What ECONOMICS? 4.

financial capital money waiting to be used

capital goods.
This is a study of how people make choice and
also the consequences of this choices. ENTERPRISE

This is a study of how people use their limited -refers to decision making and risk taking of an
resources to fulfill their unlimited wants. entrepreneur.

MICROECONOMICS LIMITED RESOURCES

-study of small individual economy -there are not enough resources to produce all
goods and services that consumer wants.
Ex. Household, firms, industries making choices.
(Resources are combined together to produce
MACROECONOMICS
goods and services)
-study the aggregate behavior of whole
UNLIMITED WANTS
economy.
-Individuals, businesses and government always
-unemployment, inflation, GDP, international
wants more, their wants are insatiable
trade, etc.
Impossible to satisfy or never ending
ECONOMIC RESOURCES
This is because: goods can wear out; there is
-also known as “factor of production”
new and improved products; a once one
-production of goods and services satisfied want more; advertising create a new
want.
-classified as land, labor, capital, and enterprise
BASIC ECONOMICS CONCEPT
-scarce related to unlimited wants.
1. SCARCITY
LAND (natural resources)
-Economic resources are LIMITED COMPARED
Land is a natural resource, a free gift from TO WANTS WHICH ARE UNLIMITED.
nature.
-Wants always exceed the limited resources
LABOR (human resources)
-it can never be eliminated
It is a human effort (manual or mental)
2. CHOICE
CAPITAL
- because of scarcity, we cannot fulfill all wants
Manmade resource and must choose from the available
-Use to produce goods and services alternatives.

1. industrial capital e.g., Machinery, tools, etc. -Choice is necessary because resources can be
used in lots of ways to make different goods &
2. social capital belong to whole economy e.g., services.
belong to school, hospital, roads.
-The only way unlimited wants can be
3. private capital belongs to individuals e.g., reconciled with limited resources is through
households. choice
-scarcity is universal everyone must choose. -all decision of resource allocation is decided by
the government.
3. OPPORTUNITY COST
- all resources are owned by the government
-the second best alternative forgone after
and directs them to production of all the goods
making a choice.
and services
-Every choice involves a sacrifice or trade-off
WHAT TO PRODUCE?
-Choosing more of one thing means giving up
Government planners estimate what their
something else in exchange.
population needs. They fixed the quantity of
-This is a real cost, the cost of an item not in each good to be produce.
terms of money, but in terms of the resource,
HOW TO PRODUCE?
good or service that had to be given up to
obtain that item Government set quotas to each factory. Decides
how many employed in procuring goods.
INDIVIDUAL
FOR WHOM TO PRODUCE?
Rational consumers decide where to spend
they’re in something that fulfill their Prices and income are controlled so that each
satisfaction. citizen has equal amount of what has been
produced
ECONOMIC SYSTEMS
Free (Market) Economic System (Capitalism)
An economic system is a system which attempts
to solve the basic economic problem of scarcity. It does not exist in the real world in its purest
form. In reality, all economies are mixed
They need to address three basic questions:
economies. However, there has been a marked
-what to produce tendency the two or three decades to moves
aways from central planning and towards
Means choosing the mix of goods and services resource allocation using price mechanism.
to produce
WHAT TO PRODUCE?
-how to produce
Producers are free to produce what they wish.
Who will do the production or what method will Decisions are made base on the self-interest-
be used. E.g., machinery maximizing profits.
-for whom to produce HOW TO PRODUCE?
-who will consume the goods and services after This is decided by the producers using the best
they had been produced. method of production in order to keep down
-What is the best method of distributing the cost and be able to compete and maximize
products to ensure the highest level of wants profit.
are met? FOR WHOM TO PRODUCE?
Planned (Command) Economic System This is decided by the consumer’s ability to pay
(Socialism) for goods and services.
PRIVATE ENTERPRISE

Resources are owned by private individuals.

COMPETITION

Competition exists between, producers and

consumers.

CONSUMER SOVEREIGNTY

Consumers are the ‘king’

Freedom of consumers to decide what to buy

influences what to produced.

PRICE MECHANISM

Resources are allocated by the price

mechanism. Consumer buy good and are, in
effect casting voted

Mixed Economic System

In this system, there is a private (i.e.,

household) and public sectors (i.e.,
government)

In private sector the price mechanism allocates

resources, but in the public sector intervenes
when the private sector fails to produce in an
efficient way the goods and services which the
consumer wants. In practice all economies are
mixed, what varies is the degree of mix. E.g.,
some are planned rather than free e.g., north
Korea e.g., while others are free rather than
planned e.g., UK.