Topic 1

SCARCITY, PRODUCTION POSSIBILITY,

OPPORTUNITY COST Chapter #1

1

EDWARD BAHAW - Economic Principles and Their Application to

Business (ABE)

Goods & Services and Consumer Needs

Goods and services refer to the products which consumers consume to satisfy their needs and wants. Consumers have basic economic needs which include food, clothing and shelter.

2EDWARD BAHAW - Economic

Principles and Their Application to Business (ABE)

Consumer Wants and Desires

In addition to basic needs, consumers have wants and desires for luxury cars, to eat exotic meals, to wear expensive jewelry, to spend vacation in a fancy resort.



Resources or Factors of Production



Resources or Factors of Production

This wide array of factors of production can be grouped into four groups. These are:

• Land• Labour• Capital• Enterprise



LandLand accounts for all the natural resources on the

planet which can be used in the production

process. It includes agricultural land, forestry,

oceans, mineral deposits such as diamonds and

petroleum and of course the geographical site

where production is located. The payments made

for the use of land is called rent.



LabourLabour is the contribution made by workers in

the production process. Labour is not

homogenous though, as different labourers

have different mental or physical abilities. As

compensation for this effort in production,

labour receives income in the form of wages.



Capital Capital accounts for all physical goods used to

produce other goods and services. In contrast

to "land," which is naturally occurring, capital

is man made or artificially created. This

includes; machines, computers, tools,

factories and roads.



EnterpriseEnterprise is the factor of production which is

responsible for organizing the other three

factors of production. This is the role of the

entrepreneur who decides how the other

three factors of land, labour and capital are to

be combined to produce output.



SCARCITY

Unlimited Wants &

Needs

Finite Resources



Possibility Commodity Y Commodity X

A 14 0

B 12 10

C 9 18

D 5 25

E 0 30

The Production Possibility Curve

In table a production possibility schedule is given for a hypothetical economy which shows all combinations of Good X and Good Y which can be produced. 11


Business (ABE)

G.

U.

A

B

C

D

E

5

9

12

14

1810 25

30

X

Y

O

The Production Possibility Frontier



Rightward Shift of the Production Possibility Frontier

An economy might be able to increase its production capacity and hence the production possibility curve would shift outwards under the following situations.

• Improvements in technology • Investments in capital • Discovery of new resources



GU.

A

B

C

D

E

Y

O

A’

X

E’

A Rightward Shift of the Production Possibility

Frontier



Points within the PPF

If resources were being used inefficiently or they

were idle or under-utilized, then output

produced by the economy would not be

maximized. Such output combinations would

correspond to points within the production

possibility frontier. This is shown by the point U

in the figure.15


Business (ABE)

Points beyond the PPF

Any point which is beyond the production

possibility frontier, such as point G in the

figure represents an output combination that

is unattainable with the current endowment

of resources. 16


Business (ABE)

Opportunity Cost

• Opportunity costs refer to what has to be

foregone in order to obtain something else.

This is encountered whenever economic

choices are made.



Opportunity Cost

• For example, when a person decides to buy an

audio CD for $25 the opportunity cost is the

next best alternative or what could be bought

with the money.



Opportunity Cost

What should I purchase? I can choose either an

audio CD or a T shirt!



Specimen Paper – Question 1

• Q1 State clearly whether each of the following statements (a–e) is TRUE or FALSE.

• Explain clearly, using diagrams where appropriate, your choice of true or false.

• (a) The slope of the production possibility frontier can be interpreted as a measure of opportunity cost.



Three basic Economic Questions• Given the problem of Scarcity, every economy

has the answer the following questions:1. What? - What goods and services should be

produced with the available scarce resources?2. How? – How are the resources going to be used

to produce the chosen goods and services?3. For whom? – Who would be able to consume

the goods and services which are produced?



Free Market Economy

The Three Basic Economic Questions

The People Decides the Answers



Advantages of Free Market Economies

• Consumer sovereignty

• Higher efficiency

• Higher investments

• New inventions and innovations



Disadvantages of Free Market Economies

• Inequality

• Dangerous Products

• Monopoly and imperfect competition

• Lack of Public Goods.



Command Economy

Basic Economic Questions

The non democratic government (dictator) decides the answers



Advantages of Command Economies

• Full employment

• Equality is achieved



Disadvantages of Command Economies

• Lacks of choices for consumers

• Complacency

• The government may produce goods not

required by the people

• Low quality goods and services



Mixed Economy

Basic Economic Questions

The government decides some of the answers



What is Economics?• Economics is a social science, in that it studies

the behaviour and decisions made by people

in relation to how resources are used to

satisfy wants and needs.

• This is different from natural sciences such as

chemistry and physics which do not focus on

human behaviour29


Business (ABE)

Microeconomics vs Macroeconomics

• Microeconomics – This focuses on the production, distribution and consumption of goods and services. As such it examines the behaviour of firms, consumers and the role of government in various markets.

• Macroeconomics – This focuses on the management of the overall economy on issues such as national income, inflation, unemployment, imports, exports, and the role of government. 30


Business (ABE)

Positive Economics

• In the study of economics there are two types of statements; positive statements and normative statements. Positive statements are based on facts and can be tested by looking at the evidence. An example of a positive statement is ‘Inflation in Trinidad and Tobago in 2007 is 10 percent’. This statement can be verified by referring to the rate of inflation reported by the Central Bank.



Normative Economics

• Normative statements are statements based on judgments or opinions and cannot be tested. An example of a normative statement is ‘Your salary should be much more than it is now’. This is based on someone’s opinion and cannot be verified by reference to facts. Usually in normative statements the word should or ought is used.



Topic 1

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