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The first lesson of economics is scarcity: There is never enough
of anything to satisfy all those who want it. The first lesson of
politics is to disregard the first lesson of economics. Thomas
Sowell (American academic, 1994) Introduction to Economics
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Lesson ObjectivesBy the end of this lesson you will:
Be familiar with what the subject of Economics is and what it
involves
Be able to state the basic economic problem
Know what an economic system is and be able to identify the main
types of economic system
Be able to name the 4 economic resources (aka the Factors of
Production)
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What is Economics?
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What is Economics?If you ask somebody in the street to describe
to you what Economics is they are likely to look at you with a
blank expression. However the following list of questions are asked
frequently by people all over the country:
Why can't we just pay doctors and nurses more money?
Why can't I just get a grant to go to university?
The unemployed should get off their backsides and get a job!
Why do people always get so excited about interest rate
changes?
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What is Economics?Inflation - no idea what it is; it doesn't
affect me!
It's obvious that fining polluters would stop them from doing
it!
We should just wipe out the debt that third world countries owe
us
I never seem to have enough to get what I want; I wish I could
win the lottery - not millions just enough to get by!
That CD I bought was a real bargain at 10- I would have paid
anything up to 30 to get it it is sooo cool!
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What is Economics?What happens when oil eventually runs out?
It's crazy, fishermen are catching decent fish and have to throw
half of them overboard - even though they are dead!
It's not fair, they are the only firm I can buy from and they
are so expensive; I don't have any choice!
It's so annoying, the price of my train journey is twice as
expensive before 9 o'clock!
Not another threatened strike, why don't they just go back to
work?
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Types of Economics EconomicsMicroeconomics: focuses on
individual markets and decisions by individual households and
firmsMacroeconomics: focuses on the economy as a whole, e.g. it
considers the price level for the economy as a whole, rather than
for one market.
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Type of Economics Positive economics: is based on testable
theories. E.g. the idea that higher interest rates leads to a fall
in aggregate demand can be tested by looking at past data.
Normative economics: is based on opinion. Normative statements
often have should or ought to in them; they involve value
judgements. E.g. the government should make improvements in the NHS
its number one priority is one persons view; another person might
think the government ought to increase growth.Economics
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Have you ever met a genie?
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A genie grants you 3 materialistic wishesYou find a magic lamp
and the genie grants you 3 materialistic wishes, a once in a
lifetime offer, but sets the condition that once granted it will
make you ecstatically happy.
So you choose.
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A genie grants you 3 materialistic wishesSo what 3 things did
you wish for to make you ecstatically happy?
Have you satisfied all of your wants and needs in life?
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What does this tell us about the Economic problem?There are
certain things in life that we need. For example we all need food,
water, warmth and shelter if we are to stay alive.
There are also some psychological and emotional needs that we
have. For example people have a desire for self esteem and to be
loved.
However these needs are limited or FINITE. There is a basic
minimum to what we need to stay alive.
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Unlimited WantsBUT, we all have UNLIMITED WANTS.
It does not matter whether you are the poorest peasant in the
Third World, a labourer in Eastern Europe, a manager in the UK or
Bill Gates and Warren Buffett (40.0bn & 37.0bn respectively,
Forbes Billionaires List, March 2009)
There is always something that we will want or want more of.
This can include more food, a bigger house, a longer holiday, a
cleaner environment, more love, more friendship, better
relationships, more self-esteem, greater fairness or justice, world
peace or more time to do the things we enjoy.
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The issue of scarcityThe problem is that we live in a world with
limited resources. There is a FINITE amount of land, water, oil,
food and other resources available.
Economists say that resources are SCARCE. Resources that are
scare are called ECONOMIC GOODS.
Not all resources are scare. For example there is more than
enough air on the planet for everyone. We call resources that are
not scarce FREE GOODS. However as the worlds population has
increased so has the number of free goods.
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The Basic Economic Problem The Basic Economic Problem can be
defined as follows:Resources are scarce but wants are infinite
This leads to the issue of CHOICE. Economics is the study of how
society chooses to allocate its finite resources.
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A definition of EconomicsEconomics is the study of how society
decides what, how, and for whomTo produceBegg, Fischer and
Dornbusch, 1997
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Opportunity CostEvery choice we make involves a range of
alternatives. A major part of economics is understanding that if
one choice is made, then others have to be forgone.
By opting for one choice we lose the benefits associated with
the alternatives.
The benefit lost from the next best alternative is called the
opportunity cost.
E.g. If you have 50p and can buy either a Mars bar or a Snickers
then the opportunity cost of buying the Mars is the benefit you
would have gained from eating the Snickers.
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An Economic System Societies need an economic system to
decide:What gets producedHow it get produced(Crucially) Who gets
what
There are various ways in which economic systems can be managed.
You need to know about the various sectors of the economy, the 3
main types of economy and the the 2 main types of production
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Sectors of the economyPrivate sector: resources owned by private
individuals
Public sector: resources owned by the State
Primary sector: extractive industries (e.g. coal, fishing,
forestry)
Secondary sector: converts primary materials into goods (e.g
manufacturing)
Tertiary sector: the service sector (e.g. finance, tourism)
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Types of EconomyFree MarketMixed EconomyCommand or Planned
EconomyPublic sectorPrivate sectorCubaChinaHungarySwedenUKUSAHong
Kong
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Types of Economy Free market: the allocation of resources if
left to market forces of supply and demand
Mixed economy: some of the decisions are made by the Government
and some are made by market forces
Command or planned economy: the Government decides what is
produced, how it is produced and for whom.
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Factors of production Another way of looking at economics is as
the study of how wealth is created. The creation of wealth involves
taking resources and transforming them into products or services
that can them be used (consumed) in some
way.INPUTSOUTPUTSPRODUCTION
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Factors of
productionOUTPUTSPRODUCTIONINPUTSLANDLABOURCAPITALENTERPRISE
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Factors of production: Land (a natural resource)Land in the
economic sense is the natural resources of this planet.
It is not only land itself, but also what lies under the land
(like coal and gold), what grows naturally on top of the land (like
forests and wild animals), what is over the land (like the air and
space), and what is around the land in the seas and oceans (like
fish and oil).
Only one major resource is for the most part free - the air we
breathe. The rest are scarce, because there are not enough natural
resources in the world to satisfy the demands of consumers,
producers etc.
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Factors of production: Labour (a human resource)Labour: is the
human input into the production process. It is not just the work
that is done but includes what we as people bring to the production
process, including personal attributes, individual aptitudes and
skills and capabilities.
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Factors of production: Labour (continued)There are approximately
6.7 billion people on this planet. Many of these are too young, too
old or too ill to work. In the UK, of about 58 million inhabitants
only approximately 36 million are of working age (16 - 64 years for
men and 16 - 59 for women), and of those only about 26 million have
paid jobs. Two important points need to be remembered about labour
as a resource:Just because a person has not got a paid job, it does
not mean that he or she does not produce goods and services. A
housewife, a keen gardener and a DIY enthusiast all produce goods
and services, but they do not get paid for them.Not all labour is
of the same quality. Some workers are more productive than others
because of the education, training and experience they have
received. This is called human capital. The greater the human
capital of a worker, the more productive he or she will be.
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Factors of production: Capital ( a man-made resource)Capital:
includes money but is more than just money. Specifically it is the
assets that are used to produce goods and services including
factories, machinery and equipment that help to transform the
land
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Factors of production: Enterprise (an organising
resource)Enterprise: this is the process of managing and deciding
how factors should be confined and to what end. Being enterprising
my also involve taking risks and guessing what goods or services
are likely to be in demand.
An entrepreneur is an individual:Who risks his or her own
resources (money in most cases) in a business venture; andWho
organises the business- that is, organises the other three factors
of production. Thus, is both a risk-taker and a decision-maker.
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Types of production Capital intensive: uses relatively high
amounts of capital compared to the other factors of production. An
example of a capital intensive industry is oil refining
Labour intensive: uses relatively high amounts of labour
compared to the other factors of production (e.g. hair
dressing)