Download UNIT 1 WHAT ECONOMICS IS ALL ABOUT

UNIT 1
WHAT ECONOMICS IS ALL ABOUT
PEOPLE LETS GO FOR IT LETS GET OURSELVES
DISTINCTIONS IN ECS1501
ECONOMICS IN ACTION
FROM STUDYGUIDE EXPLAINATION OF PAGES 2 & 3
Lets look at the first article on page 2 of the study guide the 1st article
we should ask ourselves a question why did they put this article at the
start of unit 1 the answer is simple lets look at it carefully!!!!!
ARTICLE 1
• Article 1 extracted from the mail guardian tells us that Joe
Modise wants to buy four gun boats but the cost is going to be
more than the entire RDP ( Reconstruction and development
programme)
• On the other side we see Jay Naidoo can think of other ways to
use that 2,5 billion
Let’s be serious if it was me and you we would have gone for RDP but
why did Joe Modise choose to buy 4 Corvettes!!!
Let me give you the answer after studying this article carefully in 2003 it
was sad to know that South African waters did not have enough security
in terms of gunship navy etc therefore no one knows what’s going to
happen tomorrow we never know that Michael Jackson would die so
early in the same way after this was discussed in cabinet it was decided
that safety comes first and therefore this decision was accepted.
Now let’s look at it in economics!!!!!!!
In economics we are making decisions all the time because we have
unlimited wants and limited recourses we have to make choices.
We have to see in economics how we fulfill our unlimited wants with
limited resources.
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NB OUTCOMES OF STUDY UNIT
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Define the term economics
Explain the difference between wants, needs and demands
Identify the 3 main elements of the basic economic problem
Define the concept of opportunity cost
Explain the economic problem by using a production possibilities
curve
Explain why economics is a social science
Distinguish between microeconomics and macroeconomics
Distinguish between positive and normative statements
Distinguish between levels and rates of change
INTRODUCTION
• Fifty years ago in South Africa economics was at its lowest
stage due to political and racial issues hardly anyone knew
what economics was, even students who went to university to
study accounting did not know a single thing of economics.
• South Africa 2009 everyone knows what economics is and how
important it is, it is taught in schools, universities, websites are
been made daily, newspapers, television shows show it and talk
about it daily, even 533 pages textbooks are printed about
economics like the one we are studying right now.
• Nowadays people are more aware of economics but people
have different view about economics let’s look at some of them.
(a) Some people think economics is all about making money.
(b) Some think its all about buying and selling shares on the
JSE
(c) Some think its all about balance sheets and profit statements
BUT THE BIG QUESTION IS WHAT ECONOMICS IS?
WAIT TAKE A DEEP BREATH I AM GOING TO GIVE YOU THE
TOP 6 DEFENiTIONS I HAVE COME ACROSS REGARDING
ECONOMICS IN MY ENTIRE LIFE.
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DEFENTION OF ECONOMICS TOP 6
1. Economics is a study of mankind in the ordinary business of life.
2. Economics is the art of the making the most out of life.
3. Economics is the only profession in which one can gain great
eminence without ever been right.
4. Economics is the study of how our scarce productive resources are
used to satisfy human wants.
5. Economics is the study of the use of scarce resources to satisfy
unlimited wants.
6. Economics is the study of how individuals, firms, governments,
and other organizations within our society make choices and how
these choices determine how the resources of society are used.
HERE ARE THE TOP 6 DEFENITIONS MY PERSONAL
FAVOURITE NUMBER 5 LEARN 1 DEFENTION AND USE IT FOR
THE REST OF YOUR LIFE.
Examples 1 and 2 show us how wide ranging economics is now to show
you and make you understand how wide ranging economics is I am
going to tell you a economics story!!!!!!
ECONOMICS STORY
Once upon a time in the lovely mountains of Nelspruit there lived a boy
by the name of Tom. Now Tom had just finished Matric now he had to
make many decisions like is he going to go to a college, university, work
full time and study at Unisa? What field of study is he going to go into?
If he finds a job what job will he find? What type of transport will he
use to travel to lectures? What will he wear to campus? If he starts
work what will he do with his pay cheque. The list of decisions that Tom
will have to make is endless.
Tom has so many choices to make and this exactly is what economics is
all about. It deals with choices that people have to make at every
juncture in their lives.
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MORE FACTS ON ECONOMICS
• Economics is derived from the Greek word Oikos meaning
manage therefore it is the science of household management and
as such is concerned with the ordinary business of life.
• Economics is not only involved with choices people have to make
such as Tom it is also involved with decisions governments,
companies and businesses have to make.
Some examples are:
• Should the government invest more money in Transport or should
they invest more money in Health.
• Should BMW expand its production of motorcars
• Should Rothmans increase the price of its cigarettes or should
they decrease it to increase sales
Like Tom businesses and governments have to make choices this brings
us to the fact of scarcity everyone wants to do many things but these
wants are scarce.
Wants- plentiful we all want to do and want a lot of things.
Means- are scarce
Choices- we all have to make choices
The relationship between unlimited wants and scarce resources are so
important that it forms the central focus of many definitions
CENTRAL ELEMENTS OF ECONOMICS THERFORE ARE
SCARCITY AND CHOICE.
NB ON PAGE 5 AND 6 IN THE TEXTBOOK THERE ARE AMNY
QUESTIONS I WILL ANSWER ALL THESE QUESTIONS FOR
YOU AT THE END OF ALL THE UNITS UNDER ADDITIONAL
INFORMATION.
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1. SCARCITY, CHOICE AND OPPURTUNITY COST
Firstly it is important for us to understand all the terminology correctly.
So firstly I am going to explain to all of you the proper terminology.
Wants- are things that we do not necessarily need to survive, but those
we would like to have.
Example: luxury villa, Audi R8 etc, we have biological, spiritual,
material, cultural and social wants while people as a group have
collective wants such as justice etc,
Needs- necessities, things that are essential for survival such as water,
food, clothes. Needs unlike wants are not absolutely limited.
Example: It is possible to calculate the basic needs which have to be met
if a person or household is to survive.
Demands- a demand for a product or service exists when people want to
buy it and also can buy it, in other words if they have the financial
means for it they can afford it.
Opportunity cost- This is the cost of something you have to give up to
get something else, that is, the value of alternative opportunities that
have been given up.
WHY DO WE SAY RESOURCES ARE LIMITED?
3 TYPES OF RESOURCES
1. Natural resources- agriculture, minerals
2. Human resources- labour
3. Man mad resources- machines
• These resources are the means with which goods and
services can be produced therefore we call them factors of
production.
• All societies are faced with unlimited wants and limited
needs they therefore have to make choices.
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LET’S TAKE A LOOK AT SOME EXAMPLES:
1. Betty goes to the shop R20 in her pocket, she wants to buy a
burger and a coke. But her resources are limited she cannot buy
both a burger and a coke one of the items have to be sacrificed.
2. Sipho is at home on Saturday night because he has to study
however his friend phones him and tells him lets go to the movies
Sipho cannot do both the things he has to sacrifice one of the
things.
We see from these examples the difficult choices people have to make
some wants will be satisfied and others unsatisfied.
Economics decisions are also very difficult due to the fact we stay in a
world with scarcity forces, when resources are used to produce a certain
good then they are not available to produce something else.
ECONOMIC PROBLEM, SCARCITY AND EXTRA INFO
• Because resources are scarce the use of resources can never be
costless there is always going to be costs involved, even if the cost
are not apparent to consumers of goods and services
• Economist called this principle the TANSTFAAL principle.
Because the acronym means “There aint such a thing as free
lunch” someone always has to pay.
• Economics may be called the ‘dismal science” because it deals
with scarcity.
• Scarcity and poverty are different.
• Scarcity affects everyone even the rich. The richest person on this
world also has unlimited wants.
What is the economic problem????????
Scarcity is the essential element of the economic problem but the need
for decision making only arises when scarce resources have to be
allocated between competing alternatives.
Example: If you have one goal in life and limited resources to achieve
that goal you resources are scarce however with one goal you will not
have an economic problem to solve.
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If you look at the earlier example with Betty and Sipho they were faced
with difficult choices, between different alternatives this is where the
economic problem arises.
OPPURTUNITY COST
Opportunity cost- This is the cost of something you have to give up to
get something else, that is, the value of alternative opportunities that
have been given up.
EXAMPLE: If Betty has to choose between the burger and coke the
opportunity cost of the burger would be the coke which she has to give
up when there more than two alternatives the opportunity cost becomes
more complicated, than the best alternative has to be sacrificed.
Opportunity cost of choice- the value to the decision maker of the best
alternative that could have been chosen but was not chosen.
• Every time a choice is made opportunity costs are incurred and
economist always measure cost in terms of opportunity costs.
• For an economist the cost of something is what you have to give
up to get it.
• Opportunity cost one of the most important concepts of economics
because it captures the essence of the scarcity and choice.
• Also Essential element of economic way of thinking.
PRODUCTION POSSIBILITIES CURVE
Production possibilities curve- A curve that illustrates the various
combinations of two products that a producer may produce by
allocating the available resources fully and effectively to the two
products.
NOW I WANT YOU ALL TO LOOK AT TABLE 1-1 AND FIGURE11 I AM GOING TO VERY SIMPLY EXPLAIN YOU WHATS
HAPPENING WITH THIS GRAPH SO THAT YOU UNDERSTAND
SUPERBLY
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Basically what is happening there is a rural area in the Wild Coast
• People have found if they devote all their time and resources to
fishing they can produce 5 baskets of fish per working day.
• People also have found that if they devote all their time in the
garden for the production of potatoes they can produce 100kg per
day.
• Either way one of the productions has to be sacrificed
• If the people want to have a balance of both they have to balance
their productions.
NOW I WANT YOU ALL OF YOU TO LOOK AT TABLE 1-1 IN
THE TEXTBOOK PAGE 8 LETS LOOK AT WHAT THOSE
FIGURES ARE
• Figures show maximum amounts which can be produced with
available resources.
• Lets look at E they will be able to produce 4 baskets of fish and
40kg of potatoes.
• They have to decide if they want to produce more potatoes or fish,
• Therefore in producing 4 baskets of fish they have to forgo 60 kg
of potatoes likewise in producing 40kg of potatoes they have to
forgo 1 basket of fish.
• We can now say opportunity cost of producing 40kg of potatoes is
1kg of fish
• Opportunity cost of producing 4 baskets of fish is 60kg of
potatoes.
NOW LETS LOOK AT THE PPC CURVE AND ANALYSE IT
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Fish production measured on horizontal axis.
Potatoes production measured on the vertical axis.
0 is the origin, here the 2 axis cross at the value of zero.
A,B,C,D,E,F In the diagram form the PPC curve
From point A to B right down to F the production possibilities
increases
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• As we go downward the opportunity cost of each additional
basket increases
• Therefore the curve bulges outwards or form a concave shape to
the 0
• Scarcity is illustrated by the fact that all points to the right of the
curve are unattainable cannot be reached
• Choice is illustrated by the need to choose among the available
combinations along the curve
• Opportunity Cost is illustrated by the negative slope of the curve,
which means one good can only be obtained by sacrificing the
other good therefore opportunity cost, involves the trade-off
between the 2 goods.
DEAR READERS AND STUDENTS I WOULD LIKE ALL OF YOU
TO NOW DO ACTIVITY 1 IN THE STUDY GUIDE AND SEE IF
YOU CAN ANSWER ALL THE QUESTIONS EASILY IF YOU
HAVING ANY PROBLEMS WITH UNDERSTANDING UP TO
ACTIVITY 1 EMAIL ME.
ECONOMICS AS A SCIENCE
ECONOMICS IS A SOCIAL SCIENCE
• Economics is a science
What does economics involve?
1. Involves a systematic attempt to discover regulate patterns of
behavior these patterns are used to explain what is happening and
to predict what might happen.
2. It assists policy makers to devise or choose appropriate economic
policies
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EXAMPLE: WE HAVE THE OIL PRICE WHAT DOES
ECONOMICS DO?
• It assists us in explaining the level of the oil prices, or why it has
been changed.
• It helps us to predict what price will be in the future and what will
happen to the economy if the oil price increases.
• It also provides authorities with useful information to decide on
policies with regard to the oil prices.
Social Science- Science that deals with groups of people and the way
they act and think.
Natural Sciences- Sciences that deal with nature and general laws.
Difference between Social Science and Natural Science.
NATURAL SCIENCE
Possible to conduct controlled
experiments.
Found in the nature of their
generisations certain natural laws
can be found ex, law of gravity
SOCIAL SCIENCE
Study behavior of people in
constantly changing environments.
Do not use generisations
Ceterus Peribus- in Latin means all things are equal, Conditional law
which says that the quantity demand will increase when price falls,
provided all things remain the same.
Essential part of economic reasoning.
Economics is also an empirical science which means the actual
experiences are measured and studied.
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MICROECONOMICS AND MACROECONOMICS
Microeconomics- in microeconomics, the decisions and actions of
decision makers such as individual consumers, households, firms or
other organizations are studied separately from the rest of the economy.
Macroeconomics- Concerned with the economy as a whole. It studies the
overall economic system and total economic behavior.
DIFFERENCES BETWEEN MICROECONOMICS AND
MACROECONOMICS
MICROECONOMICS
1. The price of a single product
2. Changes in price of products,
like tomatoes
3.The production of maize
MACROECONOMICS
1. The consumer index price
2. Inflation( the increase in general
level of prices in the country)
3. The total output of all goods and
services in the economy
4. The decisions of individual
4. The combined outcome of the
consumers
decisions of all the consumers in
the country
5. The decisions of individual firms 5. The combined decision of all
or businesses, like a factory
firms in South Africa
6. The market for individual
6. The market of all goods and
goods, like banana’s
services in the economy
7. The demand for a product like
7. The total demand for all goods
maize
and services on the economy
8. An individuals decision whether 8. The total supply of labour in the
or not to work
economy
9. A firms decision whether or not 9. Changes of total supply of goods
to expand its production
and services in the economy
10. A firm’s decision to export its
10. The total exports of goods and
products
services to other countries
11. A firm’s decision to import a
11. The total import of goods and
product from abroad
services from other countries.
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The difficulties that are some times experienced in distinguishing
between micro and macroeconomics have given creation to an inbetween level called mesoeconomics.
POSITIVE AND NORMATIVE ECONOMICS
POSITIVE STATEMENT
Positive statements are objective facts they can be proved right or
wrong on the basis of science or facts.
Examples are:
• Santos won the Supa 8 in 2006
• Jacob Zuma was the South African newsmaker in the year 2006
• The rand appreciated against the euro in 2006
• Tiger Woods won the US Open in 2007
• In 2009 the average South African inflation rate, based on
consumer price index, was 6,0 percent.
NORMATIVE STATEMENTS
• Normative statement involves an opinion or judgment.
• Normative issues can be debated but they can never be settled by
science or by an appeal to facts.
• Normative statements include words such as “should”, “ought”,
“desirable” and “must”
Examples are:
• The South African inflation rate is too high
• Gerrard is a better footballer than Ronaldo
• Economic policy in South Africa should primarily be aimed at
reducing unemployment
• Capitalism exploits workers
• Poverty is the direct result of the apartheid system
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DEAR READERS AND STUDENTS I WOULD LIKE ALL OF YOU
TO NOW DO ACTIVITY 2 IN THE STUDY GUIDE AND SEE IF
YOU CAN ANSWER ALL THE QUESTIONS EASILY IF YOU
HAVING ANY PROBLEMS WITH UNDERSTANDING UP TO
ACTIVITY 2 EMAIL ME.
LEVELS AND RATES OF CHANGES
Consumer price index-measures the level of prices in a country, we then
calculate the rat of change of that level to determine the inflation rate.
• Inflation rate measured in percentages
• CPI and PPI measures the inflation in a country
LETS LOOK AT PAGE 15 IN THE TEXTBOOK
1. the first example shows us that the CPI increases from 200 to 220 the
rate of increase is 10%, but how do we work this out:
Calculation:
220-200
=20
= 20/200* 100/1
= 2000/200
=10%
Therefore we see you put the difference of the CPI over the original CPI
amount and then you times it by a 100 to get the percentage increase.
2. With the second example where they ask you the percentage of
something for example 50% of 300.
Then you put the percentage amount over 100 and times it by the
normal amount to get an answer.
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