IGCSE Economics: Introduction to Economics

IGCSE Economics: Introduction to Economics ● Basic problem of economics is scarcity: ○ ● Limited resources but unlimited demand. Economics determines how resources are distributed because there are simply insufficient resources to satisfy everyone's needs: ○ Even in rich countries you see poor people. ● Economics is the study of how to make the best use of the resources we have. ● Economics is also about increasing the choices of people: ○ To allow people to see that there are other ways they can choose to utilize their resources. Key Terms: ● Domestic: ○ ● Own country. Needs: ○ Things that are necessary for survival: ■ ● Food, clothing, shelter, water, warmth. Wants: ○ Things that we would like to have but can do without: ■ Cars, televisions, etc. ■ We want things for different reasons but most of the time these reasons are things like: ■ Peer pressure. ■ Desire for entertainment. ■ Convenience. ■ Popularity: ■ Fashionable clothing. Three Basic Economic Questions: ● What goods and services should an economy produce? ○ Should the emphasis be on agricultural goods, consumer goods, military goods, or services? ○ Should it be on sport and leisure or on housing? ● How should these goods and services be produced: ○ Labor intensive? ■ ○ ■ Subsistence farming. ■ Food processing/manufacturing. Capital intensive? ■ ○ Such as: Such as: ■ Car factory. ■ Milking cows. ■ Large industrial farms. People decide which to use by determining their respective availabilities: ■ In Hong Kong more manufacturers choose to use machines as labor is very expensive. ● Who should get the goods and services that are produced? ○ Even distribution? (Communistic) ○ More for the rich? (Capitalistic) ○ More for those who work hard? (Meritocratic) ■ Meritocracy is basically giving the “tools to Him that can best handle them”. Factors of Production: ● ● ● ● Land: ○ All natural resources. ○ Ocean, forest, desert, grassland, crude oil, agriculture, ore, etc. Labor: ○ All human effort (physical and mental). ○ Factory workers, managers, etc. Capital: ○ Manufactured/man-made resources used in the production process of other goods. ○ Plastic, tools, machinery, etc. Enterprise: ○ The unique ability certain people have in organizing the factors of productions and to take risk. ○ ● Risk takers such as entrepreneurs like Bill Gates. The more available the factors of production used in the manufacturing of a certain good the cheaper are that good will be (for the producer). ● Combination of factors of production change over time as a country develops: ○ A car factory in a LEDC will start off with a production line consisting of mainly laborers. ○ As the country develops and machines become more available the car factory will start using more machines as these become cheaper and are more productive than laborers. Division of Labor: ● Also known as job specialization. ● Divides a firm’s labor force into small groups each doing special jobs for which they were trained. ● This technique provides benefits and disadvantages. ● This technique was the brain child of Henry Ford. Benefits of specialization: ● Standardized products (may be good, may also be bad). ● Increase in rate of production (productivity rises). ● Time saving. ● Lower costs. ● Employment is increased because there is a rise in productivity. Disadvantages of specialization: ● Products are standardized and present no variety. ● Small businesses cannot compete as they do not have the funds necessary to employ so many workers at once. ● ● Boring repetitive work for workers. ○ Workers start to lose interest in their jobs. ○ Workers start to think that their bosses do not care about them. People become dependent on each other. Sectors of the Economy: Primary: ● Deals with the provision of raw materials and natural resources: ○ Crude oil, agriculture, wood, mining, fishing, even venison, etc. ○ Some resources are renewable such as water, sunlight, wind, geothermal and even fishes to an extent. Secondary: ● Output from the primary sector is processed into manufactured goods. ○ Refining crude oil, making plastics, making consumer and producer goods, etc. ○ Capital goods are used to help produce other goods but are not used up in the process. ■ ○ Producer goods are used to produce other goods: ■ ○ Tools. Plastics. Consumer goods are final goods: ■ Food, movie discs, etc. Tertiary: ● The production of services rather than goods: ○ Restaurant, banking, insurance, hairdressing. ■ ● Banking and insurance are examples of financial services. This sector often assists the first two sectors: ○ Providing firms with startup loans, and with insurance, etc. All the sectors are interdependent. Types of Goods and Services: Capital Goods and Services: ● Items or services that are bought for use in the production process: ○ These goods and services are used to make other things. ○ These goods and services include: ■ Processed materials. ■ Equipment: ■ Tools such as hammers. ■ Machinery. ■ Financial advice and aid for businesses. Consumer Goods and Services: ● Items or services that are bought by the general public for private use (private consumption): ○ ● These include: ■ Dishwasher. ■ Cars. ■ Flowers. ■ Food. ■ Bus rides. Consumer goods are split into four different types: ○ Consumer durables are items that last for a long period of time. ■ ○ Single-use goods and services are used up quickly: ■ ○ Such as TVs and DVD players, cars, etc. These include food, taxi ride, etc. Perishable goods are items that do not last very long and need to be consumed almost immediately after purchase: ■ ○ Such as fresh flowers and milk, etc. Soft goods are between consumer durable and single-use/perishable goods: ■ Such as light bulbs. All goods and services can be classified as either a capital good or service or a consumer good or service or a producer good or service. Opportunity Cost: ● Opportunity cost is the cost measured in terms of the next best alternative(s) sacrificed. ○ A new bag’s opportunity cost might be 2CDs or a new haircut. ○ A warship may have an opportunity cost of 3 new schools. ○ The opportunity cost of reading a book may be finishing a new computer game. ■ ○ In this case the opportunity cost is measured in terms of time. A farmer’s choice to grow corn may have an opportunity cost of using that same land to grow wheat. ○ The opportunity cost of building a motorway may be 10 schools, peace and quiet, and attractive countryside scenery, the external benefits of having more schools and more educated people, and fresh air. ○ Opportunity cost can be measured in terms of money, time, factors of production (land, labor, capital, and enterprise), scenery, external benefits, etc. ○ ● One cannot have everything due to scarcity. Opportunity cost measures the benefit you could have had from the next best alternative which you have given up. ○ Therefore, the cost of the next best alternative given up is the opportunity cost. ○ Also, opportunity cost always includes the external costs that occur: ■ For a factory those may be peace and quiet, beautiful scenery, fresh air, etc. because these things must be sacrificed for a factory to be built. ■ If opportunity cost did not include these costs it would not be a true measure of what has been sacrificed. ● Opportunity cost can be incurred by society as well as by a single person. ○ The opportunity cost to society of building a factory on a piece of land formerly used for farming might be air and noise pollution, or it might also be a smaller variety of food to choose from, or even just the loss of aesthetically pleasing scenery. ● Money is a medium of exchange and is not the way economists use to measure something’s cost. ● Foregone income is an additional opportunity cost for people who wish to go on leave and yet are not paid: ○ ● People who are paid hourly wages. If a good does not have an opportunity cost incurred in its production it is not an economic good, rather it is a free good. Production Possibility Frontier (PPF): ● When plotted on a line graph with capital goods versus consumer goods or some other such combination (cancer treatment versus tachycardia treatment) the PPF forms an inverted parabola. ○ This curve means that if one were to increase the production of one good one would need to decrease the production of the other production substitute. ○ Please note that the above combination must be a combination of two close production substitutes. ● This shows all production possibilities. ● The PPF is the boundary between the combinations of goods and services that an economy can produce and those that it cannot produce, given a certain set of resources. ○ ● This curve represents what an economy or firm is able to produce because of scarcity. Any point that is within the PPF is attainable but if it is not on the PPF then an economy or a firm will have spare production capacity or wastage: ○ ● Unemployment will result in this. Any point that is on the PPF is attainable and also means that an economy or a firm is producing at the maximum rate allowed for by its supply of resources. ● Any point that is beyond the PPF is not attainable with the amount of resources currently available. Shifts in the PPF: ● Outward: ○ Improvement in the quality of FoPs: ■ ○ Improvement in the productivity of labor or capital or both. Increase in the total quantity of FoPs available: ■ Discovery of new deposits of natural resources: ■ A new deposit of crude oil.