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Xolisa S MboboUniversity of Johannesburg

Economics for Grade 11

Learners

ECONOMIC CONCEPTS AND SYSTEMSEconomic concepts 1-2

Lecture Plan

What is Economics?

Scarcity

Basic economic problems

What are resources

Production possibility analysis

The circular flow of economic activity

The interaction of the economic participants

Economic model of income and consumption

Economic policies

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What is Economics? Economics is the study of how people and society choose to

employ scarce productive resources to produce goods and services and distribute them among various groups of society

ECONOMICS

Macroeconomics Microeconomics

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Microeconomics vs. Macroeconomics

Microeconomics = the study of individual, consumers, firms and industries (‘Micro’ = the ancient Greek word for ‘small’)

It focuses on: The pricing and production decisions of industrial firms Consumer behaviour and The output and state of single industries

Macroeconomics is concerned with how the economy functions as a whole (e.g. total income) (‘Macro’ is the Greek word for ‘large’)

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Scarcity

Every economy is endowed with what we call resources, which are inputs used in the production of goods and services for consumption to satisfy our needs and wants

The basic economic problem of any society is the relative scarcity of resources in relation to the unlimited needs and wants of consumers

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Resources

Resources = All inputs that can be combined in many different ways to produce goods and services of various types to help satisfy people’s unlimited needs and wants

Often referred to as the factors of production

Resources include land, capital, labour and enterprise

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Land

All natural resources and endowments

Examples: soils, crops, minerals, forests, oceans

Critical resource for Australia (e.g. exports)

The least flexible resource

Factor income: rent

Abundant resource for Australia but an increasingly scarce resource for East Asian countries (e.g. Singapore)

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Capital

Any good or service used to produce others (i.e. intermediate goods) e.g. factories, tools, machinery and

equipment Most abundant factor for industrial

countries (e.g. United States, Japan)

Factor income: interest Note: Expenditure on capital is

Investment

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Labour

Labour = Physical and mental work of people, whether, skilled or unskilled

Examples: mechanics, doctors, farmers, computer programmers

Most flexible resource

Most abundant resource in developing countries

Factor income: wages

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Enterprise

Management (e.g. ownership, control and/or coordination) of the other three factors of production (entrepreneurship)

Covers the various organisational skills of ‘entrepreneurs’

Example: business managers

Factor income: profit

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Characteristics of Resources

Scarce

Have alternative uses

Limited, finite

Quantity of resources

Physical amount of resources available

Affected by resource endowment and population

Australia’s cropland is 463 000 sq. km, while Indonesia’s cropland is 324 000 sq. km

Australia’s labour force is around 9–10 million people, while Indonesia’s workforce is over 90 million people

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(cont.)

Characteristics of Resources (cont.)

Quality of resources

Productivity of resources

Affected by technology, education and training of workforce

Land productivity (yield/ha)

Labour productivity (production per person)

We achieve economic growth by increasing the quantity and/or quality of resources

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Consumer Needs and Wants Needs: those things necessary to human survival e.g. food,

shelter

Wants: goods/services desired by the consumer e.g. hi-fi, travel, luxury cars

Characteristics: NEED

unlimited

recurrent

complementary

changeable

WANT

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Satisfying Needs and Wants

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Production

Distribution

Consumption

Basic Economic Questions

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Scarcity Choices must be made

1. What To Produce?2. How To Produce?3. For Whom To Produce?

Opportunity Cost

The Basic Economic Problem of Relative Scarcity is illustrated by two concepts:

Opportunity Cost, and

The Production Possibility Frontier (PPF)

Opportunity cost = The sacrifice (or alternative forgone) in choosing to satisfy one need or want rather than another

Note: Situations where there is NO opportunity cost = free goods

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Production Possibility Frontier (PPF) Theory

A simplified economic model which portrays scarcity, choice and opportunity cost

The Static Production Possibility Frontier Analyses the economy at a fixed point in time Is based on the following assumptions:

There is a fixed quantity of resources The economy only produces two products Resources can be used interchangeably All resources within the economy are used Resources are used at maximum efficiency

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The PPF Graph

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Tractors

Video recorders

200-

400-

300-

100-

800400200 600

PPFE

D

B

C

0

A

Maximum Output Levels

The PPF shows the maximum output of the economy

If the economy devotes all of its resources to the production of VCRs it is able to produce 800 (+ zero tractors)—Production Possibility A

Alternatively, if the economy chooses Production Possibility C it is able to produce 200 tractors and 400 VCRs

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Opportunity Costs

The PPF shows that to produce more of one product means producing less of another

Opportunity costs of production can be measured e.g. if the economy moves from point C to D (along the PPF) it will produce an extra 100 tractors BUT 200 VCRs must be sacrificed

Hence the opportunity cost is 200 VCRs

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Points Outside the Static PPF Points outside the PPF (e.g. X) are not possible using

existing technology and resources

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A

B

.X

PPF

Points Inside the Static PPF

At point Y, the economy is satisfying fewer needs and wants than is possible

This is due to: Resources not being fully employed

and/or

Resources not being used in the most efficient way

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A

B

. Y

PPF

The Dynamic PPF Model

This model differs from the static PPF in that it incorporates changes over time

It demonstrates the effect of changes in the quantity and quality of productive resources e.g. new resource discoveries, improvements in technology

Changes in the quantity and/or quality of resources will SHIFT the PPF

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Dynamic PPF

When the quality/quantity of resources increases (decreases), the economy can produce more (less) of both products and the entire curve will SHIFT outwards (inwards)

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A

Note If the change in resources affects ONLY one product, the PPF will ONLY

shift on one axis e.g.:

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A

B

A

B

OR

The Significance of PPF Shifts

Increased maximum output levels enable:

1. higher levels of consumption

2. greater satisfaction of consumer needs and wants

Improvements in the quality of resources results in the more efficient use of scarce resources

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Basic Economic Activities

Production The use of economic resources in the creation of goods

and services for the satisfaction of human wants.

Consumption The using up of goods and services by consumer

purchasing or in the production of other goods.

Employment The use of economic resources in production;

engagement in activity

Income Generation The production of maximum amount an individual can

spend during a period without being any worse off.

Two Economic Units

Household The basic consuming unit.

Firm The basic producing unit.

Stock and Flow Variables Flow

A quantity measured over a particular period of time.

StockA quantity measured as of a given point in time.

The concepts of stock and flow measurements are essential in understanding the economic variables of wealth and income.

Wealth Anything of valued owned. It is a stock since it is what is

owned at a particular time. Income

The rate at which we earn money. It is a flow since income that is saved, increases the stock of wealth.

Economic Model of Production

The Circular Flow of the Production Process

HOUSEHOLDS

ECONOMIC RESOURCES

GOODS AND SERVICES

PRODUCING UNITS

Circular Flow of Goods Among Production Units

RAW MATERIAL FIRM

CONSUMERS

INTERMEDIATE GOOD FIRM

RAW MATERIALS

FINAL GOODS

INTERMEDIATE GOODS

FINAL GOOD FIRM

Interrelation BetweenProduction Units & Households

HOUSEHOLDS RESOURCES

RESOURCES

RESOURCES

FINAL GOOD FIRM

INTERMEDIATE GOOD FIRM

RAW MATERIAL FIRM

Economic Model of Income and ConsumptionThe Circular Flow of Goods and Income

Among Producers & Households

HOUSEHOLDS INTERMEDIATE GOOD FIRM

RAW MATERIAL FIRM

MONEY PAYMENT FOR PURCHASE OF FINAL GOODS

RESOURCES

MONEY PAYMENT FOR RESOURCES

RESOURCES

MONEY PAYMENT FOR RESOURCES

RESOURCES

MONEY PAYMENT FOR RERESOURCES

FINAL GOODSFINAL GOOD FIRM

The Circular Flow of Income

PURCHASES OF GOODS AND SERVICES

INCOME FLOW OF WAGES, INTERESTS, RENTS

HOUSEHOLDSPRODUCING UNITS

Circular Flow of Income Among Production Units

FINAL GOOD FIRM

RAW MATERIALS FIRM

MONEY PAYMENTS FOR INTERMEDIATE GOODS

MONEY PAYMENTS FOR RAW MATERIALS

INTERMEDIATE GOOD FIRM

HOUSEHOLDSMONEY PAYMENTS FOR FINAL GOODS

The Circular Flow of Output and IncomeCircular Flow of Physical Goods and Money Income

Goods and Services

Factors of Production(land, labor, capital, entrepreneur)

Payments of Factors(rent, wages, interest, profit)

Payment of Purchaseof goods and services.

HouseholdSector

BusinessSector

The Circular Flow ofGoods & Income of Households & Firmswith the Government & Foreign Countries

GOVERNMENT

HOUSEHOLDS PRODUCING UNITS

FOREIGN COUNTRIES

Income Payments of Wages, Rent,Dividends, & Interests

Purchase of Goods & Services

Economic Resources

Taxes TaxesWages, Transfer Payments Purchase of Goods

& Services

Goods & Services

Money Payments forImports

Money Payments forExports

Implications of the Circular Flow of Economic Activity

1. The goods, resources, and money payments will flow as long as households continue to consume, and as long as firms continue to produce.

2. That since goods and resources flow in exchange for payments, the rate of payments flow will in the end be the same. Money is the inducing factor, and the pillar of the price system. Without it, there is no price system.

Inflows and Outflows

Outflows (factors that decrease the level of economic activity)

Savings

Taxes

Import

Outflows are difficult to control because they are dependent on income. When income increases, we expect savings, taxes, and imports to increase.

Inflows (factors that increase the level of economic activity) Investment

Government Spending

Exports

Inflows are easier to manipulate. The proper use of policy enables the government to encourage exports and investments and to increase its expenditures when it desires to expand the flow of economic activity.

Fiscal and Monetary policy

Fiscal- the utilization of certain governmental activities and actions in the development and stabilization of the economy.

Monetary- this pertains to the amount of money circulation or the money supply in our country.

Economic Policies

Monetary policy Affects the savings and investment.

Fiscal policy Controls taxes and government expenditures.

Trade policy Affects a country’s exports and imports.

Elements of Fiscal Policy

Taxation- means of obtaining revenue/s from government, as a means of transferring resources from private to public sector.

Expenditure-means the amount of the expenses of the government to finance the goods and services they provide.

Debt management- how government manage the debts in the country in various forms.

Public Finance

Income- it is the financial resources that the government get from taxes and other revenues.

Outgo- is the government’s expenditure of funds to finance the goods and services.

Public Finance

5 step process

the formulation of fiscal policy.

The generation of revenue from taxation and other sources.

The expenditure of funds through the national budget.

Public borrowings

accountability

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References

This presentation is a mashup of 3 different sources. They are:

Cristabol M. Pagoso, Rosemary P. Dinio, and George. A Villasis . (2011). The circular flow of economic activityhttp://www.slideshare.net/dienshMBA/dmydocspatricelourdescollegepowerpointsecon1thecircularflowofeconomicactivity-090331025031phpapp01Accessed date: 05 March 2014

Faizan Chaudhry. (2011) Economic concepts and systemshttp://www.slideshare.net/HUKKAM/ch01-ppt-7484908Accessed date: 05 March 2014

April Van Diwata. (2013)http://www.slideshare.net/FairywithBraces/fiscal-and-monetary-policyAccessed date: 05 March 2014