econs 101 introduction to economics 1 - · pdf fileecons 101 introduction to economics 1...

College of Education

School of Continuing and Distance Education 2014/2015 – 2016/2017

ECONS 101

Introduction to Economics 1

Session 2 – Introduction II

Lecturer: Mrs. Hellen Seshie-Nasser, Department of Economics Contact Information: [email protected]

Session Overview

• This session involves understanding the concept of resources in economics and analyzing some fundamental such as scarcity and choice as well as opportunity cost. It also discusses specialization and trade, economic systems and allocation of resources

Mrs. Hellen Seshie-Nasser, Dept of Economics, University of Ghana

Slide 2

Session Objectives

• At the end of the session, the student should be able to: – Identify types of economic resources and types of income

associated with various factors.

– Define the economizing problem, incorporating the relationship between scarcity (limited resources) and unlimited wants.

– Understand the concept of opportunity cost and how to determine the opportunity cost of a chosen decision.

– Use the concept of PPF to demonstrate scarcity, opportunity cost, efficiency, and economic growth.

– Understand Absolute and Comparative advantages in trade.

– Appreciate the fundamental Economic problems, the types of economic systems and the ways of allocating resources to solve basic problems. The student should also be able to give real life examples of each of the economic systems discussed.


Slide 3

Session Outline

The key topics to be covered in the session are as follows:

• Factors of Production

• Scarcity and Choice

• Opportunity Cost

• The Production Possibility Frontier

• Specialization and Trade

• Absolute and Comparative Advantage

• Economic Systems


Slide 4

Reading List

• Lipsey R. G. and K. A. Chrystal. (2007). Economics. 11th Edition. Oxford University Press.

• Bade R. and M. Parkin. (2009). Foundations of Microeconomics. 4th Edition. Boston: Pearson Education Inc.,

• Begg. D. Fischer S. and R. Dornbusch. (2003). Economics. 7th Edition. McGraw-Hill

Mrs. Hellen Seshie-Nasser, Dept .of Economics, University of Ghana

Slide 5

What are Resources?

• Economic resources, also referred to as factors of production, are the inputs employed in the production of goods and services. These include:

– Land

– Labour

– Capital

– Entrepreneurship


Slide 6

Land:

• The term “land” in economics widely refers to all natural productive resources (inanimate) freely given by nature such as:

Arable land,

Forests, wildlife

Rivers

Sea,

Mineral

Mineral deposits which man has no hand in its creation

Types and Nature of Resources

Slide 7 Mrs. Hellen Seshie-Nasser, Dept .of Economics, University of Ghana

• Labour: It refers to all human resources, both mental and physical,

inherited and acquired which are employed in the creation of wealth (production of goods and services) for which economic reward in the form of wages and salaries are received in return.

• It is the services of labour which is bought and sold and not labour itself.

Measures of labour – size of labour force (quantity)

– skills of labour force (quality)

– human capital

– the value of time Slide 8


Types of Labour

• Skilled – Developed or specialized mental effort used in the production of goods and services e.g. Doctors, Accountants, engineers.

• Unskilled – The use of manual or physical strength and little or no training at all e.g. watchman, grave digger, chop bar ‘fufu’ pounder, porter, etc.


Slide 9

• Capital: These are man-made goods which are not consumed directly but used

in the production of goods and services. It has two main characteristics; – It is man-made and accumulated out of income through savings and

investment. – It is not consumed directly.

• Physical capital -- goods used to make other goods -- factories -- machines -- infrastructure

NOT financial capital (stocks, bonds, bank loans)

• financial capital facilitates building of physical capital


Slide 10

Entrepreneurship

• Entrepreneurship/Enterprise: It is the act of coordinating the other three factors of

production in order to produce goods and services. An entrepreneur is the risk bearer who co-ordinates the other three factors of production in the most efficient way in order to maximize profit.

• Human resource • Ideas about -- doing things better

-- e-commerce -- new products

Mrs. Hellen Seshie-Nasser, Dept .of Economics, University of Ghana Slide 11

• Resources are relatively scarce

• They have alternative uses

• They are combined in varying proportions to produce a given good or service. In other words, resources are substitutable. One can be substitute for the other.

Characteristics of Factors of Production


Slide 12

• Scarcity

– Situation in which the amount of resources available is insufficient to satisfy all the alternative uses for it.

• As a result, economic agents end up making choices from

the alternative uses

Scarcity and Choice


Slide 13

• There are an unlimited variety of scarcities, however they are

all based on two basic limitations; • Scarce time • Scarce spending power

• Limitations forces each of us to make choices. • Economists study choices we make as individuals, and

consequences of those choices. • Economists also study more subtle and indirect effects of

individual choice on our society.

Scarcity and Individual Choice


Slide 14

• The problem for society is a scarcity of resources

– Scarcity of Labour • Time human beings spend producing goods and services

– Scarcity of Capital

• Something produced that is long-lasting, and used to make other things that we value – Human capital – Capital stock

– Scarcity of land

• Physical space on which production occurs, and the natural resources that come with it

– Scarcity of entrepreneurship

• Ability and willingness to combine the other resources into a productive enterprise

Scarcity and Social Choice


• As a society our resources (land, labor, and capital) are insufficient to produce all the goods and services we might desire. In other words, society faces a scarcity of resources

• The scarcity of resources and the choices it forces us to make

is the source of all of the problems studied in economics

– Households allocate limited income among goods and services – Business firms choices of what to produce and how much are

limited by costs of production

– Government agencies work with limited budgets and must carefully choose which goals to pursue

Scarcity and Economics


• Economists study these decisions to:

– Explain how the economic system works

– Forecast the future of the economy

– Suggest ways to make that future even better


Slide 17

• The basic economic problem is scarcity:

-- wants are unlimited, but resources are limited

• so with scarcity, we must make choices,

• and with choices, come costs

• Cost is the opportunity cost

-- what you give up when you make a choice

-- “there’s no such thing as a free lunch”

Opportunity Cost


Cost of going to college includes:

• what you can buy with the tuition fees

• what you could earn by working

• what you could do with the free time

• you are willing to give up to come to the university because you expect higher income or more rewarding career

-- tuition

-- wages

-- leisure time


Slide 19

• Opportunity cost is the cost of goods or services measured in terms of the lost opportunity to pursue the best alternative activity with the same time or resource. It includes the explicit cost of the chosen alternative and the lost benefits that accrue to the next best alternative activity in which the resource can be put to use.


Slide 20

Cost of education/college Tuition and fees ¢ 5800 Books and supplies 400 Transportation to and from school 400 Room and boarding 2900 Personal expenses 700 Total out of pocket cost ¢ 10200 • If instead of sitting in the classroom, he decides to get an employment, how much would

he have made, e.g. 8000.

Budget for Opportunity cost Tuition and fees 5800 Books and supplies 400 Transportation 400 Forgone income 8000 Opportunity cost 14600

Illustration of Opportunity Cost


Slide 21

• Costs of room & boarding and personal expenses are not part of the opportunity cost of college because in making such costs one is not really giving up the opportunity to spend on something else. Whether one goes to school or not he will eat, live somewhere and buy clothes.


•The PPF is a curve showing the combination of maximum outputs of two goods (and services) that can be produced at a point in time by fully utilising the limited resources available and the best known technology.

•The curve can be used to illustrate the concepts of;

• Efficiency

• Trade-offs

• Opportunity Cost

• Economic Growth

The Production Possibility Frontier


The PPF

Assumptions • We are dealing with a very simple economy in which only two

goods are produced, say X and Y (food and defence). • There are fixed level of resources, X and Y • The level of technology is constant • Resources can be combined in various ways to produce the

goods or services • The economy uses all its available resources


60

A B

C

D

E

80

Y

40

20

200 400 600 800

G

F

X

Bundle Y X

A 80 0

B 60 200

C 40 400

D 20 600

E 0 800

Assuming given technology and the resources of the economy,

these combinations of X and Y can be produced.

The information is presented in a graph

called PPF as follows

To move from one combination to other,

say from A to B, some units of Y are lost

while some units of X are gained because

all resources are utilized in the production

process. Hence, there is a trade-off. The

opportunity cost of moving from one

bundle to the other is calculated as:

The opportunity cost of producing more of X by

moving from A to B


• Producing along the PPF A to E means the economy is producing efficiently, i.e. resources are being utilized efficiently.

• Point G indicates the concept of scarcity. It is an unattainable point, i.e. resources, are not sufficient enough to produce at point G.

• At point F, resources are being under-utilized or underemployed. They are not used efficiently.

• The slope of the PPF indicates the concept of opportunity cost

• The frontier is curvy and not a straight line because there is no perfect substitutability among the factors of production. Some commodities are better produced than others given the same level of resources. E.g. labour for producing food or tractor.

Features of the PPF


Shifts in the PPF

• Changes (increases) in resource endowment OR

• Technological improvement

• then the PPF will shift out

– produce more food and more defence

– economic growth!


Slide 27

Food

Defence

Shifts in the PPF


Slide 28

• You might have woken up this morning to an alarm clock made in Korea.

• You might have taken a beverage made of cocoa grown in Ghana and the Milo made in Nigeria.

• You put on some clothes made of cotton grown in USA or Ghana and sewn in factories in Thailand.

• You watch/listen to the morning news broadcast on your TV/Radio made in Japan.

• You receive calls on a phone made in China, USA or UK

• You drive (driven in) to class in a car made of parts manufactured in a half-dozen different countries.

Specialization and Trade


Specialization

• In ancient times, we had hunters and gatherers who made

most of the things for themselves. But in modern societies where people began agricultural production and began living in towns, it is almost impossible to make everything for oneself; leading to specialisation in specific jobs.

• The question of ‘how do we get the most out of our resources? became dominant.

• Specialization of labour is the allocation of different jobs to different people.

• We specialize in what we do best and trade that for what we need


Specialization

For example:

• I teach.

• I get paid for it.

• I use the money to buy

• food

• fuel

• Clothes made by others


Slide 31

• If I… • grew my own food

• made my own clothes

• fixed my own car

• I would not consume as much

• Specialization produces gains!

• I can consume more than what I could make on my own


Slide 32

Specialization

• How do we satisfy our wants and needs in a global economy?

– We can be economically self-sufficient.

– We can specialize and trade with others, leading to economic interdependence.

• Individuals and nations rely on specialized production and exchange as a way to address problems caused by scarcity. But this gives rise to two questions:

– Why is interdependence the norm?

– What determines production and trade?

Slide 33 Mrs. Hellen Seshie-Nasser, Dept .of Economics,

University of Ghana

Specialization

• Why is interdependence the norm?

– Interdependence occurs because people are better off when they specialize and trade with others.

• What determines the pattern of production and trade?

– Patterns of production and trade are based upon differences in opportunity costs.


Specialization

• Differences in the costs of production determine the following: – Who should produce what?

– How much should be traded for each product?

Differences in Costs of Production

• Two ways to measure differences in costs of production: – The number of hours required to produce a unit of output

(for example, one basket of potatoes). OR

– The opportunity cost of sacrificing one good for another.

The Principle of Comparative Advantage


• Absolute advantage is the comparison among producers of a good according to their productivity. It describes the productivity of one person, firm, or nation compared to that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.

Absolute Advantage


Example

• A Rancher needs only 10 minutes to produce a bunch of plantain, whereas the Farmer needs 15 minutes.

• The Rancher needs only 20 minutes to produce a kilogram of meat, whereas the Farmer needs 60 minutes.

• The Rancher has absolute advantage in the production of both plantain and meat.

Rancher

Farmer


• In determining comparative advantage producers of a good are compared according to their opportunity cost. That is, whatever must be given up to obtain some item. The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.

From the earlier example;

– Who has the absolute advantage? – The farmer or the rancher?

• Who has the comparative advantage?

– The farmer or the rancher?

Opportunity Cost and Comparative Advantage


Opportunity cost of 1 Kg of Meat 1 bunch of Plantain

Farmer 4 baskets of cassava ¼ kg of meat Rancher 2 bunch of plantain ½ kg of meat

The Farmer’s opportunity cost of a kilogram of meat is 4 bunches of plantain, while the Rancher’s opportunity cost of a kilogram of meat is only 2 bunches of plantain. The Rancher has a lower opportunity cost here. The Farmer’s opportunity cost of a bunch of plantain is ¼ kilograms of meat, whereas the Rancher’s opportunity cost of a bunch of plantain is ½ a kilogram of meat. The Farmer has a lower opportunity cost here. …so, the Farmer has a comparative advantage in the production of cassava but the Rancher has a comparative advantage in the production of meat.


• Differences in opportunity costs are the basis for specialized production and trade. Whenever potential trading parties have differences in opportunity costs, they can each benefit from trade.

Comparative Advantage


Slide 40

The bottom line:

• Scarcity & opportunity cost are unavoidable.

BUT

• Efficiency & specialization makes the most of scarce resources


Economic Systems and Allocation of Resources

• Scarcity means there are not enough resources to satisfy all wants, hence choices must be made. This therefore poses three fundamental economic questions:

1. What to produce?

2. How to produce (the stuff in #1)?

3. For whom to produce? (who gets the stuff in #1?)


Economic Problems

• Any given economy decides what to produce to satisfy the wants of the people.

• It then decides how to produce what has been decided. The

question of should the method of production be labour-intensive or capital-intensive, is addressed? The economy chooses that method or technology at which production is done at the least cost.

• Finally, the decision of who gets what, is made. The issue of distribution of the goods and services produced is made deciding how the goods and services are shared among the people.

• The solutions to these economic problems based on the decisions

made by each economy leads to different economic systems. Slide 43 Mrs. Hellen Seshie-Nasser, Dept .of Economics,

University of Ghana

• Economic systems are arrangements made to employ the scarce resources in order to satisfy the wants of the people. It is about; – Who owns the factors of production, and

– The method used to co-ordinate and direct economic activities. Thus, the methods employed in solving the fundamental economic problems.

• Basically, there are four types of economic systems: • Traditional

• Capitalism/market economy

• Socialism/command economy

• Mixed economy

Economic Systems


Slide 44

Traditional Systems

• In this system, economic decisions are based on tradition, custom and habit.

• The technique of production is also based on traditional patterns. Distribution is based on long-established traditions.

• The answers to the economic questions of what to produce, how to produce and how to distribute are determined by what happened in the past.

Slide 45 Mrs. Hellen Seshie-Nasser, Dept .of Economics,

University of Ghana

• In this economic system, decisions about who owns factors of production and the method used in controlling and directing economic activities are determined by private individuals and businesses, based on the price-mechanism. It is also called lasser-faire.

Characteristics • It is based on private ownership of resources and the freedom of the individual

to conduct his affairs aimed at maximizing profit.

• The system emphasizes the freedom of the individual both as a consumer and as the owner of factors of production. There is limited government interference.

• Prices and outputs are determined through the free interaction of forces of demand and supply.

• There is a high degree of competition and every economic agent is a maximizer.

Capitalism/Market Economy


• This is an economic system in which firms are owned and controlled by a central authority or by the government acting in the name of the people, and all the basic economic decisions about the allocation of resources are taken by the central government rather than individuals or firms.

• The main instrument for resolving economic problems is through central planning. Examples of countries in which this is practiced are former U.S.S.R., China, North Korea and Cuba.

Characteristics • Government/ central authority own virtually all resources

• There is limited economic freedom of the individual

• Economic decision making is through a central economic planning authority.

Socialism/Command Economy


• It is an economic system in which both the public and private sectors contribute significantly to allocation of resources, and other economic decisions.

Characteristics

• There is private ownership and various degrees of government control through the use of legislation such as pollution laws, safety laws, labour laws etc.

• Essential goods and services such as electricity, railways, part of road transport, civil service and defence are controlled by the state while others such as manufacturing of goods and the commercial sectors are controlled by the private sector (enterprise).

Mixed Economy

48 Mrs. Hellen Seshie-Nasser, Dept .of Economics, University of Ghana

The Ghanaian economy is a mixed market economy, since

government plays a role - regulates markets, taxes to

provide goods & services

It must be noted, however, that the economic systems of countries change overtime. Example is the former Soviet Union.

Ghana’s Case


Slide 49

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