Introduction+to+Economics

Economics is about solving the fundamental economic problem that wants are infinite and resources are scarce. So economics is about allocating those scarce resources in the most efficient manner.

A good introduction is this video:

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Resources or as they are sometimes referred to as "Factors of Production" are generally scarce, although some goods which are not scarce such as sea water and air are referred to as free goods. Free goods have no "opportunity cost (see below). We group resources into 4 distinct groupings: Land  Labour  Capital  Entrepreneurship.

Now watch this video FOP Video

Once you have finished watching the video open the PDF below entitled "intro concepts" and copy out the definitions for the four factors of production In addition your homework when we complete this introductory unit is to read this PDF and if there is anything that you don't understand you must ask for help.

= Opportunity Cost = Because resources are scarce we have to make choices and we have to give up things. This leads to the concept of opportunity cost Opportunity cost measures the cost of any economic choice in terms of the next best alternative foregone Many examples of opportunity cost exist at the level of the individual, the household, the firm, the government and the economy: media type="youtube" key="1nlIiDmKD9k" width="560" height="315"
 * The opportunity cost of deciding not to work is the lost wages foregone
 * The opportunity cost of spending money on a foreign holiday is the lost opportunity to buy a new dishwasher or the chance to enjoy two short breaks inside the United Kingdom
 * The opportunity cost of the government spending £20 billion on interest payments on the national debt is the extra money it might have allocated to the National Health Service
 * The opportunity cost of an economy investing its resources in new capital goods is the current production of consumer goods that is given up
 * The opportunity cost of using arable farm land to produce wheat is that the land cannot be used in that production period to harvest potatoes

Student Activities on Opportunity cost

here is an activity for you to identify the different opportunity costs stakeholders have through making choices.

For a fuller explanation and further notes your task now is to go to //tutor2u.net/economics/revision-notes/as-markets-scarcity-and-choice.html

Opportunity costs and PPFs Production possibility curves ( production possibility frontier)

The PPC/F illustrates the concepts of choice and opportunity cost. If we assume that a country only produces food and clothing, and that country wishes to produce more clothes, then it would have to sacrifice the production of some food. It is this sacrifice of food that is the opportunity cost of the extra clothing. How to construct a PPC: Assumptions: we have 5 workers, producing food and clothing. How we allocate these workers will determine how much of each good we produce. eg 5 People producing food: 20 units of food; 0 clothes 4 people producing food: 16 food; 2 clothes 3 people producing food 12 Food 4 clothes etc etc Draw a PPC (you'll need graph paper) From this it is easy to show the opportunity cost of producing more food (or more clothing) Note that in this simple example opportunity cost is fixed. Do you think that this is realistic and if not why?

A more realistic model is shown below, but this only has 4 workers Worker 1 is very good at cooking but not so good at sewing so produces 10 units of food or 2 units of clothing Worker 2 can produce 8 food or 4 clothes Worker 3 is equally good at both so they produce 6 food or 6 clothes Worker 4 is great at sewing but a lousy cook so produces 2 units of food or 10 units of clothes.

If all 4 workers are initially producing food, which would you transfer first to producing clothes? Now draw the PPC. What is happening to opportunity cost as you move along the PPC?

Now download and read the word document below;

Now complete the following worksheet:

Extension Activities:


 * [|Along came Polly what is the opportunity cost involved here?]

And for those of you who missed the lesson, or require a little extra help here is [|a link] to a revision video on opportunity cost.

Basic economic systems

No two economies are organized in exactly the same way, but all have to solve three fundamental problems:

1. What should be produced in the economy?

What quantities of food, mobile phones or banking services should be produced by the economy? How many trees need to be felled to meet the demand for pulp for newspapers and magazines? Should we spend extra money on national defence or should more resources be devoted to health care and education?

2. How should production be organised?

Should a firm use labour or machinery to produce their goods? How many workers should be employed? Should production take place in London or Bangkok or in the UK or Malaysia? Should Mazda plc buy its components from Thailand or Indonesian suppliers? These are all examples of important production decisions.

3. For whom should production take place?

Should everybody be entitled to an identical share of production, or should some receive more than others? We know that the distribution of income and wealth in Thailand and every other economy is not equal. There are large-scale inequalities in people's living standards.

There are four main types of economic system

TRADITIONAL OR SUBSISTENCE ECONOMIES

A SUBSISTENCE ECONOMY is one where


 * There is little specialisation and trade within the economy and with other countries
 * The productivity of workers tends to be low leading to low incomes and a poor standard of living
 * People tend to live in family groups, and grow most of their own food, make their own houses, gather their own fuel and provide their own leisure activities i.e. to a great extent they are self-sufficient
 * Few goods and are marketed and command a price or value - there is little surplus production to export

FREE MARKET ECONOMIES

A free market economy is one where economic decisions are made through the free market mechanism. The forces of market demand and supply, without any government intervention, determine how resources are allocated. This is known as the working of the price mechanism. The basics of this are covered in the theories of demand and supply later on.

COMMAND ECONOMIES
 * What to produce is decided upon by the profitability for a particular product.
 * When demand for a product is high, the price rises and this raises the profitability of selling in the market
 * High prices and high profits provide the signal for firms to expand production.
 * Supply from producers responds to consumer wants and needs expressed through the price mechanism
 * The consumer is said to be sovereign - their "economic votes" determine how resources are allocated

A command economy is one where all key economic decisions are made by the government (or state). The government decides what to produce, how it is to be produced and how it is to be allocated to consumers. This involves a great deal of economy planning by the state. The price mechanism has no active role in a pure command economy since market prices are rarely used. By state planning, goods and services can be produced to satisfy the needs of all the citizens of a country, not just those who have the money to pay for goods. Over the last decade, many former planned economy have attempted to bring market forces into their economy.

[|N. Korea today- a video to show a failed planned economy]

MIXED ECONOMIES

A mixed economy is a mixture of a pure free-enterprise market economy and a command economy. Nearly every country in the world operates a mixed economy although the "mix" can change. There is a private sector and a public sector in the economy. In recent years many command economies have become mixed economies. Examples include countries that were part of the former Soviet Union. These economies are often referred to as Transitional Economies as they are moving towards a freer market system, and becoming a mixed economy. To become a mixed economy, the role of the market and the private sector of the economy must be increased. This can be done in a variety of ways - listed below:

The amount of state intervention differs in all economies. For example Sweden has a great deal of Government intervention, whilst the USA has far less. The mix depends often on the political party in power at the time. Left wing governments tend to intervene in the market economy far more than right wing governments who leave the allocation of resources mainly to the market mechanism. Eg health care provision often differs in many countries
 * Privatisation of state industries
 * De-regulation of markets promoting increased competition through the entry of new firms
 * A gradual ending of state subsidies
 * Encouraging foreign investment into the economy



External Links
 * [|The Economic problem]


 * [|factors of Production]


 * Goods and Services


 * [|Opportunity cost]


 * [|Economic Resources] Brief revision notes on the main economic systems - all of which must approach the fundamental problems of how to best allocate scarce resources among competing needs and wants.


 * [|Scarcity & Choice] : Opportunity cost measures the cost of any economic choice in terms of the next best alternative foregone


 * [|Production Possibility Frontier] detailed revision note on the concept of the production possibility frontier and how it links with the concept of economic efficiency


 * [|**Positive and Normative Economics**]: You will often hear statements about economic issues on the television and written in newspapers and magazines and web sites. These statements can be divided into two main groups - positive and normative.

The difference between Micro and Macroeconomics media type="youtube" key="ukQ1ZVCp72o" height="315" width="560"