeks to

explain something about society, just likeother social sciences such as psychology,

sociology and political science.


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What is Economics?But economists generally ask different

questions about society than the sociologist

and psychologist do, such as:

! Why are some countries growing faster thanothers?

! When a country is struck by a natural disaster such as earthquake, how are peoples incomes &living standards affected?

! When inflation rates in an economy increasesignificantly, what would the government do to

reduce inflation rates?


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What is Economics?

Economics is the study ofchoice under conditions of

scarcity


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What is Economics?

Economics is a social science which

studies how society usesscarce

resourceswhich have alternative uses to

produce goods and services to satisfy

unlimited human wants.


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Economic Resources

Resources

Land EntrepreneurshipCapitalLabour

Goods & ServicesAlternative Use

Limited


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Economic Resources

Gifts of nature - includes allnatural resources such as

agricultural land, urban land,

rivers, soil, climate and

mineral deposits .

Mental and physicalhuman effort

!Physical man-made goods,eg machinery, tools,

buildings, unsold inventory

! can be used as inputs forfurther production.

A specialized type of labour that

possess risk-taking and decision making

ability to organize other factors ofproduction to produce goods and

services.

LABOUR

ENTREPRENEURSHIP

LANDCAPITAL


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The term resourcesis often confused with

another more general term inputs.

An input is anything used to make a good or

service.

Inputs include not only resources but also many

other things made from them (cement, rolled

steel, electricity), which are, in turn, used to

make goods and services.

Resources versus inputs


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Scarcity

Unlimited humanwantsLimited Resources(limited in Supply)

The central problem of

economics is:Scarcity


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Unlimited Human Wants

Due to the desire for even higher levels of

consumption once a particular level is attained.

Similarly, desires increase over time as old

wants are satisfied and new wants are created.


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Scarcity exists because human wants

always exceed what can be produced

with the limited resources and time thatnature makes available.

Scarcity


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!All individuals face scarcity.!As individuals, we face a scarcity of

time and spending power. Given more

of either, we could have more the

goods and services that we desire.

Scarcity


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! Because of scarcities of time and spendingpower, each of us is forced to make choices.

! We must allocate our scarce time todifferent activities: work, play, education,

sleep, shopping and more.

! We must allocate our scarce spending poweramong different goods and services:

housing, transport, food, medical and others.

Scarcity


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! Even the richest person must live withscarcity and must, at some point, choose

one want or desire over another.! As we get more affluent, we learn of new

luxuries to provide us with satisfaction.

Scarcity


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The central problem ofeconomics is:Scarcity

Unlimited HumanWants

Limited amountof Resources

For both therich & the

poor

there are not enoughto meet everyones

wants for goods &

services to the point

of satiety


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Scarcity can never willbe eradicated.

Scarcity


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Limited

Resources

Unlimited

Human Wants

Scarcity

Scarcity"Choice

Choice is the act of

selecting among

alternatives


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Scarcity"Choice

! Because of scarcities of time andspending power, each of us is forced to

make choices.! Each time we choose to buy something

or do something, we also choose not to

buy or do something else.


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Scarcity The Central Economic Problem

Limited Scarce

Resources

Unlimited

Human Wants

Choice

Opportunity

Costs


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Opportunity Cost

The opportunity cost of any action is

the next best alternative foregone.


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If you cannot have everything you want, then

you have to choose among the alternatives.

The next best alternative which you forgo is the

opportunity cost of the thing you chose. There

are trade-offsin every choice we make.

Opportunity Cost


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Example 1:

Tom has $2 to spend on either bread or

chocolate.

If he decides to buy bread instead of

chocolates, the opportunity cost of buying the

bread is the amount of chocolates that he

could have bought with the $2, not the $2

spent.


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Think-Pair-Share Activity

Give an example of opportunity cost

that you face in daily life?


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Think-Pair-Share Activity

Assuming you bought a bicycle for $100 butnever use it. A similar bicycle would now cost$120, but yours would fetch only $40 for a

second-hand bicycle.

What is the present opportunity cost of owningthe bicycle?


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! There's no such thing as a free lunch.! A lunch may be free to you, but it is not free

from society's perspective.

! Some of society's scarce resources that couldhave been used to produce something else of

value will have been used in the preparation of

the lunch.

A free lunch?


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What to produce How to produce

For whom to produce

ChoiceAll economies will have to constantly make choices

regarding resource allocation because of the problem of

scarcity. There are three important questions that any

economy will have to consider in allocating resources.


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What to produce?

! We cannot produce everything, we need todecide what to produce and in what

quantities.

! We have to choose, for e.g. whether toproduce lots of goods and services, such as

food, clothing and vehicles or to produce

more military weapons.


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What to produce? - An example -

At the government level

Military Gds Hospitals

How much of

each good mustbe produced


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How to produce?! Arises from the basic economic problem

that, since resources are scarce in relation tounlimited wants, we need to consider how

resources are used so that the best outcomearises.

! To consider how we can get the maximumuse out of the resources available to us.


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How to Produce

Labour IntensiveMethod of production Capital IntensiveMethod of production

Aim of Producer:

Use the least-cost method of productionWhy?

Maximizes the level of output or

Minimizes wastage of resources.


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For whom to produce?! In every society, some mechanism must exist

to determine how goods and services are to be

distributed among the population. Who gets

what?! Are goods and services produced for those

who are able and willing to pay the prices for

the goods and services?


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Human

Wants

UnlimitedVary in Importance

Unlimited amts of

gd & srvcs desiredLimited amt of gds & srvs

produced at any one time

Resources

Limited have alternativeuses

Can never satisfy allof societys

unlimited wants withlimited resources

Scarcity

Choice

Opportunity Costs


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Scope of Economics

2 Branches of Economics

Microeconomics Macroeconomics

i individual

economic units

(1) Consumers/households

(2) Firms(3) Government(4) Industry

a aggregate demand &

supply

It deals with the aggregate

level of economic activitiese.g. national income, total

employment rate, aggregate

investment and savings, the

general price level & the

level of govt spending.


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MicroeconomicsBasic ToolsDemand for & supply of

various goods & services

and factors of production

Examples of topics:Prices of various goods, eg

cars, houses

Level of output in anindividual market in an

economy

Profits / losses in a firm

Macroeconomics

Basic ToolsModel of the circular flow of

income.

Examples of topics:General level of prices in an

economy

Determination of NationalIncome

Level of employment or

unemployment in the whole

central economic problem (h2 and h1) set 1 (18 feb 2013)

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