Basic Economic Ideas & Resource Allocation: TOPIC Objectives
Basic Economic Ideas & Resource Allocation: TOPIC Objectives
RESOURCE ALLOCATION
TOPIC objectives:
•Explaining the concept of economics
•Describing a Production possibility curve/
frontier
•Explaining the functions of money &
resource allocation
•Describing the classification of goods
Intro: What is economics?
• Discussion point:
• It’s a social science that deals with
the study of how to allocate scarce
resources in the most efficient
way.
• Task: Give examples to illustrate
that resources e.g. money are
never enough!!
• Human needs & wants are always
unlimited while the means of
providing them (resources) are
scarce.
• Thus choices must be in order of
priority of how to satisfy them
• Task: draw the illustration..
Economic analysis
Wirtschaft
Microecono Macroeconomics
mics
1. Microeconomics;
• Q2.9708/13/O/N/2012
Applications of the PPF
• The choice between production of
capital and consumer goods:
• Consumer goods are used to satisfy
wants directly while capital goods
are used to produce other goods eg
machinery
• Capital goods are created through
investment & are subject to capital
consumption/depreciation which is
the process of wear and tear
• Gross investment - depreciation=
net investment
• A choice has to be made btn.
producing consumer goods or
producing capital goods.
• More consumer goods will imply high
living conditions but this may reduce
in future if capital goods are not
produced to replace those worn out.
• This implies a hard choice so as to
balance out the two goods
• Hard choices for developing
economies
• They are faced with low living
standards hence they must
increase their capital stock
investment
• They must devote more resources
from current consumption to
investment so as to grow while
producing enough consumer goods to
feed their high populace.
• The issue of high population causes
lots of resources to be committed for
subsistence at the expense of capital
investment.
• This problem is referred to as ‘jam
today or more jam tomorrow’.
• Task: draw fig 1.11 from page 31
• Observations:
• o-a is the capital
consumption/depreciation
• O-b is the quantity of consumer
goods
• Producing o-b units of consumer
goods will improve welfare today
only.
• This is because depreciation rate
will be higher than the quantity of
capital goods produced.
• Self assessment task: page 30
Economic resources:
• These are the factors of production
or the factor inputs necessary to
create goods and services.
• They are always limited/scarce in
supply since human wants are
insatiable and recurrent in nature.
Categories of resources
1. Land;
• It’s a natural resource, free gift of
nature.
• It includes the earths surface, water
bodies, forests, atmosphere and
mineral deposits.
2. Labour;
• It’s the human effort used in
production.
• No production can occur with out
labour.
3. Capital
• These are man made aids to
production.
• Capital goods assist land and labour to
produce more output e.g. machinery,
• 4. Enterprise/entrepreneurship-
business skills
• The entrepreneur, business person,
organizes other factors of production
for maximum productivity.
• The enterprise involves risk taking in
undertaking various production
activities especially in a free
enterprise economy.
• Top tip:
• Economies with abundant resources
are said to have good factor
endowment
Factor rewards- earning to factors
of prodn
Factor input Factor reward
labour Salaries/wages
Land Rent
Capital Interest
Entrepreneurship profit
Economic resource video
• C:\Users\pnduati.
• Production and consumption
• Production is the process of creating
goods and services, from economic
resources, to satisfy human wants.
• Process of creating utility(usefulness of
goods & services)
• Consumption is the process of using goods
and services to satisfy human wants
Note
• Production occurs in 3 distinct
periods.
• 1. short run (SR)
• Time period during which a firm
can only change some and not all
factor inputs.
• E.g. in the SR a firm can increase
production by hiring more workers
ceteris paribus.
2. Long run (LR)
• Time period during which all factor
inputs can be varied.
• E.g. in the LR a firm can hire more
capital
• 3.Very long run
• Time period during which all key
inputs in to production are variable
• E.g. govt regulations, tech etc
SPECIALIZATION AND EXCHANGE
• C:\Users\pnduati Capitalism vs
Socialism
The Mixed economy
• What is money?..................
• It s an important aid to trade and is
anything that is generally acceptable as
a means of paying for goods and services.
• It includes notes & coins, cheques, debit
cards, credit cards or other valuable
items
• Money as a resource is scarce in supply
Near money
• Non cash assets that are highly
liquid.
• E.g. savings accounts, bonds etc.
• Assets that are cash or cash
equivalent are called liquid assets.
The origin of money
1. Medium of exchange
• It’s a medium that buyers use for
purchases and that sellers are
willing to accept in exchange for
products bought.
• It’s a means of paying for goods
and services
2. unit of account:
• Observations
• The ‘correct’ dd should be at D1
which leads to less quantity being
demanded.
• Because consumers over-value the
product, dd is registered at a higher
level
• This leads to overprodn and over
consumption.
• The market has failed because too
• much resources are devoted to the
production of this demerit good.
• Information failure
• Occurs where pple lack full info
about the benefits and harmful
effects of certain goods.
Discussion point;
• The end