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

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)

What is Economics?

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?

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!

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?

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.

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

Have you ever met a genie?

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.

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?

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.

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.

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.

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.

A definition of EconomicsEconomics is the study of how society decides what, how, and for whomTo produceBegg, Fischer and Dornbusch, 1997

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.

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

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)

Types of EconomyFree MarketMixed EconomyCommand or Planned EconomyPublic sectorPrivate sectorCubaChinaHungarySwedenUKUSAHong Kong

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.

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

Factors of productionOUTPUTSPRODUCTIONINPUTSLANDLABOURCAPITALENTERPRISE

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.

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.

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.

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

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.

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)