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Topic 1

  1. 1. SCARCITY, PRODUCTION POSSIBILITY, OPPORTUNITY COST Chapter #1 EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  2. 2. Goods & Services and Consumer Needs Goods and services refer to the products which consumers consume to satisfy their needs and wants. Consumers have basic economic needs which include food, clothing and shelter. EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  3. 3. Consumer Wants and Desires In addition to basic needs, consumers have wants and desires for luxury cars, to eat exotic meals, to wear expensive jewelry, to spend vacation in a fancy resort. EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  4. 4. Resources or Factors of Production EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  5. 5. Resources or Factors of Production <ul><li>This wide array of factors of production can be grouped into four groups. These are: </li></ul><ul><li>Land </li></ul><ul><li>Labour </li></ul><ul><li>Capital </li></ul><ul><li>Enterprise </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  6. 6. Land <ul><li>Land accounts for all the natural resources on the planet which can be used in the production process. It includes agricultural land, forestry, oceans, mineral deposits such as diamonds and petroleum and of course the geographical site where production is located. The payments made for the use of land is called rent. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  7. 7. Labour <ul><li>Labour is the contribution made by workers in the production process. Labour is not homogenous though, as different labourers have different mental or physical abilities. As compensation for this effort in production, labour receives income in the form of wages. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  8. 8. Capital <ul><li>Capital accounts for all physical goods used to produce other goods and services. In contrast to &quot;land,&quot; which is naturally occurring, capital is man made or artificially created. This includes; machines, computers, tools, factories and roads. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  9. 9. Enterprise <ul><li>Enterprise is the factor of production which is responsible for organizing the other three factors of production. This is the role of the entrepreneur who decides how the other three factors of land, labour and capital are to be combined to produce output. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  10. 10. SCARCITY EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Unlimited Wants & Needs Finite Resources
  11. 11. The Production Possibility Curve In table a production possibility schedule is given for a hypothetical economy which shows all combinations of Good X and Good Y which can be produced. EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Possibility Commodity Y Commodity X A 14 0 B 12 10 C 9 18 D 5 25 E 0 30
  12. 12. G . U. A B C D E 5 9 12 14 18 10 25 30 X Y O The Production Possibility Frontier EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  13. 13. Rightward Shift of the Production Possibility Frontier <ul><li>An economy might be able to increase its production capacity and hence the production possibility curve would shift outwards under the following situations. </li></ul><ul><li>Improvements in technology </li></ul><ul><li>Investments in capital </li></ul><ul><li>Discovery of new resources </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  14. 14. G U. A B C D E Y O A’ X E’ A Rightward Shift of the Production Possibility Frontier EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  15. 15. Points within the PPF <ul><li>If resources were being used inefficiently or they were idle or under-utilized, then output produced by the economy would not be maximized. Such output combinations would correspond to points within the production possibility frontier. This is shown by the point U in the figure. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  16. 16. Points beyond the PPF <ul><li>Any point which is beyond the production possibility frontier, such as point G in the figure represents an output combination that is unattainable with the current endowment of resources. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  17. 17. Opportunity Cost <ul><li>Opportunity costs refer to what has to be foregone in order to obtain something else. This is encountered whenever economic choices are made. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  18. 18. Opportunity Cost <ul><li>For example, when a person decides to buy an audio CD for $25 the opportunity cost is the next best alternative or what could be bought with the money. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  19. 19. Opportunity Cost What should I purchase? I can choose either an audio CD or a T shirt! EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  20. 20. Specimen Paper – Question 1 <ul><li>Q1 State clearly whether each of the following statements (a–e) is TRUE or FALSE. </li></ul><ul><li>Explain clearly, using diagrams where appropriate, your choice of true or false. </li></ul><ul><li>(a) The slope of the production possibility frontier can be interpreted as a measure of opportunity cost. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  21. 21. Three basic Economic Questions <ul><li>Given the problem of Scarcity, every economy has the answer the following questions: </li></ul><ul><ul><li>What? - What goods and services should be produced with the available scarce resources? </li></ul></ul><ul><ul><li>How? – How are the resources going to be used to produce the chosen goods and services? </li></ul></ul><ul><ul><li>For whom? – Who would be able to consume the goods and services which are produced? </li></ul></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  22. 22. Free Market Economy EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) The Three Basic Economic Questions The People Decides the Answers
  23. 23. Advantages of Free Market Economies <ul><li>Consumer sovereignty </li></ul><ul><li>Higher efficiency </li></ul><ul><li>Higher investments </li></ul><ul><li>New inventions and innovations </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  24. 24. Disadvantages of Free Market Economies <ul><li>Inequality </li></ul><ul><li>Dangerous Products </li></ul><ul><li>Monopoly and imperfect competition </li></ul><ul><li>Lack of Public Goods. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  25. 25. Command Economy Basic Economic Questions The non democratic government (dictator) decides the answers EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  26. 26. Advantages of Command Economies <ul><li>Full employment </li></ul><ul><li>Equality is achieved </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  27. 27. Disadvantages of Command Economies <ul><li>Lacks of choices for consumers </li></ul><ul><li>Complacency </li></ul><ul><li>The government may produce goods not required by the people </li></ul><ul><li>Low quality goods and services </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  28. 28. Mixed Economy Basic Economic Questions The government decides some of the answers EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  29. 29. What is Economics? <ul><li>Economics is a social science, in that it studies the behaviour and decisions made by people in relation to how resources are used to satisfy wants and needs. </li></ul><ul><li>This is different from natural sciences such as chemistry and physics which do not focus on human behaviour </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  30. 30. Microeconomics vs Macroeconomics <ul><li>Microeconomics – This focuses on the production, distribution and consumption of goods and services. As such it examines the behaviour of firms, consumers and the role of government in various markets. </li></ul><ul><li>Macroeconomics – This focuses on the management of the overall economy on issues such as national income, inflation, unemployment, imports, exports, and the role of government. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  31. 31. Positive Economics <ul><li>In the study of economics there are two types of statements; positive statements and normative statements. Positive statements are based on facts and can be tested by looking at the evidence. An example of a positive statement is ‘Inflation in Trinidad and Tobago in 2007 is 10 percent’. This statement can be verified by referring to the rate of inflation reported by the Central Bank. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  32. 32. Normative Economics <ul><li>Normative statements are statements based on judgments or opinions and cannot be tested. An example of a normative statement is ‘Your salary should be much more than it is now’. This is based on someone’s opinion and cannot be verified by reference to facts. Usually in normative statements the word should or ought is used. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)

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