INTRODUCTION

TO ECONOMICS
Basic economic concepts, PPC and
economic systems
Ground rules
◦ Put your phone away when you enter
◦ Use of laptop is a privilege – do not use it for anything else other than
taking notes
◦ Don’t be late
◦ Academic honesty matters!
◦ Homework – Just Do It! (Nike: 1988)
◦ Be active – take notes, ask questions, work with your group
◦ Anything else?
From the guide
 Explain Explain the social nature of economics

Distinguish between microeconomics and Learning

Distinguish macroeconomics
objectives

Explain Explain the nine central concepts

Can be found at the

beginning of each
Explain Explain the meaning of scarcity
chapter and on Google
classroom, useful when
revising!
Identify and
Identify and explain factors of production
explain

Explain the meaning of opportunity cost and its

Explain relationship to choice and free goods
What is Economics?

Write down three key Justify your answers

words/phrases
Why is it a social science?

◦ A social science

◦ Social: the study of individual agent's decision-making

behaviors and their interactions within societies

◦ Science: the use of logic and scientific (empirically falsifiable)

methods
Areas of Economics
◦ Microeconomics
◦ The study of individual economic agents (households, firms, etc.) and their
interactions in a market
◦ Topics: demand and supply, market equilibrium, efficiency, market failures,
taxes and subsidies, etc.

◦ Macroeconomics
◦ The study of the entire economy with aggregate variables and their
dynamics
◦ Topics: national income and output, growth, employment, inflation, business
cycles, fiscal and monetary policies
 9 key
concepts
 Identifying
Look at the identifying
concepts
concepts worksheet (also in G- exercise
classroom)

There are several headlines in

the table. Your task is to work in
groups to complete the table
for each headline. One has
been done for you as an
example. There is no right or
wrong answer.
KEY CONCEPT:
SCARCITY
 THE FIRST LESSON OF ECONOMICS IS
SCARCITY: THERE IS NEVER ENOUGH OF
ANYTHING TO FULLY SATISFY ALL THOSE
WHO WANT IT.
Thomas Sowell
Scarcity
◦ Scarcity is the condition in which available resources are limited.
They are not enough to produce everything that human beings
need and want.

• Everything that has a price is relatively scarce, and everything

that is scarce is known as an economic good.

• Those things that have an unlimited supply are called free

goods.
 ◦ Scarcity implies that we (current generations)
need to curb our unlimited wants
◦ But by how much?
◦ Leave no resources behind when we die?
Scarcity and
Sustainability ◦ Sustainability provides one way to think about
how much unlimited wants should be curbed
◦ Leave at least enough resources behind for
future generations to also have their
opportunity to meet their needs
 ◦ Now, we have access to renewable
resources (such as renewable
energies)
Scarcity and
Renewable ◦ Does this imply that we no longer
Resources face the problem of scarcity?
◦ Speed of renewal or regeneration
vs. speed of consumption
◦ Any other problems?
 Choices have to be made as
not every want can be
satisfied

Consequence Waste needs to be minimized

in the production of goods
of Scarcity and services (efficiency)

Types of goods and services

produced need to match
people's needs and wants
(efficiency)
What is the
opportunity
cost?
1. The next best
alternative foregone
when an economic
decision is made.

2. The value of something

in terms of the next
best alternative that
was given up.

3. Whatever must be
given up to obtain
some item.
 THE FOUNDATIONS OF ECONOMICS

Unlimited wants, limited resources

Scarcity

Choices

The basic economic problem

What should be produced and in what quantities?
How should things be produced?
Who should things be produced for?

17
 ◦ Given the problem of scarcity, the economy should
produce the types of goods and services that are
actually desired by people, and of correct amounts

What To ◦ Allocative efficiency refers to an allocation of

Produce? resources that results in producing the combination
and quantity of goods and services mostly preferred
by consumers

◦ In turn, need to know for whom to produce

 ◦ Given the problem of scarcity, the economy
should minimize waste in the production
process

How To
Produce? ◦ Productive efficiency refers to a situation
where all resources are fully employed and
used in the best possible way to avoid waste;
in other words, output is produced at the
lowest possible cost
 ◦ The first two questions are concerned with
resource allocation
◦ Assigning different combinations and quantities of resources to
specific uses among many possible alternatives
◦ Aiming to achieve allocative and productive efficiency

Resource
◦ Resource reallocation
Allocation
◦ Resource misallocation (allocatively inefficient)
◦ Under-allocation
◦ Over-allocation
 ◦ Knowing for whom to produce helps answering
what to produce

◦ How much each person gets depends on

For Whom To how much he/she earns
Produce?
◦ Distribution of goods and services boils
down to distribution of income

◦ Related to the notion of equity

HOW DO WE ANSWER
THE BASIC ECONOMIC
QUESTIONS?
Economic systems are all the ways in which the
society allocates its resources and solves the basic
economic problem.
Mixed Economies
A system in which economic decisions
about production and price are made
by a central authority, producers and
consumers.

Who decides?

What? How? For whom?

Both Both Both
Command
(left) vs. Free
Market (right)
Comparing systems by criteria
 The Economic spectrum

Command Mixed Free Market

Economies Economies Economies

USA
North China Switzerland
Canada
Korea, Australia
Cuba, Singapore
Venezuela, New Zealand
Zimbabwe
 Heritage Foundation Economic
Freedom Index (link)
NB: The rankings, as well as all other information on this site is to be examined critically as the Heritage
Foundation is a well known American conservative thinktank, which in and of itself is not necessarily a
problem, but they are also known for using their influence to spread misinformation to influence elections in
the States and spearhead extremely controversial projects such as Project 2025.

◦ Rule of Law ◦ Regulatory efficiency

◦ Property rights, ◦ Business freedom
◦ Government integrity ◦ Labour freedom
◦ Judicial effectiveness ◦ Monetary freedom

• Government Size • Open Markets

• Government spending • Trade freedom
• Tax burden • Investment freedom
• Fiscal health • Financial freedom
Heritage Foundation Economic
Freedom Index
 2023 report highlights

Food for thought: Does a high degree of economic freedom lead

to high income per person (and other positive outcomes) or vice
versa?
2023 highlights
CLASSIFYING
RESOURCES
 Factors of production
Factor Characteristic Payment

Physical and Mental

Labour Wage
Input

Land + Extracted
Land Rent
Resources

Capital Physical Capital Interest

Entrepreneurship Organisation of Factors Profit

Because different countries have different resource
endowments, they cannot all produce the same things
and/or in the same amounts.
ECONOMIC MODELS
Learning objectives – from the guide

Parts of this to be
covered later in the
course

Learning objectives – from the textbook

Parts of this to be
covered later in the
course

Short explanation of the PPC
Production Possibility Curve/Frontier (PPC/PPF)

◦ shows the maximum combinations of

goods and services that can be
Capital goods

produced by an economy in a given

Y A time period, if all the resources in the
Y1
economy are used efficiently and the
state of technology is fixed.

Y2 B

0 X1 X2 X Consumption goods
Q: WHY IS THE PPC CURVED,
AND NOT A STRAIGHT LINE
LIKE IN THE VIDEO?
 PPC game
◦ We live in UWCAD land that produces just two goods – manufactured goods
and agricultural goods
◦ You are the workers in this economy
◦ There are two containers with raw materials, and two containers for finished
good
◦ You produce goods by moving one unit of raw material from its original
container to the finished goods container
◦ You must stand in the production line and pass the good along the line
◦ Each worker must hold every good but can only hold one at a time
◦ Each production session lasts for 30 seconds
◦ You will start with the manufactured goods first
Constant vs. changing opportunity costs
b Constant opportunity costs a Increasing opportunity costs
Production Possibility Curve/Frontier (PPC/PPF)

• The curved line shows the different

combinations of consumption and
capital goods that can be produced
Capital goods

– potential output
Y A
Y1 • Points X and Y show the extremes

• Points A and B are productively

efficient
Y2 B

0 X1 X2 X Consumption goods
Production Possibility Curve/Frontier (PPC/PPF)
Capital goods

• Here, point A is not productively efficient,

because we are not using all available
Y resources, or we are using them
inefficiently
B C
• If we move from point A to point B, we
say that there has been actual growth

• Only point C is productively efficient

A
• In reality, most economies operate
0 X somewhere inside the PPF
Consumption
goods

44
Capital goods
Production Possibility Curve
◦ The production possibilities of the
economy will increase:
◦ If there is an increase in the quality and/or
quantity of the factors of production
◦ If there is significant technological
advancement
◦ Through increased trade
◦ If we increase the number of working hours
(this is, however, only a temporary solution)

◦ If the PPF shifts out, we say that there has

been potential growth.
Consumption goods

45
Q: Why do birth rates tend to fall as economies grow?