Economics Notebook

Unit 1: The basic Economic problem and factors of production

WHAT IS ECONOMICS
It is the study of choices leading to the best possible use of scarce resources in order to best
satisfy unlimited human needs and wants.

HUMAN NEEDS AND WANTS

Needs are the things that we require for survival (essential, necessities). Example: food,
clothing, shelter
Wants are the additional things that people would like to have but not essential for survival.
Wants are infinite or unlimited.
Example: car, phones, jewellery

FREE GOODS AND ECONOMIC GOODS

Free goods are good that are not scarce (unlimited in supply) and are available without limit by
nature like air and sunlight.
- Are available and abundant by nature
- Does not require human efforts to produce
- Has no money, value or price
- Does not reduce availability for others
- They are gifts of nature

Economic goods are those which have a price and their supply in less in relation to their
demand or is scarce. Example: table, chair, stationary
- Demand is higher than supply and availability
- Requires human efforts for production
- Has a money, value or price
- Reduces availability for others
SATISFYING NEEDS AND WANTS
In order to satisfy the needs and wants of consumers, businesses will make PRODUCTS.
Products are categorized into goods and services. Goods and tangible/visible and services and
intangible/invisible. In order to make goods and services, resources are required.

CONSUMER GOODS AND CAPITAL GOODS

Consumer goods are things that are bought for personal use, not for producing other goods.
Example: hair bands, a school bag
Capital goods are things that are brought for producing other goods.
Example: vehicles, tools
Consumer services are activities purchased by a consumer for personal or family purposes.
Example: auto repairs, getting nails done
Consumption: using up goods and services (products) to satisfy consumers’ needs and wants.
Consumer: the people or organization which buy goods or services to satisfy their needs and
wants.
Consumption Expenditure: the amount of consumers spend each period on economic goods or
services.
Exchange: trade (buying and selling)
Producers: the people and organizations which make and sell goods and services.

PRODUCTION
- Production involves using inputs (resources) to make and sell different goods and services
(outputs/products) to satisfy the needs and wants of consumers.
- Renewable resources (sunlight, air) and non-renewable resources (oil, coal, gas, copper,
iron).

FACTORS OF PRODUCTION
Land: all natural resources, including agriculture and non-agriculture land as well as everything
that is under or above the land such as oil, minerals, water, forests, etc.
Example: rent, landlord
Labour: all human resources, includes all mental and physical efforts made by an individual such
as teachers, construction workers, etc.
Example: wages, labourer
Capital: all man-made resources/factor of production that is used in the production process to
produce goods and services such as buildings, machinery and equipment.
Example: interest, capitalist
Enterprise: the skill or ability of taking risk to provide goods and services and make profits.
Example: profit, entrepreneur

FACTOR MOBILITY
Refers to the ease with which resources or factors of production can be moved from one
productive activity to another without incurring significant cost or loss of output.

Factors of production may be moved:

- Within firm
- Within industry
- Between industries
- Between countries

Types of factor mobility:

- Occupational mobility
- Geographic mobility

Advantages of factor mobility:

- Moving factors from less productive to more productive activities will increase output for
firms.
- It enables firms to improve the way they produce different products as quality and quantity
of factors of production changes.
- It allows firms to change the types of goods and services they produce as human needs and
wants changes.
- Better use of resources can be made.

Occupational mobility is when a resource is able to change tasks, such as labourer going from
being an electrician to an electrical engineer.
Geographic mobility is when a resource is able to move from one location to another. This can
either be regional, national or international. For instance, a robot, which is a factor of capital,
could be moved from India to China.

WHAT AFFECTS THE QUANTITY AND QUALITY OF FACTORS OF PRODUCTION?

Increase in quantity and quality of factors of production enables the firms to:
- Produce more goods and services.
- Produce a variety of goods and services.
- Improve the quality of goods.
- Invent new products and ways of producing them.

This is called THE BASIC ECONOMIC PROBLEM

PROBLEM 1 - RESOURCES ARE SCARCE

Resources (factors of production) are used up in production of goods and services to satisfy our
wants.
Resources that are not scarce are called free goods.
PROBLEM 2 - HUMAN WANTS ARE UNLIMITED
Our wants are without limit and many of them cannot be satisfied.
This is because there are simply not enough resources to make all the goods and services we
want and need.

PROBLEM 3 - SCARCE RESOURCES HAVE ALTERNATIVE USES

There is limited amount of resources such as raw materials, machines, factories and skilled
workers. But there are a number of different ways in which they can be used.
Resource allocation therefore involves deciding how best to use scarce resources to satisfy as
many needs and wants as possible.

PROBLEM 4 - WE MUST CHOOSE WHICH WANTS TO SATISFY

OPPORTUNITY COST
Anytime we need to make a choice, the alternatives we don’t choose have a cost. The true cost
of something is what we have to give up to get it.
Opportunity cost refers to the next best alternative foregone/sacrificed when a decision is
made.

PRODUCTION POSSIBILITY CURVES

- Production possibility curves (PPCs) show the maximum combined output of 2 or more
products a firm or an entire economy can produce with its available resources.
- Resources are being used efficiently if they are producing their maximum output.
- But, because resources are limited, producing more of one product means producing less
of another.
- PPCs are therefore a useful way of showering the opportunity cost of producing more of
one product in terms of how much of another must be given up.

Examples: think off?

- Opportunity cost and consumers: Consumers are the buyers and users of goods. They have
to decide which product to buy.
- Opportunity cost and workers: Undertaking one job involves an opportunity cost.
- Opportunity cost and producers: Produces have to decide what to make.
- Opportunity cost and government: Government has to decide its expenditure of tax
revenue on various things.

PRODUCTION POSSIBILTY CURVES

An economy producing consumer goods and capital goods
What is the opportunity cost of producing 15 more tonnes of consumer goods?

5 MAJOR ASSUMPTIONS UNDERLINE THE PPC

- All resources of land, labour, capital and enterprise are fully utilised and producing the
maximum amount.
- The economy is efficient, meaning that resources are used in the least costly manner.
- The chosen production combination of the 2 goods or services are the most desired by
society.
- All resources are being devoted to just these 2 goods and services. Traditionally, the PPC
examined the production of either consumer or capital goods.
- Finally, technology and productivity do not change.
Unit 2: The allocation of resources

MICROECONOMICS AND MACROECONOMICS

Microeconomics:
- Micro has been deprived from the Greek word “MIKROS” which means small.
- It is a study of the individual units of economic system.
- In other words, a small part of economy and not the whole economy.

Macroeconomics:
- Macro has been derived from the Greek word “MAKROS” which means large.
- Macroeconomic is the study of large part of the economy, the whole company.
- The study of economic behaviour of the economy as a whole and not the individual
economic units of the economy.

RESOURCE ALLOCATION
Deciding how to best allocate limited resources to different production is the problem of
resource allocation because productive resources are scarce relative to human wants so we
must decide:

What to produce? How to produce? Who to produce for?

Should we use resources to What tools and machinery Should people in the greatest
produce as many consumer will be needed? How many need get the goods and
goods as possible or allocate workers will be required and services they require? Or
some resources, for example, what skills will they need? It should they be produced for
to build new roads or to is cheaper to employ more people who can pay to most
provide better health care? labour or more machinery? for them? What price should
they pay?

ECONOMIC SYSTEMS
An economic system is a system of production, resource location and distribution of goods and
services within an economy.
Who in an economy decides what goods and services to produce, how to produce them and
whom to produce for, and how are these decisions made?

Market economy Mixed economy Planned economy

Who? Who? Who?

Private sector firms and Private sector firms and Government
consumers consumers, and a
government

How? How? How?

The price mechanism The price mechanism and Government planning
government planning

ECONOMIC SYSTEMS

THE MARKET ECONOMIC SYSTEM

In a free market economic system, all decisions are taken by private sector organizations and
individuals. There is little or no role for government or a public sector and therefore little or no
taxation or public spending.

THE PRICE MECHANISM

A market is any set of arrangements that brings together all the producers and consumers of a
good or service so that they can engage in exchange.
WHATS GOOD ABOUT THE MARKET SYSTEM (ADVANTAGES)

- A wide variety of goods and services will be

produced to satisfy consumer wants.

- Firms respond quickly to changes in consumer

wants and spending patterns.

- The profit motive of firms encourages them to

develop new products and use the most efficient
methods of production.

- There are very few, if any, taxes and regulations.

WHATS BAD ABOUT THE MARKET SYSTEM (DISADVANTAGES)

- Some important goods will not be produced because they are not profitable.
- Firms will only support products to consumers who are most able to pay for them.
- Resources will only be employed if it is profitable to do so.
- Harmful goods may be produced if it is profitable to do so.
- Firms may disregard the welfare of people, animals and the environment.

THE MIXED ECONOMOMIC SYSTEM

A mixed economy therefore combines government planning and ownership of resources with
the use of the free market economic system to determine the allocation of resources in the
economy that is what to produce, how and for whom to produce.
- Government ownership and control of some scarce resources.
- Government intervention to regulate the actions of private sector firms and consumers in
some markets.
DEMAND
- Demand is the various quantities of goods and services that consumers are willing and able
to buy but at different possible prices during a particular timer period, ceteris paribus.
- Effective demand: The word ‘effective’ means that people must actually have the money to
make purchases.

CETERIS PARIBUS
Ceteris paribus means all other things other than price that can affect demand is assumed to be
constant of unchanging.

INDIVIDUAL AND MARKET DEMAND

- Individual demand is the demand of just one consumer.
- Market demand is the total demand for a product from all of its consumers.

LAW OF DEMAND
The law of demand starts that there is a negative or inverse relationship between price and the
quantity of a good demanded over a particular time period, ceteris paribus.
As the price of a product falls, the quantity demand will increase. As the price of a product
increases, the quantity of demand will fall.
DEMAND SCHEDULE
Demand schedule is the table showing quantity
demanded at various prices.
A demand schedule is a table showing how much a
given product a consumer/household would be willing to
buy at difference prices.

THE DEMAND CURVE

Demand curve is the graphical representation of the
demand schedule.
Correct labels on the graph:
Y axis – Price of the product (per unit)
X axis – Quantity demanded (per period of time)

MOVEMENT ALONG THE DEMAND CURVE (Change in quantity demand)

- Movements along the demand curve are caused by
a change in price of that good, ceteris paribus.
- This is called an extension or a contraction of
demand.
- An extension of demand: As price of the product
falls, quantity demanded increases extends.
- A contraction of demand: As price of the product
increases, quantity demanded falls or contracts.
SHIFT IN DEMAND CURVES
Changes in ALL other factors except price will cause a
shift of the whole demand curve.
An increase in demand means that consumers now
demand more of a product at every price and the
curve shift out to the right.
A fall/decrease in demand means that consumers
now demand less of a product at every price and the
curve shifts to the left.

NON PRICE DETERMINANTS OF DEMAND

1. Change in consumers’ income

-Normal goods: as income rises, demand will rise as consumers can now afford to buy more of
everything. This will result in a shift to the right of the demand curve. For some products,
this could be a very small shift. There are some products that consumers will demand lots
more of if their incomes increase. These are known as luxury goods.
-Inferior goods: are goods that those consumers will buy less of if their income increases. This is
because they will buy higher priced alternatives instead. An increase in income will cause a
shift to the left of the demand curve.
2. Change in taxes or income

-Disposable income: refers to the amount of income people have left to spend or save after any
taxes on their income have been deducted.

3. Price and availability of other products (Substitutes and Complementary goods)

-Substitute goods: Substitute products compete

for demand as they can be used in place of
each other. These products can be
competitor products or other products that
fulfil the same needs. Ex; tea and coffee

-Complementary goods: some of the goods and

services we need to buy, also needs other
things like accessories to go with them. Ex; if
the price of the car increases, they certainly
would not buy more petrol.

4. Changes in tastes, habits and fashion

5. Population change

6. Other factors

-Advertising and promotion

-Interest rates
-Government interventions (laws)
-Weather

SUPLY
Supply is defined as the quantity of a good or service that firms or producers are willing and
able to make and sell to consumers in the market at a given price in a given time period, ceteris
paribus.
Can – Supply < Stock (YES)
Supply > Stock (NO)
Supply = Stock (YES)
-Individual supply: supply by one firm.
-Market supply: sum of all the individual supplies.

THE LAW OF SUPPLY

The law of supply states that there is a positive or direct relationship between price and the
quantity of a good supplied over a particular time period, ceteris paribus.
“As the price of the product falls, the quantity supplied will also fall” AND “As the price of a
product increases, the quantity supplied will increase.”
(Diagram)

MOVEMENT ALONG THE SUPPLY CURVE (change in quantity supplied)

-Movements along the supply curve are caused by a change in price of that good, ceteris
paribus.
-An extension in supply – as price of the product rises, quantity supplied rises or extends.
-A contraction in supply – as price of the product falls, quantity supplied falls or contracts.
-(Diagram)