STUDY UNIT 1.

1
CHAPTER 1
What economics is all about?
 SEMESTER RULES!!!
Respect is my number 1 rule! This means:

✔ Respect one another in class.

✔ Be on time for classes & prepare for them.
✔ Never skip classes!
✔ Attend SI classes
✔ Make your own notes
✔ Use the study guide!
✔ Stay informed about current affairs!
✔ Work hard and most importantly….
 LEARNING OUTCOMES
Once you have studied this chapter you should be able to:

o Discuss what the economic problem entails

o Give a detailed definition of what economics is

o Discuss the important concept of opportunity cost
o Describe a production possibilities curve/frontier
o Explain opportunity cost using production possibility graphs
o Distinguish between microeconomics and macroeconomics
o Distinguish between positive and normative economics
o Explain why economics is a social science
o Identify some common mistakes in reasoning about economics
o Know all relevant concepts
Central economic Problem

Scarcity

Limited needs

Choice

Unlimited wants

Opportunity cost
 THE ECONOMIC PROBLEM
(Unlimited wants, limited resources)
 S-O-C
PRODUCTION POSSIBILITY
CURVE/ FRONTIER
WANTS

DEMAND
OPPORTUNITY COST

ECONOMICS
NEEDS

SCARCE
RESOURCES CHOICE
 1.1 WHAT IS ECONOMICS?

Deals with choices that we make on how to manage our scarce

(limited) resources in an attempt to satisfy our unlimited wants

See Box 1-1 (textbook page 3)

 1.2 SCARCITY, CHOICE, AND OPPORTUNITY COST

o Because of scarcity, the choices we make are based on opportunity

costs.
o This is based on:
− Wants (desires for goods/services – unlimited)
− Needs (essential for survival – not absolutely unlimited)
− Demand (demand only if you can buy it)
 Scarcity - resources
o Scarcity means that society has limited resources and therefore cant produce all
goods and service people wish to have

o These resources aren’t just money

o Also includes the factors of production and are used to produce goods and services
(Refer box 1-2)

o 3 Types Of Resources:

Capital resources –
Natural Resources - Land
machinery

Human resources – Labour

o The use of resources thereof can never be costless as other opportunities have to
be sacrificed to obtain what you desire.
 Opportunity cost
o Opportunity cost – is value to the decision maker of the best alternative that could
have been chosen but was not i.e. the value of the best forgone opportunity.
o Opportunity costs results from choices we make:

o Every choice has a value to you – you might not know it or think about it
o And when you choose one thing over another, you are saying "I value this over
another choice I had"
o Thus the OPPORTUNITY COSTS of a choice is what you gave up to get it (e.g. if you
chose the apple, then the opportunity cost is the orange that you could have chosen but
you did not)
o When there’s more than 2 alternatives we take the opportunity cost of the best
alternative that has to be sacrificed.
THEREFORE ECONOMICS IS MAINLY ABOUT….

SCARCITY

OPPORTUNITY
COST CHOICE
Quiz time…
 1.3 Illustrating scarcity, choice, and opportunity
costs: the PPC/F
❑ Scarcity, choice and opportunity cost can be illustrated with the aid of a production
possibilities curve / frontier.
❑ The production possibilities curve indicates the combinations of any two goods or
services that are attainable when the community's resources are fully and efficiently
employed.
1.3 Illustrating Scarcity, choice and opportunity Cost: THE
PRODUCTION POSSIBILITY
Production possibility curve: indicates combinations of any two goods that are
attainable when resources are fully used.
 EXAMPLE 1: Table 1-1 page 6
Assumptions
o Simplified economy
o 2 products are being produced
o Limited resources
o Possible combinations
− You have a choice of producing a certain amount of both products
or only one
Possibility Fish (baskets per day) Potatoes (kg
per)
A 0 100
B 1 95
C 2 85
D 3 70
E 4 40
F 5 0
 Cont.….
Calculating Opportunity Cost

Possibility Fish (basket) Potatoes (Kg)

A 0 100

B 1 95

C 2 85

D 3 70

E 4 40

F 5 0

• The opportunity costs for each additional basket of fish produces increases
as more are produced (i.e. as we move along from point A to E)
1.3 Illustrating scarcity, choice, and opportunity
costs: the PPC
1.3 Illustrating scarcity, choice, and opportunity
costs: the PPC

A 0 100
B 1 95
C 2 85
D 3 70
E 4 40
F 5 0
1.3 Illustrating scarcity, choice, and opportunity costs: the
PPC

Can not be achieved with the available

Inefficient (Point H) resources (point G)

H
Opportunity cost – negative slope of
curve
The Production Possibilities Curve (PPC)

Choice

Opportunity
cost

(negative slope)

Scarcity
 The PPC

• SCARCITY is illustrated by all points to the right – unattainable (G)

• CHOICE is illustrated by different combinations (A,B,C,D,E and F)
• OPPORTUNITY COST is illustrated by negative slope of curve
• Producing more of a product means producing less of the other.
• POINT H on the curve illustrates an obtainable but inefficient
combination
• More potatoes can be produced (see point C) without sacrificing production of
fish.
 Shifts in the PPC
1. Improved techniques for 2. Improved techniques for
producing capital goods is producing consumer good is
developed developed
The PPC swivels outward from AB The PPC swivels outward from BA
to AC to BD
3. Improvements in productivity
or an increase in both consumers
and capital resources – Economic
Growth (see Fig 1-4)

o Shift of original PPC from AB to

EF.

o NB! Quantity of resources or

their productivity can also
decline → reduction in output →
inward shifts of the PPC (i.e.
reversals of the shifts illustrated
earlier)
SUMMARY: Production Possibility Curve
 ECONOMICS AS A SOCIAL SCIENCE

Economics studies human behaviour by means of empirical science. This

is done by measuring actual experiences.

Self Study
1.6 Micro- vs Macroeconomics

Micro Macro
 MACRO AND MICRO ECONOMICS

MACRO ECONOMICS MICRO ECONOMICS

• Economy as a whole • Individual parts of the economy

• Total production, Income, • Consumers - Households (what to buy)

Expenditure, Economic growth, • Firms (what to produce, how to
Unemployment, Inflation produce them, at what prices)

• Also seen as the “WORLD OF • The study of demand and supply, Maize
TOTALS” production, Market for Bananas, A firms
decision to import, Price of single
product

Note – There are many overlaps when it comes to macro & micro-econ.

Further differences in BOX 1-3

 POSITIVE AND NORMATIVE ECONOMIC
STATEMENTS

Positive Statement Normative Statement

• Cyril Ramaphosa is the president • Bafana Bafana is the best team in
of South Africa the world!

• The new official colour of NWU is • Economics is the only subject

purple that matters!

• Jacob Zuma was the best

• VAT is now levied at the president South Africa has ever
standard rate of 15% on the had.
supply of goods and services in
S.A
 SOME COMMON MISTAKES IN ECONOMIC
REASONING
1. The blinkered approach – own vantage point.
2. Fallacy or composition – whole is equal to the sum of the parts.
3. Post hoc ergo propter hoc – after this, therefore because of this.
4. Correlation and causation – one event is not the cause of another.
5. Levels and rates of change

Self Study
 Homework – Due in the next class
Palesa is a first year student at Pukke University. She faces a dilemma: we know from looking at
her preferences that she wants both her grades and her free time to be as high as possible. She
cannot increase her free time without getting a lower grade in the exam. Assume that luck plays
no part here.

Possibilities Free time Grades (final marks)

A 0 100
B 13 84
C 14 81
D 19 57
E 20 50
F 24 0

a) Sketch Palesa’s PPC with grades illustrated on the Y-axis.

b) Is it possible for Palesa to get a grade of 70 if she has 20 hours of free time? Illustrate this on
the graph and explain.
c) Is it possible and efficient if Palesa attains a grade of 60 if she has 13 hours of free time?
 REVISE CHAPTER 1

(see Study Guide)

Don’t wait till test day. Start now….

 OUTCOMES COVERED

o The fundamental nature of economics - unlimited wants, scarce

resources and the need to make choices
o As we make choices we incur opportunity costs
o Production possibility Curve is then used to illustrate the three core
concepts of economics
o Economics as a social science (Self study)
o Macro vs. Micro Economics
o Normative and positive statements
o Common mistakes in economic reasoning (Self Study)
o NB! Appendix 1-1: Basic tools of economic analysis (Self Study)
 NEXT CLASS
Prepare Chapter 2: Economic Systems
Thank You
See you next class!