AS Economics

Assement Objectives (AOS)

 The nature and purpose of economics activity
 Economic resource
 Scarcity, choice and the allocation of resource
1.1-1.3
The nature and purpose of economics activity
• Economics defi ned ： The social science that studies how individuals,
institutions, and society make optimal (best) choices under conditions of
scarcity.

• Human wants and needs are unlimited, but the means to satisfy the wants are
limited.

• The central (or main purpose) of economic activity is the production of

goods and services to satisfy people’s needs and wants.
What is difference between needs and wants?
Wants:Always want more whatever their current
Needs: basic requirements for human survival circumstances.
Needs VS. Wants

• People have a limited number of needs, which must be satisified if

they are to survive as humans. Some are material needs such as
food, water, heat, shelter and clothing. Other are psychological
emotional needs such as self-respect and being loved.

• However, wants are goods and services that people would like but
are not required for them to surive. Human wants are unlimited.
Economic activity and Welfare.
• Welfare: the satisfaction or utility obtaining from consuming goods and services, which
contributes to the standard of living and happiness of individual or group.

• Economic activity is concerned with the production , distribution and consumption of

goods and services.

• Production involves turning inputs such as raw materials, captial and labor into final
output.
SCARCITY

• Everything is scarce. Scarce means limited in availability or quantity.

• The fundamental economic problem is how best to make

decisions about the allocation of scarce resources among
competing uses so as to improve and maximise human happiness
and welfare.
Resources/Factors of production /Inputs

• Land:natural resources
• Captial: human -made resources
• Labor: human resources ( people’s skills and efforts)
• Enterprise: take risk, make decisions and organises the
production process.
 Renewable resources and non renewable resources
• Another way to classifying economic resources is whether they are renewable or non-renewable resources.

• Renewable resources : resources that can be replaced naturally after a peirod of time. These
include trees, fish, sunlight, wind and water for drinking.

• Non renewable resources : resources can not be replaced naturally after use. These include
coal, oil and diamonds. They are limited supply and can run out.
Why the environment is a scarce resource
• Resources are scarce if they are limited in suppl y. There are not enought to
satisfy our wants.

• The natural resources are limited in supply and has a alternative uses.

• Production and consumption can both affect environment . For example, more land
is being used for housing and roads.
Scarity and choice

• Economics agents(individuals, household, firms and governments) have to make

choice in order to achieve maximum utility.

• Economic theories usually assume that individual are motivated by self-interest,

focusing on their own needs and wants.

• Rational behavior assumes that people will consider alternative choice a nd make
decisions that will provide them with the most benefits, welfare or statisifcation .
But... we all have to make choices
There is a limited amount of resources such as raw materials,
machines, factories and skilled workers. But there are a number
of different ways in which they can be used.

CHOIC E
E CHOIC

Resource allocation therefore involves deciding how best to use

scarce resources to satisfy as many needs and wants as possible
Resource allocation
Because productive resources are scarce relative to human wants we must
decide:

What to produce and in How to produce? Who to produce for?

what quantities?
Should we use resources to What tools and machinery will Should people in the greatest
produce as many consumer be needed? How many workers need get the goods and
goods as possible or allocate will be required and what skills services they require? Or
some resources, for example, to will they need? Is it cheaper to should they be produced for
build new roads or to provide employ more labour or more people who can pay the most
better health care? machinery? for them? What price should
they pay?
Opportunity cost

• The cost of any good, service, or activity is the value of what must be given
up to obtain it. This is known as the opportunity cost .

• The next best alternative sacrificed as compared to what actually take

place.
Practice Question

• The basis economic problem of all countries is the existence of

A) Tax increases and budget deficits

B) Limited resources and unlimited wants

C) Unemployment and inflations

D) Government and private industry

Practice Question

• Opportunity cost is defined as:

A) Unlimited resources and unlimited wants

B) A comparative advantage in the production of a good

C) The value of the next best alternative that is forgone when an activity is pursued

D) The value of all other possible alternative that forgone when an activity is pursued
Practice Question

Land refers to

A) All productive resources

B) All natural resources

C) Farmland only

D) Real estate
The allocation of resources in different types of economy

• In order to allocate resources, decisions need to be made about what to produce,

how to produce it and who should benefit. How these decisions are made depends
on the type of economy:

• Free market

• Centrally planned

• Mixed
Free market economy

• Free market economy also called captalist and laisse-faire economies.

• In a completely free market economy, decisions about what to produce, how to

produce it and who should benefits are taken by buyers and sellers . Therefore,
decisions are left to the private sectors .

• The way in which the prices of goods and services are determined by the free
market forces of demand and supply is known as the price mechanism.
Centrally planned economy
• Centrally planned economy is also called command economy.

• Centrally planned economy where decisions about what to produce,

how to produce it and who should benefit are taken by the government.

• Decisions are left to the public sector, the part of the economy under
government control.
Market economy C e n tr a l ly p l a n n e d e c o n o m y
• Since sales are on the basis of people being • A centrally planed economy can result in a
willing and able to pay, those with little or no fairer distribution of goods and serivces.
money will not be able to buy as much, and
may not even be able to buy the basic
necessitities. This can lead to inequality. • There may be shortage or surplus in the
economy.

• lack of incentive to work hard or to produce

• Some people may have too many products
better products
and some people do not have enough, it
could be example of market failure.
Mixed economy
• In a mixed economy, some decisions about what to produce, how to
produce it and who should benefit are taken by buyers and sellers
and some decisions are taken by the government.

• All economies in the world are mixed but with different amounts of
government intervention.
Primary, secondary and teritary production
• Production is often classified into one of three sectors:

Primary- Private
Secondary
Tertiary
Primary, secondary and teritary production
• Primary sector: the part of the economy involved with extracting or
acquiring raw material. The primary industry sector industries are
mining, farming, forestry, quarrying and fishing.

• Secondary sector ： the part of the economy involved any construction

or manufacturing activities. The secondary sector uses the raw
material from primary sector for construction or to make goods.

• Tertiary sector: the part of economy that provides services.

Automation
• Automation: using advanced techonology to produce goods and
services with little help from workers.

• Artificial intelligence (AI) is being used to allow manchines to react

to, and learn from, their enviornment.

• For example, computer-controlled cars can drive themselves,

switching lights from the mobile phone.
Producti on
possi bi l i ty diagrams
1.4
Production Possiblities boundaries
• Production Possiblities Boundary （ PPB ） =Production Possiblity Curve
(PPC)=Production Possiblity Frontier(PPF ）

• Definition: A curve showing the different combinations of two goods or services that
can be produced in a full-employment, full-production economy where the available
supplies of resources and technology are fixed.
Production possiblities boundaries

• Assumptions:
• Full employment: employing all available resources
• Full production:all resources are fully and efficiently used.
• Fixed resources: the supply of resources is fixed in quantity
and quality at this point in time
• Fixed technology
• Two goods: economy is only produce two types of goods
The shape of the PPB

Cakes Buns

20 76

30 62

40 42

• Opportunity cost producing (1st) 10 cakes=14

Buns

• Opportunity cost producing (2nd) 10 cakes=20

Buns
The shape of PPB

• PPB is normally drawn bugling out

/concave/ bowed out from the origin.

• There is an increasing opportunity cost

when production of one of good is
increased.

• Resources may be better at producing one

good than the other.
 The shape of PPB

Cakes Buns

20 60

30 40

40 20

Opportunity cost of producing 10 cakes =20 Buns

The shape of PPB

• PPB is downward sloping straight line if

opportunity cost is contant.

• Resources are comepletely adaptable for

alternative uses.

• In the reality, PPB is more likely concave

rather than straight line.
Unemployment of resources
• Attenable point:

• Unattenable point:

•X
• Full capacity: when a firm, or an
economy, is producing its maximum output
from the available resources, given the
current level of technology.

• Point B represents full capcity

• Spare capacity: where a firm, or an

economy, has some resources not fully
employed.

• Point Y represents spare capcaity

Productive efficiency and allocative efficiency

• Productive efficiency: where it is not

possible to produce more of one good or
service without producing less of another.

• All points on the PPB are productive

efficiency.

• Allocative efficiency: the combination of

goods that best meets people’s preferences.

• Only one point on the PPB is allocative

efficiency.
Trade off
• PPBs can be used to illustrate opportunity cost and trade-offs.

• A trade-off is where two things can not be achieved at the same time, one must be
sacrificed for another.

• An improvement one situation will lead to the other becoming worse, so decision
must be made about which is more important and which should be scarficed.
Practice Question
One of the assumptions underlying the production possibilities curve is that

A. at least one of the factors of production is a free good.

B. the quantity of resources available is fixed over a given time period.

C. there is at least one factor of production that is employed inefficiently.

D. some of the factors of production are not being used.

Practice Question
Which one of the following statements is TRUE?

A) All points on the production possibilities curve represent an equal

distribution of income.
B ） The slope of the production possibilities curve reveals the current rate of
economic growth.
C ） When the economy is operating efficiently, it will be at a point inside its
production possibilities curve.
D ） Points outside the production possibilities curve are unattainable given
current technology and resources.
Practice Question

The production possibilities curve can shift inward when

• (a) production increases.
• (b) employment increases.
• (c) a country is in peacetime.
• (d) a country experiences a natural disaster.
Practice Question

• Economic growth can be pictured in a production

possibilities curve diagram by
• (a) moving from left to right along the curve.
• (b) moving from right to left along the curve.
• (c) shifting the production possibilities curve out.
• (d) shifting the production possibilities curve in.
Economics as a social science

• A social science involves the study of society and the relationship

between individuals in the society.

• It considers human behaviour and can help to explain how society

works.

• Social science provide information that helps governments and other

policymakers.
 Natural science theories are usually
much ‘harder’ than the theories
associated with ‘softer’ social
sciences such as economics.

Economic theories often survive

only through allowing a
significant number of
exceptions to their
central predictions,
which according to
critics, turns the
theories into little
more than generalisations .

 ECONOMICS YEAR ONE

Similarities and differences in methodology from other sciences
Nature Science Social Science-Economics
• A natura l s ci ence i nvol ve s the stud y of the • E c o n o mic s a l s o u s e s e mp i ri c a l e v id e n c e t o
physi cal w orl d. It hel p s to exp l ai n how the d e v e lo p a n d t e s t t h e o ri e s .
w orl d around us w ork s.

• E c o n o mic s u s u a l l y re l ie s o n e v e n t s t o
p ro d u c e e v id e n c e , it i s v e ry d i ff i c u lt t o d e s ig n
• E mp i ri c al ev i den ce obtai ned through e x p e rime n ts th a t a re v a li d .
observ ati on , e xperi en ce and l aboratory
experi ments i s us ed to devel op a nd test theory.
• T h e b e h a v i o r o f p e o p le is l e s s p re d ic ta b le
th a n w h a t h a p p e n s in th e n a tu ra l w o rl d .

• F orma l sc i e nce do no t use empi ri cal evi dence

• It ma y ta k e ma n y y e a rs b e f o re s u ffi c i e n t
but they start w i th a s et of d efi ni ti ons, or
e v i d e n c e is a v a il a b l e to re j e c t a th e o ry.
pri nci pl es , from w hi ch theorems a re l ogi cal l y
E c o n o mic th e o ri e s a re a l s o mo d i f ie d a s n e w
devel op ed.
e v i d e n c e b e c o me a v a i l a b l e .
 Figure 6 The Phillips Curve in the 1960s

Inflation Rate
(percent per year)

10

1968
4
1966
1967

2
1965 1962
1964 1961
1963

0 1 2 3 4 5 6 7 8 9 10 Unemployment
Rate (percent)
Copyright © 2004 South-Western
Two types of investigation
P o s i tiv e Sta te me n t N o r m a ti v e Sta te m e n t
• Positive statement: a statement that can be • Normative Statement : a statement that is
tested against economics that can be proven based on value judgements, people’s views
to be true or false. of what is good or bad, right or wrong.

• It is the scientific or objective study of the • Ultimately, they are viewpoints about how
subject and concerned with finding out how economies and market should work.
economies and market actually work.

• Normative statement often contains the word

• can be supported or refuted by evidence. “should”, “ought” or consider equity (whether
something is fair or just).

• “the price of gold will rise in the next 12

months.”
How value judgement influence economic decisions making and
policy?

• Value judgement: are views are based on value judgements, people’s views of what
is good or bad, in a moral sense.

• Value judgement affect our decisions making and also the decision making policy of
firms and governments.

• If we value education and think it is important, then we may believe the more money
should be spent on education.
Practice Question
• Statement 1: The UK government increased eduction spending from ￡ 86.9 billion in 2012 to
￡ 87.3 billion in 2013.

• Statement 2: The government should allocate an additional ￡ 1 billion to schools to improve the
quality of education.

• Which one of the following best describes the two statements above?

Statement 1 Statement2

A Positive Positive

B Positive Normative

C Normative Positive

D Normative Normative