Notes to Accompany Chapter 1
 

1.1  The Economic Problem

What is economics about?
 

If someone asked you to tell what briefly what economics is about you probably would find it difficult to say.

You could perhaps suggest that it was about money but this would not be sufficient (as economic activity can be carried on without money).

Probably it would be best to suggest the two main areas of economics i.e. production and consumption.

So every economic society has need to produce various goods and services, like food, clothing, education etc., which are then consumed by the general population.

Sometimes a third area - distribution - is included in the definition in that a key problem for every economic society is to decide how the various goods and services are distributed among the population.
 
 

The problem of scarcity
 

The fundamental economic problem of every economic society is that of scarcity.

Even in the most affluent countries people ideally want more than they can currently have. How many people would turn down a big win in the national lottery?

So human wants i.e. in the desire for goods and services e.g. houses, cars, foreign holidays are (potentially) unlimited whereas the resources to provide them (through production) are always in short supply. So this leads to the problem of scarcity and the need for choice.
 
 

Just reflect on your own situation! You are attending college with a certain income to provide your needs during the week. However as you cannot afford to buy everything you like you have make difficult choices.

For example if you buy the recommended textbook in Economics will you have enough left over to enjoy yourself at the weekend?

So here the problem of scarcity applies and the need to make rational decisions.
 
 

Economists often refer to the basic resources (used to produce goods and services) as the factors of production.

There are four factors of production each with its own reward (which represents a form of income)

Land. This includes all raw materials (e.g. oil and minerals) provided by nature. The income reward here is rent

Labour. This can be assessed in terms of numbers and skills. The income reward here is wages and salaries

Capital. This refers to goods (e.g. factories and machinery) that enable the more efficient production of goods and services. The income reward is interest

Enterprise. A special form of labour that organises production and undertakes the risk of business. The income reward is profits
 
 

Demand and Supply

Demand relates to consumers and represents their expressed wants for goods and services. (For demand to exist wants must be backed up by the means of purchase. For example I may want a new car. However demand only arises when I have the money to carry out the purchase.

Supply relates to producers and the amount of a good (or service) made available.

Transactions for goods and services take place in markets. So in every market e.g. the housing market there is demand (i.e. people wanting to buy houses), supply (builders making them available) and finally a price (at which the houses are sold).
 
 

1.2 Dividing up the subject

What's meant by 'macroeconomics' and 'microeconomics'

Economics is divided into two main branches macroeconomics and microeconomics.

Macroeconomics deals with the economy as a whole. Some areas of special interest are the rate of growth in the economy, the rate of inflation (i.e. general price level), the level of emplyment (and unemployment) and the balance of payments (i.e. difference between overall value of exports and imports).

Microeconomics deals with the individual parts of the economy, such as consumer behaviour, production by firms and the behaviour of individual markets.

Because resources are scarce (in any society) choices have to be made. The three main categories of choices are

What goods to produce and in what quantities (relating ultimately to consumption). For example if a society spends a great deal of money on building new roads there may not be much left for other areas like health and education.

How goods are to be produced (relating ultimately to production). For example a firm could use a lot of labour (labour-intensive) or alternatively plenty of machinery (capital-intensive).

Finally society has to dcide for whom goods are to be produced (relating ultimately to distribution).
At one extreme we could have a small minority super rich with the majority of the population very poor.
However we could aim at another more equal situation where everyone gets roughly the same amount of what is produced.
 

Opportunity Cost

Because resources are scarce the production of one good involves the sacrifice of other goods that could otherwise be provided.

For example a farm might be able to produce 1000 tons of wheat or 2000 tons of barley. Therefore in this case the opportunity cost of producing the 1000 tons of wheat is 2000 tons of barley. In other words if we produce 1000 tons of wheat we therfore have to forego the opportunity of producing 2000 tons of barley.

Opportunity cost is relevant in all our daily lives. For example you may have a certain limited amount of income at college. Therefore whenyou spend money on some item (e.g. a meal) you will have to sacrifice some alternative purchase (e.g. a CD).

Opportunity cost can be illustrated using production possibility curves.(See diagram)
 

See Questions 1 and Answers 1 on site (which illustrate various issues in this Chapter)