Notesale: Turn your study into money

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Basic economic idea

History of Economics

● Economics

originated from the Greeks,
it was first known as
“OIKONOMIA” (OIKONOMICOS)
which means household management
...
are limited in supply
...
It
means the supply of a commodity is
limited in relation to its demand

Choice
● It

is the selection between two or more
commodities
...


Opportunity cost
● Opportunity

cost is the next best
alternative forgone
...

When we make a choice we have to
give up or forgo something, the
forgone thing is the opportunity cost
...
Therefore, we
cannot produce all the goods and services
required by all the people
...

● In other words, the basic economic
problem is to decide the best use of our
limited resources
...

● What to produce?
● How to produce?
● For whom to produce?



 what goods and services to be
produced?
● A society

cannot produce all the wants
of all the people
...

● Consumer goods
● Capital goods

Consumer and capital goods

● Therefore,

the society should decide
whether they should produce more
producer goods or more of consumer
goods
...
 

How should the goods and services
be produced?
 
●

Commodities can be produced by using
different methods of production
...

 

Labour and capital intensive method

For whom should the goods and services be
produced?


● This

question is related the problem of
distribution
...


Production possibility curve
● It

shows the maximum combination of
consumer and capital goods an
economy can produce by using their
available resources
...


Convex
● With

economies of scale the PPF
curve will inward
...


linear
● If

the opportunity cost are constant
straight line PPF is produced

Shift in production possibility curve
● Outwards

means-economic growth
● Inwards-recession
...
Factors of production are
broadly classified into:
● Land
● Labour
● Capital
● Entrepreneur

land
●

Land refers to all the natural
resources on Earth which are
available to us for the satisfaction of
our wants
...
It is the gifts of nature
...


Renewable and non-renewable
resources
● Eg:

minerals in the earth oil, oil once
used up we cannot bring it back these
are known as non-renewable or nonreplaceable resources
...


Renewable and non-renewable
resources

land
● Land

is occupationally mobile, that
means a piece of land can be used for
various purposes, like to farm or to
build a house or to have a shop…etc
...


Labour
●

Labour refers to all kinds of human
effort whether physical, mental, skilled
or unskilled which is done for a reward
other than the pleasure derived from it
...


● The

reward for labour is wage or
salaries

Capital
●

Capital refers to man-made resources
which are used in the production of
goods and services
...


● Capital

is categorized into two:
● Fixed capital
● Working capital

Entrepreneurs
● Entrepreneurs

refers to the person
who undertakes the responsibility and
risks of employing the land, labour,
capital and who decides on how these
resources are to be used
...


Major functions of entrepreneur
●
●
●
●
●
●

 

Planning and organizing the production process
Combining the factors of production
Deciding what and how much of goods to be
produced
Bearing the risk involved in running the business
...


The margin
● What

does it mean to think at the
margin? It means to think about your
next step forward
...

● " The first glass of lemonade on a hot
day quenches your thirst, but the next
glass, maybe not so much
...
 


Margin means that a small change in
one economic variable will lead to
further changes in other variables

The time dimension
● Time

dimension is to assess how
overtime change can influence the
concepts that economists are seeking
to model and explain
...

● Very long run-Where not only are all
factors of production variable, but all
other key inputs are also
variable(technoglogy,government rules
and regulation)

Positive and normative statement
● Positive

statements are objective
explanation and the testing and
rejection of theories
● Facts which have already experienced

Normative statement
● Normative

statements are subjective
● It carry value judgment

The Three basic economic questions
● What

will be produced?-The
consumption decision
● For whom will it be producedDistribution
● How will it be produced-The production
decision
● Capital intensive
● Labour intensive

Economic system
● An

economic system of producing and
distributing of goods and services and
allocating resources in a society
...

● Freedom of choice
● The level of competition
● The price mechanism

Advantages of market economy
●

There is more freedom of choice for
producers and consumers
...

● Profit motive encourages firms to find
better methods of production so as to
minimize their average cost of production,
● Market economy helps to achieve
efficiency in resource allocation,  
● Freedom of enterprise encourages
producers to produce what consumers
want




Disadvantages of market economy
●
●
●
●
●
●

Therefore, the gap between the rich and poor
widens
...

As it allows freedom of choice, it may
encourage the consumption of harmful goods
...


A command Economy
 
● The

command economy is a system in
which all the means of production are
owned and controlled by the state
...

A command economy is so named
because the government has the power
to command the nation’s economic
resources
...


As there is welfare motive, the people
are well taken
● Economic activities are well planned so
the resources are allocated efficiently
...


Disadvantages of command economy
●

1
...
There is no competition in a command
economy as everything is produced by the
state; this reduces the quality of products
...
In a command economy mostly shortage of
goods arises  
● High degree of government influence lead
to larger bureaucracy and this may lead
to corruption and bribery…etc
 
 
 

MARKET ECONOMIES

COMMAND ECONOMIES

Freedom of choice
Free market economy

No freedom of choice
Planned economy

Profit motive
Prices are determined by the
market forces of demand and
supply
Limited role for the government

Welfare motive
Prices are fixed
by the government
Major role for the government

Mixed economy
● A mixed

economy is an economic
system in which both private and
public sector exist side by side and
operate for the welfare of the people
...


 
●

Since mixed economy is a planned economy, it
can avoid wastage of resources
...
Hence, it helps to allocate the scarce
resources in an efficient manner
...


Disadvantages of mixed economy
●

Mixed economy is difficult
...


●

Public sector has certain inborn defects like corruption,
bribery
...
which may reduce its productivity which
could affect the national income of the country
...


 

 

HOW DIFFERENT ECONOMIC SYSTEMS ANSWER
THE BASIC ECONOMIC PROBLEMS


TRADITI
ONAL
ECONO
MIES
What to
produce, how
to produce
and for whom
to produce
are not seen
as economic
problems as
they have
been decided
long ago by
their
ancestors
...


What to produce,
how to produce and
for whom to
produce are
decided by the
government
directives as
specified in the
national plan
...


The Transition Economies
● Economies

which changes from
centrally planned economy to a more
free market or mixed economy

Reason for transition
● Lack

of freedom
● Low quality products
● Low efficiency/low standard of living
● Lack of incentive for innovation
● No private ownership/private property

The problems of transition economies
● Rising

unemployment
● Rising inflation
● Lack of entrepreneurship and skills
● Corruption
● Inequality
● Lack of infrastructure
● Lack of sophisticated legal system

Barter system
● Needs

for presence of double
coincidence of wants
● Absence of common measure of value
● Indivisibility of certain goods
● Lack of standards for deferred
payments
● Difficulty in storing wealth

Money
● Anything

which is generally acceptable
in exchange for goods and services
and repayments of debts

The functions of money
● A medium

of exchange
● A measure of value
● A store of value
● A standard for deferred payments
● Unit of account

Characteristics of good money
● General

acceptance
● Divisibility
● Durability
● Uniformity
● Portability
● Scarcity
● Stability

● Near

money-no cash assets that can
be quickly turned into cash
● Liquidity-the extent to which there is an
adequate supply of assets that can be
turned into cash
● Liabilities-debt obligations

Specialization and division of labour
●

specialization-Concentration of factors
of production in one particular task in
which they are best suited
...


Advantages of division of labour
● More

goods and services can be
produced
● Maximum use of the workers ability
● Time is saved
● It allows the greater use of machinery

Disadvantages of division of labour
● Work

may become boring
● Loss of craftsmanship
● Workers become too dependent upon
each other
● Limited knowledge
● Products are all the same

Classification of goods and services

Services
● These

are intangible things which we
can’t see, feel or touch
...
etc

Goods
● Good

is anything that is tangible which
has the power to satisfy human wants
...
Goods can
be mainly categorized into the following

Classification of goods

GOODS
Economic goods

Free goods

Consumer goods

Durable goods

Non-durable goods

Capital goods

Economic Goods/
Private goods
Those goods which are
limited in supply
compared to demand
...


Free goods
❖ Those goods which are unlimited in
supply compared to demand, which
can be obtained without sacrificing
something else
...


CONSUMER GOODS AND CAPITAL GOODS
Those goods which
are directly to satisfy
human wants

Those goods which
are used to produce
other goods and
services

Durable Goods
● These

are goods which last for long
period of time
...
Example, fruits, batteries,
pens…etc

Merit goods
● Merit

goods are those goods that the
government thinks people should
have, and if not provided by the
government these goods and services
will be underprovided by the private
sector
...


Demerit goods
● In

economics, a demerit good is
a good or service whose consumption
is considered unhealthy, degrading, or
otherwise socially undesirable due to
the perceived negative effects on the
consumers themselves
...


Merit goods, demerit goods and value
judgment
● If

a society is able to say to consumers
that they do not fully realize what is
good or bad for them,then we are
accepting that society knows best and
has some right to make such a
judegment
...

This means that consumption of the good by
one individual does not reduce the amount
of the good available for consumption by
others; and no one can be effectively
excluded from using that good
...
Indeed non-payers can enjoy the
benefits of consumption at no financial cost –
economists call this the'free-rider' problem
...
If it is
supplied to one person, it is available to all
...


Quasi-public goods
●

●

●

A quasi-public good is a near-public good i
...
it
has many but not all the characteristics of a public
good
...
Eventually beaches
become crowded as do parks and other leisure
facilities
...
E
...
fencing a park or beach and
charging an entrance fee; building toll booths to
charge for road usage on congested routes

Free rider
● In

economics, the free rider problem
refers to a situation where some
individuals in a population either
consume more than their fair share of
a common resource, or pay less than
their fair share of the cost of a
common resource
...
Many public goods are
provided more or less free at the point of use and then
paid for out of general taxation or another general form
of charge such as a licence fee
...

If the government provides public goods they may be
able to do so more efficiently because of economies of
scale
...

● Adverse selection-Where information
failure results in some one who is
unsuitable obtaining insurance

Key terms
● Excludability
● Rivalry
● Non-excludable
● Non-rival
● Free

rider
● Information failure
● Paternalism
...
[8]
● Discuss whether prices are less
important in allocating scarce
resources in a mixed economy
compared with a market economy
...
(Up to 4 marks) Features
include no government intervention, private
ownership, entrepreneurs and the profit motive
and supply and demand
...
(Up to 4
marks) Allocation of scarce resources explained
through the use of a supply and demand diagram
is required for full marks here
...
(b)
Discuss whether prices are less important in
allocating scarce resources in a mixed economy
compared with a market economy
...
In these cases price is not a reflection of
marginal social cost and as a result there is a misallocation of resources
...
For analysis showing the role
of price in a mixed economy with reference to private goods, public
goods, merit and demerit goods
...
(Up to six marks for
one side allows a 6/2 or 2/6 split)
...
) For evaluative comment on the
‘less important’ aspect of the question
...
Or it could be argued that it is less important
because price is the only means of allocation in a market economy
...


● Discuss

whether all planned
economies should become market
economies?
● Explain why division of labour in an
economy depends on the ability of
money to perform effectively?

● (a)

Explain, with the help of a
production possibility diagram, how the
opportunity cost of producing different
combinations of goods can be
measured
...
[12]

Questions
● Using

production possibility curve,
explain how opportunity cost can be
used to show trade offs involved?[8]
● Discuss some of the problems when a
planned economy makes the transition
to a market economy[12]

● (a)

Explain, with the aid of a diagram,
what changes will alter the amount of
consumer surplus available from the
consumption of a good
...

[12]

● Using

examples, explain the
characteristics of public goods and
merit goods
...
[10]



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