Economics

• Economics is the scientific study of how man uses scarce resources to

  produce goods and services to satisfy his wants.


  The economy is the mechanism through which these scarce resources are organised for the production of goods and services.
• Choice is the range of options available to the individual

  household, firm or government when making a decision.
• Opportunity cost is defined as ‘the next

  best alternative forgone’.
• A resource is any factor of production used by an organisation to produce its output
• Scarcity refers to the fact that there is never enough of anything to satisfy all our needs and wants
• An economic system is the way in which an economy operates
• The production possibility frontier (also called a production possibility ‘curve’ or ‘boundary’) is a graph showing the various combinations of two goods that an economy is able to produce with fixed resources.
• A production possibility

  frontier is drawn on the following assumptions.

  • The economy produces only two goods.

  • The amount of resources is fixed.

  • Each of the goods can be produced using changing ratios of the factors of

  production. This is called ‘variable factor proportions’.
• Factors that could cause the production possibility frontier to move outwards

  are:

  • economic growth;

  • discovery of new natural resources;

  • growth in population;

  • technological progress;

  • improvements in labour productivity.
• The main economic agents are households, firms and the government.
• Since resources are scarce and wants are unlimited, scarcity exists. Scarcity necessitates choice, and making a choice involves incurring an opportunity cost.
• Money cost is what is paid to produce a good or a service and is different from opportunity cost, which is the alternative forgone.
• The production possibility frontier can be used to illustrate scarcity, choice and opportunity cost.
• Economic decisions is where an individual is faced with options and chooses one course of action.
• Factors affecting the decisions of individuals are:

  • personal choice;

  • size of income;

  • bandwagon effect (peer pressure);

  • type of work;

  • level of education;

  • rate of interest;

  • climate and weather conditions.
• Factors affecting the decisions of firms are:

  • costs of production;

  • profits;

  • resource base;

  • industrial relations;

  • changing demand.
• Economic growth is the increase in real per capita gross domestic product (GDP).
• Inflation is when there is a general rise in prices across the economy over time.
• Factors of production are the economic resources that are used to produce goods and services.
• Land is defined as all the factor services available naturally, whether on, above or beneath the earth’s surface
• Characteristics of Land:

  • It is fixed in supply.
  • There is no cost to produce(it already exists).
  • Land is immobile.
  • It is used in almost all production.
• The labour supply refers to those people who are available for work in the economy
• Labour is the physical and mental effort of man in the production process.
• Capital refers to all the goods used to produce more goods.
• Entrepreneurship refers to the risks involved in organising the other three factors for production.
• An entrepreneur is one who is willing to take on substantial financial risks to begin or organise a business.
• Characteristics of Labour:

  • Labour is the human factor.
  • Labour services cannot be stored in the same way as units of land or capital.
  • Labour is geographically and occupationally more mobile than land.
  • Labour is not homogeneous
• Characteristics of Capital:

  • Capital is man-made.
  • Units of the same type of capital are homogeneous.
  • Mobility of capital varies.
  • Capital can be imported.
• Types of Capital:

  • Physical Capital- also known as fixed capital, remains fixed for a certain range of output.
  • Working Capital- is intermediate goods and raw materials used in production.
  • Social Capital- are the goods and services which help the economy to function.
  • Human Capital- consists of the abilities and skills of people, which is obtained through education and training.
• Features of an enterprise:

  • It combines the other three factors of production in a profitable manner.
  • It bears the risk of production/business venture. If the venture is not profitable the entrepreneur incurs the loss and is responsible for the cost of each of the factors employed.
• Factors of Production rewards:

  • Land- rent.
  • Labour- wages.
  • Capital- interest.
  • Enterprise- profit.
• Goods are tangible products whereas services are intangible.
• • Producer goods are goods, such as machinery, that help in the production of other goods and services.
  • Intermediate goods are goods that are used as inputs in the production of other goods and services.
  • Final goods are goods that are bought by consumers for use or consumption.
• Production: the act of converting raw materials into finished goods and services. It is done by converting the four(4) factors of production into goods and services that can be consumed.
• Productivity: describes how well a factor converts inputs into outputs. This can be measured by calculating the amount of output produced by each unit of input.
• Labour productivity = Quantity of output

  Quantity of labour used

  Productivity of land = Quantity of output

  Quantity of land used

  Productivity of capital = Quantity of output

  Quantity of capital used
• Formula for Productivity: Units of Output

  Units of Input
• Resource allocation: is the act of dividing up the scarce resources of the economy to produce different goods and services to meet the needs and wants of society.
• Resources: all materials available in our environment to help us satisfy our needs and wants.
• An Economic System: the means by which societies organise and distributes available resources.