BUSFF019 Lecture 1 - Basic Economic Problem PDF

FASS Foundation Programmes BUSFF019 ELEMENTARY ECONOMICS & MATHEMATICAL SKILLS Lecture 1 Basic Economic Problem 1  OUTLINE 1.1 Economic resources 1.2 Basic economic problem 1.3 Basic economic questions 1.4 Economic decision- making un...

FASS Foundation Programmes BUSFF019 ELEMENTARY ECONOMICS & MATHEMATICAL SKILLS Lecture 1 Basic Economic Problem 1  OUTLINE 1.1 Economic resources 1.2 Basic economic problem 1.3 Basic economic questions 1.4 Economic decision- making units 1.5 Private goods & public goods 1.6 Positive vs normative statements 2  LEARNING OBJECTIVES 1 2 3 Identify Explain the State the categories of basic basic economic economic economic resources problem questions 4 5 6 Describe the Explain the Distinguish goals of characteristics between economic of private positive & agents goods & normative public goods statements 3  Economic Resources Resources - inputs/factors of production used to produce goods (physical objects) & services (tasks performed for people to satisfy wants) Land Capital Labour Entrepreneurship 4 1.1 Economic Resources (a) Land  natural resources  land area & raw materials 5 Economic Resources (b) Capital  manufactured resources  inputs into production that have themselves been produced 6 Economic Resources (c) Labour  work time & work efforts (physical & mental) of human workforce  limited in number & skills 7 Economic Resources (d) Entrepreneurship  the human resource that organises land, capital & labour  risk-taking element 8  Basic Economic Problem Human wants are virtually unlimited or infinite The resources available to satisfy those wants are limited or scarce Gives rise to the basic economic problem – resources have to be allocated between competing uses Allocating resources between competing uses involves making choices Economics - the study of how society choose to allocate their scarce resources to provide for their unlimited wants Scarcity 9 1.2 Choice & Opportunity Cost Because resources are scarce, choices have to be made Making choice involves trade-off or sacrifice By deciding in favour of one action over another - opportunity cost incurred Opportunity cost - the cost of any activity measured in terms of the best alternative forgone (not all alternatives foregone) Quantity of goods you must give up Quantity of goods you will get 10 Opportunity Cost: What You Must Give Up Opportunity cost: the highest-valued alternative that must be given up Things you Things you can’t can’t afford to do with your time buy 11  Exercise 1 (a) In one day, Maggie can bake 500 cookies or 5 cakes. What is the opportunity cost per cookie for Maggie? (b) Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. What is the opportunity cost of producing a unit of X for Agnes? What is the opportunity cost of producing a unit of Y for Brenda? 12  Exercise 2 People sometimes say that viewing a beautiful sunset from the middle of the Sahara Desert have no opportunity costs. Do you agree? 13  Exercise 3 You plan to go to school this summer. If you do, you won’t be able to take your usual job that pays £6,000 for the summer, and you won’t be able to live at home for free. The cost of tuition is £2,000 and textbooks is £200, and living expenses are £1,400. What is the opportunity cost of going to summer school? 14 Past Test Question 2022-2023 State an opportunity cost: (i) To a student of undertaking longer hours of part-time work. (ii) To a country of allocating more resources to national defence. (4 marks) 15  Basic Economic Questions Economic choices can be summarised in 3 questions: WHAT to choice of mix of goods produce? & services to produce choosing which factors HOW to of production to use produce? more of & which to use less For WHOM distribution of goods & to produce? services to people 16 1.3  17 Source of data: CIA Factbook 2017, Central Intelligence Agency  Economic Decision-Making Units Consumers/ Producers/ Household Firms Economi c agents Factor owners Government 18 1.4 1. Consumers/Household  Buyers of goods & services  Economic goal? To maximise 19 2. Producers/Firms  Buy productive resources from factor owners & sell products to consumers  Economic goal? To maximise 20 3. Factor Owners  Owners of factors of production  Earn income by selling the services of the factors of production they own  Economic goal? To maximise 21 4. Government  Functions as a guide in economic activities of country  Formulates/implements economic policies  Economic goal? To maximise 22  Exercise Moodle 4 Identify the key terms/concepts associated with the following: (a) Labour, land, capital & entrepreneurship (b) The organising, risk-taking, & innovative resource (c) Payment for the use of land (d) The hours of human effort available for production (e) Entrepreneur’s reward (f) Payments for labour services (g) Entrepreneurshi The excess of human wants over what can Labour actually p be produced to fulfil Profit Rent these wants 23 Resource Scarcity Wages s  Private Goods  A private good is both rival and excludable  Examples: car, house, food & drink One person’s use of it decreases the quantity Rival available for someone else It is possible to prevent Excludable someone from enjoying its benefits 24 1.5 Public Goods  Produced by the government  Examples: national defence, flood-control dams Consumption of good by Non- one person will not rivalry prevent others from benefiting from it Non- once provided, no one can excludabil be excluded from ity benefiting from it 25  Positive vs Normative Statements  Economists can help governments to devise economic policy by examining the consequences of alternative courses of action.  In doing this, it is important to separate positive statements from normative statements Positive What the effects statement of the policies are Normative What the goals of statement policy should be 26 1.6 Positive Statement  Statement of fact (value-free statement): what is  May be right or wrong  Its accuracy can be tested by checking it against the facts  Examples: Unemployment is rising The percentage of the population fully vaccinated in my country is over 70% 27 Normative Statement  Statement of value (value judgement): what ought/ought not to be, good/bad, desirable/undesirable  Cannot be proved or disproved by a simple appeal to the facts  Examples: The government should lower the minimum wage The percentage of the population fully vaccinated in my country is too low 28  Exercise MS 5 Forms Classify the following statements as positive (P) or normative (N). 1. The inflation rate is greater this year than last year. 2. UK’s rate of economic growth is greater than Germany’s. 3. Students deserve to have free education. 4. The government should increase the retirement age. 5. Higher union wages cause inflation. 6. On average, annual income is influenced 29 positively by education.  Exercise 5 7. Malaysian workers should not have to compete with cheap foreign labour. 8. Malaysia’s national income per capita is higher than Singapore’s. 9. The value of the euro against other currencies is much too low. 10.Luxuries should be taxed more heavily than necessities. 11.It is unfair nurses are paid less than teachers. 30  Exercise 5 12.Annual increase in old age pensions in the UK is linked to the annual rate of inflation. 13.Instead of being linked to the rate of inflation, annual increase in old age pensions ought to be linked to the annual increase in UK average earnings. 14.The tax on cigarettes and other tobacco products should be increased and the extra revenue raised by the government should be spent on health care. 15.It would be a good idea if the government increase the tax on cigarettes and other tobacco products to limit the harmful effects of smoking 31 upon the nation’s health. Past Test Questions 2020-2021 Construct a positive statement and a normative statement in relation to the price of hand sanitizer. (4 marks) 2021-2022 Construct a positive statement and a normative statement in relation to the distribution of Covid- 19 vaccine. (4 marks) 2022-2023 Construct a positive statement and a normative statement in relation to the choice of residential properties to be built. (4 marks) 32  READINGS Economics, Sloman, Garratt & Guest, 11th ed. Chapter 1: Economics and Economies Economics, Michael Parkin, 14th ed. Chapter 1: What is Economics? Principles of Economics, Case, Fair & Oster, 13th ed. Chapter 1: The Scope and Method of Economics Chapter 2: The Economic Problem: Scarcity and Choice 33  EXTRA EXERCISES Source: http://cws.cengage.co.uk/mankiw_taylor2/students/stu_mcqs.htm Economics, 2nd Edition, N. Gregory Mankiw & Mark P. Taylor (Students’ Resources) Chapter 1: Ten Principles of Economics True/False 1 question: 2 Multiple Choice 5 questions: 16-18, 21 & 34 Chapter 2: Thinking Like an Economist True/False 2 questions: 12 & 13 Multiple Choice 6 questions: 21, 31-35 34