GRADE 11 IB Economics First Theory Lesson

WHAT IS ECONOMICS? Economics is about how society uses its scarce resources to try to achieve maximum progress towards all objectives and improve the overall welfare of the community. OR Economics is about scarcity and how we use the world’s limited resources in an attempt to satisfy what appears to be unlimited human wants.

WHAT IS ECONOMICS? Economists study the way people make decisions about how to allocate scarce resources to provide themselves with goods and services the problems that arise in this allocation process. They analyse the relationship between the supply and demand of goods and services and the ways in which goods are produced, distributed and consumed within an economic system.

How is Economics used in our Society? Personal Level Economic and financial advice is useful when making decisions regarding the purchases of goods and services or determining investments in the share market. Business Level Business managers need to consider costs and benefits before making decisions on issues such as the expansion of a firm, agreeing to wage increases for staff or extending domestic sales to international markets. Government Level  Economic decisions in government can involve issues such as the setting of a Federal or State Budget.

SCARCITY & CHOICE If something is to be called scarce, in the Economic sense, two conditions have to be satisfied: People must want the item. The amount of the item must be limited. Some things have a negative, rather than positive economic value. (for example polluted air or water) – we may be willing to pay someone to eliminate these problems. Who should pay for such problems presents a dilemma?

SCARCITY & CHOICE The Economist holds value judgements like anyone else. However, it is his or her primary job as an Economist to figure out the ramifications of an alternative course of action, given a particular set of values or goals.

TYPE OF WANTS Competitive Wants Goods and services which can be substituted for each other. Complimentary Wants Wants which go together. Recurrent Wants Wants which are never satisfied and keep recurring.

CLASSIFICATION OF WANTS Classify each of the following wants: Competitive, Complementary or Recurrent Butter and Margarine Books and Bookcases Coke and Pepsi Bread and milk Cars and Petrol Holiday and Home improvements.

OPPORTUNITY COST The best alternative option foregone when a choice is made – often referred to as `real cost` or `economic cost`. Eg: If the Federal Government chooses to increase its spending on roads, there is not only a monetary cost, but an opportunity cost. It may mean less money for spending on health care. Opportunity cost is about trade offs. If we increase spending in one area, it is often at the expense of another.

OPPORTUNITY COST Examples of Opportunity Cost: By increasing funds for public schools, this means all children may have a better chance to achieve higher grades and ultimately have better career opportunities, but if we have to reduce health care spending, this may mean less people have the opportunity to see a doctor or vital surgery may be delayed. Which of these priorities is more important?

THE ECONOMIC PROBLEM What is the economic problem? The problem of deciding or choosing how to satisfy unlimited wants with limited resources. This is also often used as a definition for Economics. However, the Economic Problem can also be expressed in the form of 3 basic questions.

SOLVING THE ECONOMIC PROBLEM Every society must answer the following three questions What goods and services are to be produced and in what quantities? How are those goods and services to be produced? Who will receive and consume those goods and services?

SOLVING THE ECONOMIC PROBLEM What to Produce In the US Economy this is determined by consumers. While most production is undertaken by private firms (or entrepreneurs) firms are dependent on the public to purchase these goods. If firms overproduce, they may be forced to sell off surplus stock at below cost. Underproduction will also result in a failure to maximise profit.

SOLVING THE ECONOMIC PROBLEM How to Produce This may be decided by a business person, by the government or according to tradition. Examples Motor vehicles can be made using an assembly line technique or a single unit method of construction. Aluminum Cans can be spun, stamped, extruded or moulded.

SOLVING THE ECONOMIC PROBLEM How to Produce (continued) The production method will be decided by the entrepreneurs, who will generally be looking for the lowest cost method in relation to size and quality of their output. Government Influence on How Item is Produced Safety regulations concerning machinery Health regulations with food production. Content regulations with regard to the origin of different parts of a product.

SOLVING THE ECONOMIC PROBLEM Who will Receive and Consume the Goods and Services The basic factor that determines the share of total production each person receives is: Income (wages - as a return on labour) Rent (as a return on land & buildings) Interest (as a return on capital) Profit (as a reward for taking risks in the production process)

SOLVING THE ECONOMIC PROBLEM Who will Receive & Consume the Goods and Services (continued) Governments take a large fraction of gross Income through various forms of taxation. The government income is used partly to provide community goods and services for the general welfare of society and partly to pay for various social services such as pensions and unemployment benefits.