Unit 1: Scarcity

The Nature of Scarcity

•       Lack of resources to produce all the wanted products.
•       Resources are Scarce.

Definition of Scarcity 

A situation where there is not enough to satisfy everyone’s wants

The continuing nature of Scarcity

•       Growth in wants is exceeding the growth of economic resources.
•       Wants continue to grow and change and thus Scarcity continues to exist.

The Economic Problem

•       Unlimited wants exceed scarce resources.
•       It arises because of scarcity. There is no limit to people’s wants – they are infinite. However, resources are finite.
•       A mismatch, or disequilibrium between what people want and the maximum that can be produced, gives rise to the economic problem.

Unit 4 : Market and Mixed Economies

Market and Mixed Economies

·         All economies have to answer 3 fundamental questions:

o   What to produce

o   How to produce it

o   Who is to receive the products produced

·         These questions arise because of The Basic economic problem: Unlimited wants exceed scarce resources

Different Economic Systems

Planned Economy

·         Aka centrally planned, command economy, collectivist economy

·         One in which the state (government) makes the crucial decisions

·         Land and capital are state owned

·         Gives instructions(directives) – resources are allocated by directives to SOEs (State Owned Enterprises)

·         Definition : A planned economy is an economy where the government makes the crucial decisions, land and capital are state-owned and resources are allocated by directives

Market Economy

·         Aka free enterprise economy

·         It is an economy where consumers determine what is produced

·         Resources are allocated by price mechanism

·         Resources switch from products that are becoming less popular to products that are becoming more popular

·         Government intervention is minimum

·         Land and capital are privately owned

·         Private firms decide how to produce the products that consumers want to buy.

·         Firms have two methods of production – capital or labour intensive

o   Capital intensive: Employs large amounts of capital relative to labour. Example : Steel firms

o   Labour intensive: Uses a relatively high number of workers in comparison with the amount of capital used. Example: Hotels.

·         Firms use the least cost method of production

·         The advantages of market economy

o   A market economy should be very expensive in consumer demand

o   Consumers are said to be sovereign

o   Choice: Consumers can choose which product from which firm

o   Efficiency: Promoted by profit motive and competition

o   Incentive: High incomes provide incentives to workers to work hard and entrepreneurs to expand firms

·         The disadvantages of market economy

o   Firms only take into account the costs and benefits to themselves. Eg: Smoking

o   Competition will result in domination by one or a few firms leading to limited choices

o   Firms may not be able to respond to desires of consumers

o   Firms will not make products unless they can charge for it

o   Advertising can distort consumer choice

o   Consumers may have a lack of income. There can be a very uneven distribution of income

·         Definition: A market economy is an economy where consumers determine what is produced, resources are allocated by price mechanism and land and capital are privately owned.

Mixed Economy

·         An economy in which both the private and public sectors play an important role

·         Both consumers and government influence what is produced

·         Benefits due to state intervention:

o   Government takes into account all the costs and benefits that will arise from their decision

o   Encourages the consumption of beneficial products by granting subsidies and providing information

o   Discourages the consumption of harmful products by imposing taxes, providing information and passing legislation

o   Can finance the production that cannot be charged for directly. Eg: Defence

o   Can prevent private sector firms from exploiting consumers by charging high prices

o   Can make maximum use of resources

o   Can plan ahead to a greater extent than private sector firms

o   Can help vulnerable groups – can create a more even distribution of income

·         Definition: A mixed economy is an economy in which both the private and public sectors play an important role.

Examples of different economic systems

·         Mixed – Sweden

·         Market – USA

·         Planned – Cuba

Unit 3 : Opportunity Cost

Opportunity Cost

·         It is the cost of a decision in terms of the best alternative given up to achieve it

·         It is the best alternative forgone

Occurrence of opportunity cost

Ø  Opportunity cost and consumers: Consumers are the buyers and users of goods. They have to decide which product to buy.

Ø  Opportunity cost and workers: Undertaking one job involves an opportunity cost

Ø  Opportunity cost and producers: Produces have to decide what to make

Ø  Opportunity cost and government: Government has to decide its expenditure of tax revenue on various things

Economic goods and Free goods

o   Economic goods are products which require resources to produce it and therefore has an opportunity cost. They are limited in supply.
Example : Carpets, A child’s education.

o   Free goods are products which do not require any resources to make it and so do not have an opportunity cost. They are products for which people do not have to pay for.
Example : Sunshine, Water in the Rivers

Production Possibility Curve

o   PPC aka opportunity cost curve/ production possibility boundary/ production possibility frontier

o   It shows the maximum output of two products and combinations of these products that can be produced with existing resources and technology

This PPC shows that there is a maximum output of DVD players and MP3 Players and the combination of the two products can be produced with existing resources.
that means, at A,B,C, you can have an optimum utility of your resources.

(Image taken from google)

Unit 2 : Factors of Production

Factors of production

Definition : They are the economic resources of capital, enterprise, labour and land

TYPES OF FACTORS OF PRODUCTION

Land

·         Covers any natural resource which is used in production

·         Includes what is beneath the land, what grows naturally on land, what is found in them.

·         The supply of land : The amount of physical land in existence does not change in time, therefore

·         The mobility of land : Occupationally mobile, Geographically immobile.

Capital

·         Any human-made goods used to produce other goods and services

·         Example: Offices, factories, machinery

·         Capital is also known as capital goods and producer goods

·         They are not wanted for their own sake but for what they can produce
Consumer goods are wanted for the satisfaction they provide to their owners

·         Supply of capital:

o   Increases with time. Every year some capital goods physical wear out and some become outdates.

o   The total value of the output of capital produced is referred to as gross investment.

o   Some of the capital goods produced will be replacing those which have worn out or become obsolete.

o   The value of replacement capital is called depreciation or capital consumption

o   Net investment is the value of the extra capital goods made

o   Net investment = Gross Investment – Depreciation

·         Mobility of capital:

o   It varies according to the type of capital good.

o   Example: A photocopier is geographically mobile. A coal mine is geographically immobile as well as occupationally immobile. An office block is occupationally mobile.

Labour

·         Labour covers all human efforts – both mental and physical, involved in producing a good.

·         Supply of labour: it is influenced by 2 factors:

o  Number of workers available (which is influenced by:)

§  Size of the population

§  Age structure of the population

§  Retirement age

§  School leaving age

§  Attitude towards working women

o   The number of hours for which they work (which is influenced by:)

§  Length of an average working day

§  Full time/ Part time

§  Duration of over-time

§  Length of holidays taken

§  Length of sick leaves/ time lost through sickness & illness

·         Those people who are working or are seeking work from the labour force(work force)

·         Productivity : output per worker hour

·         The mobility of labour: Varies from person to person. The causes for geographical immobility of labour:

o   Differences in the price and availability of housing in different areas and countries

o   Family ties

o   Differences in educational systems in different areas and countries

o   Lack of information

o   Restrictions on movement of workers (visa)

·         The main cause for occupational immobility: lack of appropriate skills and qualification.

Enterprise

·         It is the willingness and ability to bear uncertain risks and to make decisions in a business

·         The supply of entrepreneurs is influenced by:

o   A good education system (university degree courses in economics and BST)

o   Lower taxes on firm’s profits (corporate tax)

o   Reduction in government regulations.

·         The mobility of enterprise : It is the most mobile factor of production – both occupationally and geographically mobile

PAYMENTS TO FACTORS OF PRODUCTION

Land – Rent

Capital – Interest

Labour – Wages

Entrepreneur – Profit

Changing patterns of exports and imports NOTES

Changing patterns of exports and imports

International trade	Internal trade
·         Exchange of goods and services between countries ·         Enables firms to reach a wider market, take greater advantage of economies of scale, source their products from a wider area and earn higher profits	·         Trade within a country ·         Has to arrange and pay for transport ·         May have to wait for the payment of goods.

Problems with international Trade

·         Products travelling greater distances

·         Differences in languages

·         Differences in culture may have to be taken into account in what type of product are exported and the method of marketing adopted

·         Trade restrictions

·         Foreign governments may place tariffs on imports

·         Increase in competitiveness may either make the firm more efficient or result in them struggling to survive.

·         Dealing with foreign currencies

Tariff: A tax on imports

The pattern of International Trade

 Factors which influence the choice of trading partners of a country:

·        Countries will seek to buy from countries which produce good quality products at low prices

·        They will sell to countries which have a high and stable demand for the products it is producing

·        They will trade mainly with countries close to them in tastes, development and geography or with whom they share historical links.

·        Trades will take place between developed countries.

Changes in exports and imports

Factors that influence the value of a country’s exports and imports:

·        The country’s inflation rate:

o   High inflation rate: Domestic households and firms are likely to buy a significant number of imports.

The firms are likely to experience some difficulty in exporting

o   Fall in inflation : Increases the country’s international competitiveness and would be likely to increase exports and reduce.

·        The country’s exchange rate: A fall in the country’s exchange rate will lower export prices and raise import prices. This will increase the value of its exports and lower the amount spent on imports.

·        Productivity: The more productive a country’s workers are, the lower the labour costs per unit and cheaper its products. It is likely to lead a greater number of households and firms buying more of the country’s products – so exports should rise and imports fall.

·        Quality: A fall in quality of exports relative to the other country’s exports would have an adverse effect on the country’s balance of trade in goods and services.

·        Marketing: The amount of goods imported or exported is affected by the efficiency of the marketing undertaken by foreign firms.

·        Domestic GDP: If household incomes rise, more imports maybe bought. If this occurs, exports will fall.

·        Foreign GDP: If incomes abroad rise, foreigners will buy more products. This may enable the country to export more.

·        Trade restrictions: A relaxation in trade restrictions abroad may increase exports.

The causes of a current account deficit

·        Cyclical Deficit is a deficit arising from a fall in incomes abroad or a rise in incomes at home.

·        A high exchange rate can also call a current account deficit. This is because it will raise export prices and lower import prices

·        Structural problems include a problem with the products manufactured by the firms in the country, costs incurred to produce them, prices at which they are sold and strategies adopted for marketing them

The consequences of a current account deficit

·        Country living beyond its means: Country is consuming more than what it is producing.

·        Significance of a current account deficit depends on its size, duration and cause.
A small deficit that lasts for only a short time is unlikely to cause any problem.

·        A deficit will put downward pressure on the exchange rate. Then exports will become cheaper and imports will become more expensive.

·        A deficit due to a lack of international competitiveness is more serious as it will not be self-correcting.

Population Growth NOTES

Causes of population growth

Natural increase – Birth rate exceeds death rate

Birth rate is influenced by

·         The average age of the population

·         The number of women in the population

·         Women’s fertility rate

Fertility rate is affected by

·         Age at which women marry

·         Number of women pursuing higher education

·         Labour force participation rate of women

·         Socio-economic status of women

·         Availability of family planning services

·         Availability of government support for families

·         Cost of bringing up children

·         Provision of benefits for the sick and the elderly by the government.

Birth rate INCREASES by

·         Young, average-aged population in which women marry young

·         Infant mortality is high

·         Girl education is poor

·         Women are non-working

·         Cheaper to bring up children

·         Lack or disapproval of family planning

·         Government’s cash incentives

Birth rate DECREASES by

·         More expensive to raise children

·         Legal requirement to send children to school for a number of years

·         Well paid jobs are open to women

·         Government not providing state pensions

The death rate is affected by

·         Nutrition

·         Housing conditions

·         Medical care

·         Lifestyles

·         Working conditions

·         Involvement or non-involvement in military action

Death rate DECREASES by

·         Healthy diets

·         Good housing facilities

·         Access to high quality medical care

·         No smoking

·         Less alcohol consumption

·         Not sexually promiscuous

·         Exercise regularly

·         Enjoy good working conditions

·         Their country is at peace with other countries

Net immigration occurs when more people come into the country to live than people who leave it to live elsewhere (emigrants)

The rate and pattern of migration is influenced by

·         Relative living standards at home and abroad

·         Persecution of particular groups

·         Extent of control on movement of people

·         Most migrants tend to be single people of working age

Population structure

·         The sex distribution of population indicates the number of males and females in the country

·         The age distribution is the division of people into different age groups

·         Population pyramid shows a more detailed breakdown of the different age groups

·         The age structure influences the dependency ratio

Number in the dependent age groups  x 100
       Number in the labour force

·         The dependant age groups are those below the school leaving age and those above the retirement age

Optimum Population

·         This term refers to the number of people which when combined with other resources of land, capital with existing technical knowledge, gives the maximum output of goods and services per head of the population

·         A country is said to be overpopulated if there is an excess of labour, relative to land, capital and technical knowledge

·         In such a case, the government might seek to move towards its optimum population either by introducing measures to reduce population size or seeking to in increase investment

·         A country is said to be under populated if it does not have enough of human resources to make the best use of its resources. In this case, government will encourage immigration.

Malthusian theory of population

·         Made by : Thomas Malthusian

·         Theory states: population pressures would tend to prevent the rise of living standards

Population grows at a geometric rate – 1,2,4,8,16

Food production grows at an arithmetic rate – 1,2,3,4,5

·         Results : population doubling every 25 every years

·         There are two checks to keep population within its means of subsistence:

­  Positive check: Factors which cause a rise in the death rate – epidemics, famine, infanticide and wars

­ Preventive check : Contraception, moral restraint which means delaying marriage

·         What has made food production rise more rapidly than population?

­ Improvements in technology, including fertilizers and combine harvesters

·         Malthusian’s theory overlooks that people are producers as well as conumers.