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Capitalism ? Mixed economy ? Scarcity ? Economic growth ? Command economy ? Entrepreneur Start-up Activity Discuss on the meanses to accord scarcity of resources with rapid population growth, so that it is possible to satisfy Human wants. Definitions of Economics The definition of economics has evolved over time. Economic theory has developed significantly, and new subjects have been added to the field. The definition of economics is ongoing, and it is under refinement mainly in areas such as: ? ? ? Wealth definition Welfare definition Scarcity definition Every definition is vulnerable to objections.
However, let us consider current ideas of what economics is all about and what economics as a subject is considered to be. In this regard, let us consider some universal truths ? Human wants are unlimited. ? Resources (means) to satisfy them are scarce (limited). ? Resources have alternative uses. 1. 1 MeanIng and Scope of econoMIcS 4 Definition: Grade 11 Economics Economics is a study of problems regarding choices that must be made due to scarcity of resources. It examines how the scarce resources can be used for the maximum fulfilment of human wants. Economics is a study of how society manages scarce resources.
The Nature of Economics We have observed that the variety in the definitions of economics reflects the changing views of economists over time. Some economists have treated economics as a science, and others consider it to be an art. Economics as a Science Science produces a systematic and organised knowledge that correlates causes and effects. This knowledge can be called a knowledge of “What is”. In economics, various facts are systematically collected, classified, analysed and interpreted to make predictions for the future, and it is in this sense that economics can be considered to be a science.
Economics as an Art One important definition of art is a technique or a way of doing or achieving something. While dealing with problems like unemployment, poverty and inflation, economics presents principles and methods by which these problems can be solved. Thus economics not only investigates the nature and causes of an economic problem but also sets guidelines for its solution. On this basis, we can consider economics to be an art. Branches of Economics The field and scope of economics is expanding rapidly and has come to include a vast range of topics and issues.
In the recent past, many new branches of the subject have developed, including development economics, welfare economics, environmental economics, and so on. However, the core of modern economics is formed by its two major branches: microeconomics and macroeconomics. 1. 1 MeanIng and Scope of econoMIcS Unit 1: ConCEpts of EConomiCs 5 Microeconomics Primarily deals with the behaviour of individual economic units. For instance, economic activities and studies concerning a consumer, a producer, a firm or industry, individual income, the determination of product price and factor price, etc. come under the scope of microeconomics.
The central problem of microeconomics is the problem of allocation of resources or the problem of price-determination. It is, therefore, termed price theory. Demand and supply are the main tools of analysis in microeconomics. Adam Smith is usually considered to be the founder of the field of microeconomics. Macroeconomics Deals with aggregates or averages covering an entire economy. For instance, total employment, national income, national output, total investments, total consumption, total savings, aggregate supply, aggregate demand and general price level, wage level and cost structure come under the scope of macroeconomics.
In other words, it is an aggregative economics that examines the interrelations among various aggregates, their determination and the causes of fluctuations in them. The central problem of macroeconomics is the problem of determining income and employment. Therefore, it is known as the theory of income and employment or simply income analysis. Aggregate demand and aggregate supply are the main tools of analysis in macroeconomics. The credit for the evolution of macroeconomics as a field of economics goes to Lord J. M. Keynes. Distinction between Microeconomics and Macroeconomics
Microeconomics is the study of individual economic units of an economy such as individual households, individual firms, or industries. On the other hand, macroeconomics is the study of an economy as a whole, and its focus is the study of broad economy-wide aggregates. For example, when we study the price determination of a commodity in a market, our study is micor-analysis and is treated by microeconmics, but if we study the trend of the general price of commodities over time in a country, our analysis macro-analysis and is treated by macroeconomics.
Major points of distinction between these two branches of economics are listed in Table 1. 1. 1. 1 MeanIng and Scope of econoMIcS 6 Table 1. 1 1 2 3 4 5 Grade 11 Economics Microeconomics It studies individual economic units of an economy. It deals with individual income, individual prices, individual outputs, etc. Its central problem is price determination and allocation of resources. Its main tools are the demand and supply of particular commodities and factors. It helps to solve the central problem of ‘what, how and for whom to produce’ in an economy. It discusses how the equilibrium of a consumer, a producer or an industry is attained.
Examples are: Individual income, individual savings, individual prices, an individual firm’s output, individual consumption, individual expenditure, etc. Macroeconomics 1 It studies an economy as a whole and its aggregates. 2 It deals with aggregates like national income, general price level and national output. 3 Its central problem is determination of level of income and employment. 4 Its main tools are aggregate demand and aggregate supply of an economy as a whole. 5 It helps to solve the central problem of ‘full employment of resources in the economy. 6 It is concerned with the determination of equilibrium levels of income and employment. 7 Examples are: national income, national savings, general price level, national output, aggregate consumption expenditure, aggregate employment, etc. 6 7 Usefulness and Significance of Economics Economics is an extremely useful subject, and its study and knowledge has acquired greater importance in recent times. As you know, economic problems are being faced today by an increasing number of countries all over the world, and this is one reason behind the growing importance of economics. Some of the advantages of studying economics are: ?
Economics helps us to understand certain problems and questions affecting individuals and families. For example, ^ the types of jobs that are available, ^ the level of wages in industries, ^ the effect of price rises on peoples’ standard of living. ? Economics explains problems and questions that affect society and the state as a whole, and it suggests suitable solutions for them. 1. 1 MeanIng and Scope of econoMIcS Unit 1: ConCEpts of EConomiCs 7 For example, ^ what are the causes of unemployment and how can we reduce it? ^ What causes price rises? ^ What policies should the government adopt to control inflation? Economics examines the actions and behaviours of different types of people under different circumstances. For example: employees, investors and speculators. ? Economics explains the causes of fluctuations in economic activity and helps us to understand business trends. ? Economics helps us to understand and solve crucial problems like poverty and unemployment. ? The study of economics is useful for economic planning and economic development. ? Economics helps us to understand and participate in international trade by examining the theory and practice of exports, imports, comparative costs, etc. Economics helps us to understand how different economic systems function. ? The study of economics helps us to understand how social welfare can be achieved through material means. In addition, the study of economics develops logical thinking and analytical attitudes, and it enhances our faculties of observation and judgement. Therefore, we may conclude that the study and knowledge of economics is useful and important to each of us and to society as a whole. Activity 1. 1 Answer these questions in a brainstorming session with the class: 1 2 Describe the nature of economics. Should it be treated as a science or an art?
How do economists make assumptions? 1. 1 MeanIng and Scope of econoMIcS 8 Grade 11 Economics 1. 2 METHODS OF STUDYING ECONOMIC PRINCIPLES At the end of this section, you will be able to: ? examine the methods of studying economics. Key Terms and Concepts ? ? ? ? Deductive method Inductive method Hypothesis Data processing ? Model ? Positive economics ? Normative economics Start-up Activity Discuss the following statement: “Like any other discipline, economics should be governed by laws” Every science develops hypotheses, generalizations, principles, laws, and theories that explain the phenomena it studies.
In order to develop these generalizations and theories, the science must have a methodology. This section briefly describes the kinds of methods usually adopted to study relationships between economic variables. It also considers both the role of value judgements in economic analysis and the general nature of economic laws. Deductive and Inductive Methods Deductive Method Deductive method is a method of reasoning which enables one to reach at a particular conclusion from a general statement or assumption. Most economic theories have been constructed through the deductive method. The principal steps involved in the deductive method are:
I Identifying the Problem and its Variables In any scientific enquiry, the analyst must have a clear idea of the problem to be investigated. He or she must also identify the significant variables that interact relative to the problem. The final laws and theories will be based on these understandings. 1. 1 MethodS of StudyIng econoMIc prIncIpleS Unit 1: ConCEpts of EConomiCs 9 II Defining Technical Terms and Making Assumptions The next step in the process is to accurately and precisely define the various technical terms to be used in the analysis and to clearly state the assumptions on which the final theories and laws will be based.
III Developing Hypotheses through Logical Deduction The next step is deducing hypotheses from the assumptions stated in Step (II). The hypotheses propose cause-and-effect relationships between the variables that are related to the problem identified in Step (I). In this process, the analyst uses logical reasoning to derive the hypotheses from the assumptions defined in Step (II). IV Testing or Verifying Hypotheses The hypotheses obtained in Step (III) must be verified before they can be established as theories of economics. On the basis of a hypothesis, economists make predictions.
To verify the hypothesis, these predictions are tested. V Comparing Predictions with Facts If, on testing, the predictions of a hypothesis are found to be in agreement with relevant facts in the real world, then a useful and correct theory has been constructed and developed. However, if predictions of the hypothesis are found to be in conflict with the facts, then two courses are open to the theorist. In the first, the theory is discarded in favour of a superior alternative. In the second, the process of constructing a theory is re-started by modifying the assumptions. Inductive Method
On the other hand, inductive method is a process of reasoning from a part to whole, from particular to generals or from the individual to the general. The inductive method develops economic theories on the basis of observations and experiments. In this method, detailed data are collected with regard to the economic phenomenon. Efforts are then made to arrive at hypothesis based on the observations and data collected. Note that the number of observations must be large in order to yield valid economic theories. 1. 1 MethodS of StudyIng econoMIc prIncIpleS 10 Grade 11 Economics
Various steps are gone through in developing economic theories through the inductive method. As in the deductive approach, the first step is to identify the problem, and the second step is defining technical terms and variables related to the problem. The next step is specific to the inductive method: collecting data about the variables related to the problem and doing some preliminary thinking about possible functional relationships between the variables. The next important step in this method is processing the collected data and determining which of the relationships considered in the previous step hold true.
Based on these results, the analyst develops hypotheses, which can then be refined and tested statistically. After creating a hypothesis, the analyst bases predictions on it and tests the predictions under real-life economic conditions. If the predictions agree with the actual behaviour of the economy, then a new reliable theory has been developed. However, if the predictions are in conflict with the actual behaviour of the economy, either the theory is discarded or fresh efforts are made to modify and refine it by collecting more data and processing them.
Integrated Deductive and Inductive Methods Which is more appropriate for developing economic theories and principles – is it the deductive or the inductive approach? The modern viewpoint in this regard is that both are needed for the proper development of scientific economic theories. Indeed, the two are complementary rather than competitive. Modern economists begin by developing economic hypotheses through logical deduction and then empirically test them through statistical or econometric methods. Model Building in Economics
Economists construct analytic economic models to help explain the behaviour of an individual consumer, producer or industry or of the economy as a whole. An economic model usually consists of a set of equations that express relationships between variables that are relevant to the problem under investigation. Each equation attempts to explain the behaviour of one variable, seeking to establish cause and effect relationships regarding it. Note that causation does not always run only in one direction. There are mutual relationships among variables: one variable influences other variables and is, 1. MethodS of StudyIng econoMIc prIncIpleS Unit 1: ConCEpts of EConomiCs 11 in turn, influenced by them. For instance, consumption depends upon income, and also consumption influences income through its participation in aggregate demand. Because of this mutuality in economic systems, the values of different variables are determined simultaneously, and models that involve more than one equation attempt to solve these equations simultaneously. Note also that a model does not represent its part of the real world in entirety. The model represents only its main significant features.
This is because, while constructing a model, we must incorporate some unrealistic assumptions in order to simplify the situation enough to be able to construct a model of it. Definition: A model is an abstraction of the real world. Why are economists interested in building models? One of the most important strategies of economists is the economic model. A model is a simplified theory or a simplified picture of what something is like or how something works. Simple models can often be constructed that reduce complex situations to their most basic elements.
Economic models include function, schedule and graph. Economic models are built for purposes of analysis and prediction. By analysis we mean determining how adequately we can explain the behaviour of an economic agent such as a consumer, a producer or the economic system as whole. Based on a set of assumptions, we use deductive logic to develop laws of economics that describe the behaviour of economic agents and that have general application. Prediction implies the ability of a model to forecast the effects of changes of some magnitude in the economy.
Positive versus Normative Economics: The Role of Value Judgement in Economic Analysis Positive Economics (Economics as a science) Definition: Positive economics is concerned with explaining what is. In other words, it develops theories and laws to explain observed economic phenomena. Example: Minimum-wage laws cause unemployment. 1. 2 MethodS of StudyIng econoMIc prIncIpleS 12 Definition: Grade 11 Economics Normative Economics (Economics as an art) Normative economics includes concerns of what should be, and it involves value Judgement. Example: The government should raise the minimum wage.
Laws and theories of positive economics do not include value judgements since positive economics is concerned only with facts, which are, in principle, either true or false. Positive economics deals with analysis of how the economy operates, whereas normative economics deals with analysis of the benefit of economic policies to society. Robbins emphasised that economics should be treated as a positive science only, and he contended that it should not become normative in character. In contrast, Professor Pigou argued that economists should not refrain from making value judgements.
The Nature of Economic Laws Economic laws are usually stated based on ceteris paribus. Ceteris paribus a Latin translated as “other things being equal,” used as a reminder that all variables other than the ones being studied are assumed to be constant. Economic laws are also known as economic generalisations and economic principles. Economic laws describe how man behaves as a producer or as a consumer. Such laws are also concerned with how the economic system works and operates. Here are some of the main features of economic laws: I Economic laws are a lot like statements of tendencies
Economic laws are very close to being statements of tendencies, unlike the laws of the physical sciences, which are quite exact, precise and definite. Because of their exactness, the laws of the physical sciences can predict the course of events, but the laws of economics lack this absolute predictive quality. II Economic laws are conditional. Laws of economics are conditional and are associated with a number of qualifications and assumptions. For example, the law of demand states that the demand for a commodity rises with a fall in its price, provided that other things remain the same. . 2 MethodS of StudyIng econoMIc prIncIpleS Unit 1: ConCEpts of EConomiCs 13 III Economic laws are scientific in nature. All scientific laws, including economic laws, establish relationships between cause and effect. For example, according to the law of demand, when the price of a commodity falls, the quantity demanded of it increases. Here, the fall in the price is the cause, and the rise in the quantity demanded is the effect. IV Economic laws are not completely exact and definite. Laws of economics are less exact and definite than are the laws of the physical sciences.
For example, the law of gravitation is so exact and definite that we can exactly calculate and measure the movements of the solar system. But this is not true for economic laws. We cannot say exactly what the economic behaviour of a person will be under certain conditions. We can only say that he or she would tend to behave in a particular manner. V Economic laws are not permanent and general. Unlike the laws of the physical sciences, economic laws are not permanent and general. For example, economic laws that apply to the hunting and pastoral stages of the evolution of economic life do not apply to the agricultural and industrial stages.
Similarly, the economic laws relevant to a capitalist system do not apply to a socialist system. Also, some laws of economics that are valid for developed countries might not be valid for developing countries. 1. 3 RESOURCE ALLOCATION At the end of this section, you will be able to: ? define concepts like scarcity, opportunity cost, choice and efficiency; ? construct production possibility curve; and ? distinguish the difference among economic resources, free resources and shortage of resources. Key Terms and Concepts ? Opportunity cost ? Economic resources ? Free resources ? PP curve ? PPF ?
Economic growth Startup Activity What are the central problems of Economics? 1. 2 reSource allocatIon 14 Grade 11 Economics As you know, the scarcity of resources in relation to the multiplicity of human wants is a basic fact of life. Every household, producer and economy is faced with the problem of scarcity of resources, natural as well as man-made. Therefore, it is very important that resources are used as efficiently as possible. To that end, they must be allocated properly among the available choices. The following section presents some basic economic concepts. Some Basic Concepts of Economics Economy
Human beings require various goods and services. These goods and services are produced through production units like factories, shops, offices, farms, and railways. These units also enable the people to earn income. In combination, these institutions and organisations may be collectively called an economy. We may define an economy as, a system which provides people with the means to work, and earn a living. The Economic Problem Human wants are unlimited, and productive resources such as land, raw materials, capital, and equipment that are used to produce goods and services to satisfy these wants are scarce.
With wants being unlimited and resources being limited, we cannot satisfy all of our wants. This gives rise to the problem of how to use scarce resources to attain maximum satisfaction. This is generally called the economic problem. We may say, the economic problem is concerned with the uses of scarce resources among alternative human wants and in using these resources towards the end of satisfying wants as fully as possible. ” Since all wants cannot be satisfied, due to scarcity of resources, we have to make choices. The economic problem is also called the problem of choice. Scarcity The economic problem is the problem of scarcity.
In daily life, scarcity means acute shortage of a certain commodity, but in economics, it means limitation in the supply of a commodity relative to the need for it. Similarly, resources are said to be scarce when they are not available in sufficient quantity to satisfy all human wants. In other words, resources are scarce when the demand for them exceeds their availability. And it is the scarcity of resources that creates economic problems. In other words, if resources were available in full abundance, unlimited goods and services would be produced to satisfy unlimited human wants and there would be no economic problems. . 2 reSource allocatIon Unit 1: ConCEpts of EConomiCs 15 Choice With limited resources, we cannot satisfy all our wants, and thus we make choices. Like an individual, a society also must make choices between various alternatives. The economic problem is called a problem of choice because the economy has to make choices between various types of goods that can be produced with the given resources. For example, it might choose between goods for civil use or military use, or might make a choice between luxury goods and necessity goods. Choice, in turn, implies cost or, we may say, it involves sacrifice.
Because of the scarcity of resources, our choice of one thing means the sacrifice of another. Thus, when we make a choice for one thing, it is at the cost of some other thing. This leads us to another concept in economics, known as opportunity cost. Opportunity Cost Definition: The opportunity cost of a commodity is the amount of other commodities that must be forgone in order to produce the first. In this context, the cost of producing a quantity of a commodity is measured in terms of the quantity of some other commodity that could have been obtained instead.
The opportunity cost arises because of the problem of scarcity of resources and the fact that resources have alternative uses. Hence, when we use resources in the production of one commodity, we must forgo some amounts of other commodities that could have been produced with these same resources. For example, given resources may be used for the production of cloth or of bread. If a given amount of resources can produce either 1 metre of cloth or 20 loaves of bread, then the cost of 1 metre of cloth is the 20 loaves of bread that must be sacrificed in order to produce the metre of cloth.
Efficiency (Economising of Resources) Economising resources means making the best use of available resources. In other words, it implies optimum utilisation of existing resources. The need to economise resources arises because resources are scarce and have different uses. Usually the demand for a resource exceeds, its availability, and this compels the economy to utilise its available resources in the most efficient manner in order to get maximum production and satisfaction. 1. 2 reSource allocatIon 16 Definition: Grade 11 Economics
Efficient Use of Resources Efficiency: The condition that exists when society gets the most that it can from scarce resources. Since resources are scarce or limited, they should be used fully and in an efficient manner. The problem of efficiency in the use of resources exists in all economies. At times, certain forces build up as a result of which the full utilisation of available resources is not possible. The unused capacity to produce goes to waste. The economy must identify such forces and take remedial action.
Full utilisation of available resources has taken place when no re-allocation of resources for increasing the production of some goods can be made without reducing the production of other goods. Resources There are two types of resources: free resources and economic resources. Free Resources Resources that are free gifts of nature and that are unlimited in supply, and do not have prices are known as free resources. For example, air, sunshine, and a mountain stream. Scarcity Vs. Shortage These two words are often used interchangeably, but they mean different concepts in Economics.
Scarcity means that society has limited resources and therefore, can not produce all the goods and services people wish to have. Scarcity is a universal problem that faces all societies because there are not enough resources to produce everything people want. A shortage is a situation in which the quantity demanded is greater than the quantity supplied. Shortages occur when producers are not or can not offer goods or services at the current price. Economic Resources Resources that are scarce or limited and that have prices are known as economic resources, for example, land, buildings, and machinery.
Broadly speaking, we can divide economic resources into four categories. Land, labour, capital, and entrepreneurship. 1. 2 reSource allocatIon Unit 1: ConCEpts of EConomiCs 17 Land: In ordinary language, land means the outer surface of the earth. However, in economics the meaning of the term land is more comprehensive. Here, it includes all natural wealth that exists on or under the surface, including features such as rivers, soil, forests, mines, and deserts. The reward for land is rent. Labour: By labour, we mean all mental and physical labour which is helpful in the production of goods and services.
In this way, services of a wide variety of people, such as lawyers, doctors, farm workers and factory workers, come within the category of labour. In short, all labour – mental and physical – that is done in order to earn money is called labour. Work that is performed for other reasons – for example, to provide a social service, or for entertainment, love, or affection – is not labour in economic terms. The reward for labor is wage and salary. Capital: All man-made goods that are used for the further production of wealth are included in capital.
Thus, capital is the man-made material sources of production. Alternatively, all man-made aids to production that are not consumed for their own sake are categorized as capital. Some examples are machines, tools, buildings, roads, bridges, raw material, trucks, and factories. The reward for capital is interest. Entrepreneurship: entrepreneurship is the taking of production risks and business creation. As described later in this unit, an entrepreneur is a person who organizes the other resources of production and undertakes the risks and uncertainties involved in production.
The reward for interpreneurship is profit. Economic Growth The question of whether an economy’s capacity to produce goods and services is growing, stagnating, or dropping over time is faced by all economies. Every economy must explore its growth potential in order to enable increases in its level of production. Economic growth or growth of resources can be achieved in different ways, including technological advancement and the production of new types of goods. Rapid economic growth is necessary for raising the living standard of any economy’s population.
Economic growth may be defined as an increase over time in per-capita output of material goods. The Production Possibility Curve (PPC) The production possibility curve (PPC) is an important tool of modern economics for explaining and interpreting basic economic problems. 1. 3 reSource allocatIon 18 Definition: Grade 11 Economics A production possibility curve (PPC) shows us all possible combinations of production quantities of multiple products. The production quantities represent maximum possible output and are based on full and efficient use of currently available resources and of the current production technology.
Let’s now consider a hypothetical production situation and the PPC associated with it. Note that all production possibility curves assume full and efficient use of: ? current available resources required to produce the products ? the current technology used to produce the products For the sake of simplicity, let us assume that, with the given resources, only two goods – guns and butter – can be produced. Production Possibility Schedule Table 1. 2 is a production possibility schedule that shows various production trade-offs between units of guns versus units of butter. Table 1. Hypothetical production possibility schedule for guns and butter Production possibilities A B C D E Units of guns 0 1 2 3 4 Units of butter 100 90 70 40 0 Table 1. 2 shows five possible combinations of production quantities – A through E. As shown for scenario A, if all the given resources are used to produce butter, 100 units of butter can be produced. On the other hand, as shown at point E, when all the resources are used to produce guns, 4 units of guns can be produced. In between these two scenarios, many other possible combinations of production quantities exist, and we can consider as many or as few of them as we choose.
In our case, we examine those of points B, C, and D. Production Possibility Curve Now let’s examine Figure 1. 1, which presents the production possibility curve for the schedule in Table 1. 2. As for all production possibility curves, the curve in Figure 1. 1 illustrates varying production combinations of specific products. 1. 3 reSource allocatIon Unit 1: ConCEpts of EConomiCs 19 In our case, they are guns and butter. Study Points A-E on the curve and observe their correspondence with the data in the Table 1. 2. NOTE In our example , there are only two products.
However, the concepts and procedures for production possibility curves can involve any number of products. (Attainable and e cient) (Attainable but ine cient) Figure 1. 1: Hypothetical production possibility curve for guns and butter Now consider the trade-offs illustrated in Figure 1. 1. As we move from point to point on the curve (from scenario A through scenario E), we take more and more resources from the production of butter and devote them to the production of guns. In other words, we give up units of butter in order to have some more units of guns. In order to understand the relationship etween production possibility curves and basic economic problems, study the following information about our hypothetical production possibility curve: i Points A, B, C, D, and E on the curve show five production possibilities for units of guns versus units of butter, illustrating the trade-offs that result from increasing one product over the other. To decide what to produce and the quantities of each item to produce, we assess these trade-offs relative to the economy’s goals. Regarding efficiency in production technique and in use of resources. If a production point lies anywhere inside the curve, inefficiency and waste are occurring.
Consider Point K, which lies inside the production possibility curve. Point K represents the production of two units of guns with 60 units 1. 3 reSource allocatIon ii 20 Grade 11 Economics of butter. However, Point C, which falls on the curve itself, tells us that greater production is possible – at full resource utilization, we can produce 70 units of butter (rather than 60) as well as the same two units of guns. Therefore, if the production is at Point K (or at any point inside the curve), it is inefficient in its use of the available resources, technology level, or both.
In contrast, any production point shown outside of the curve – such as U – represents an unattainable combination of goods, given current conditions of resources and technology. iii If the economy’s production capacity increases, reflecting economic growth, the production possibility curve shifts outward, to the right, as shown in Figure 1. 2, showing that greater quantities of both types of goods can be produced. Economic growth has led to increased available resources, higher technology levels, or both. Figure 1. 2: Shift in hypothetical production possibility curve due to economic growth
Activity 1. 2 With your economics workgroup, perform the following task and question: 1 2 3 Visit a factory in your locality and try to establish the PPC of the firm. What causes a PPC to shift outwards? Can an economic model exactly explain/describe reality? Opportunity Cost and PPC Recall that the opportunity cost of a commodity is the amount of other commodities that must be forgone in order to produce the first. 1. 3 reSource allocatIon Unit 1: ConCEpts of EConomiCs 21 Let us explain the concept of opportunity cost by using a PPC. For the curve in Figure 1. , assume that the economy is producing at Point C. It indicates production of 70 units of butter and 2 units of guns. Now assume that the economy needs one more unit of guns. To make this change, production must move to Point D, which shows that, when the economy increases gun production by one unit, it must forgo 30 units of butter. In other words, 30 units of butter is the opportunity cost of one unit of guns. The opportunity cost of a commodity is the amount of another commodity that must be forgone in order to produce the first. Figure 1. 3: Hypothetical opportunity cost and PPC
Generally, the opportunity cost of producing a commodity is calculated as follows: Opportunity cost of a commodity = the amount of the next-best alternative given up the amount of the commodity produced Shape of the PPC Observe that a PPC is a downward sloping curve. That shape is because, as we produce more of one commodity (guns), the amount of other commodity produced (butter) is decreased. Also, with the production of more and more guns, the amount of butter given up for every additional unit of guns increase. As you can see, this means that the opportunity cost of guns increases.
As a result, PPC curves slope down because increased production of one commodity is associated with lower production of the other. Finally, the PPC curves becomes concave to the origin, mainly because of increasing opportunity cost. 1. 3 reSource allocatIon 22 Grade 11 Economics Activity 1. 3 Perform these tasks: 1 2 Construct a PPC that shows your grades (marks) in economics and in maths so far this year. Calculate the opportunity cost of your grades for the two subjects. 1. 4 ECONOMIC SYSTEMS At the end of this section, you will be able to: ? express what economic system is; and ? ompare and contrast the three economic systems. Key Terms and Concepts ? Capitalism ? Capitalistic economy ? Command economy ? Mixed economy ? Percapita income Startup Activity How do you describe decentralisation of economic power? Enumerate some of its advantages by considering the economic power of the regional states of FDRE. Every modern society faces certain basic economic problems, such as: ? What goods and services should be produced and in what quantity? ? How and where should production be organized so as to produce the required goods and services most efficiently? How should the resulting output be distributed? Basic Economic Questions Economic problems faced by an economic system due to scarcity of resources are known as basic economic problems. These problems are common to all economic systems. They are also known as central problems of an economy. 1. 3 econoMIc SySteMS Unit 1: ConCEpts of EConomiCs 23 The three central/basic economic questions are: ? ? ? What to produce? How to produce? For whom to produce? In addition to these, every economy is faced with other problems like: ? How most efficiently utilise resources. How to accelerate the rate of economic growth. What to Produce? This problem is also known as the problem of allocation of resources. It implies that every economy must decide which goods and in what quantities are to be produced. The economy must make choices such as these: consumption goods versus capital goods, civil goods, versus military goods, and necessity goods versus luxury goods. As we know that the resources to produce any of these goods are limited, we must reduce the production of one type of goods if we want more of another type.
Generally the final choice of any economy is a combination of the various types of goods, but the exact nature of the combination depends upon the specific circumstances and objectives of the economy. How to Produce? This problem is also known as the problem of choice of technique. Once an economy has reached a decision regarding the types of goods to be produced, and has determined their respective quantities, the economy must decide how to produce them, choosing between alternative methods or techniques of production.
For example, cotton cloth can be produced with hand looms, power looms, or automatic looms. Similarly, wheat can be grown with primitive tools and manual labour, or with modern machinery and little labour. Broadly speaking, the various techniques of production can be classified into two groups: labour-intensive techniques and capital-intensive techniques. A labourintensive technique involves the use of more labour, relative to capital, per unit of output. A capital-intensive technique involves the use of more capital, relative to labour, per unit of output.
The choice between different techniques depends on the available supplies of different factors of production and their relative prices. Making good choices is essential for making the best possible use of limited resources to produce maximum amounts of goods and services. 1. 3 econoMIc SySteMS 24 Grade 11 Economics For Whom to Produce? This problem is also known as the problem of distribution of national product. It relates to how a material product is to be distributed among the members of a society. National product is the sum total of all the goods and services produced in an economy during a particular period.
The economy must decide, for example, whether to produce for the benefit of the few rich people or for the large number of poor people. An economy that wants to benefit the maximum number of persons would first try to produce the necessities of the whole population and then to proceed to the production of luxury goods. All these and other fundamental economic problems center around human needs and wants. Many human efforts in society are directed towards the production of goods and services to satisfy human needs and wants. These human efforts result in economic activities that occur within the framework of an economic system.
An economic system may thus be defined as the legal and institutional framework within which economic activities take place. It can also be referred to as an organisation for the purpose of satisfying the peoples’ needs by using available means of production. We shall now study different types of economic systems, classified on the basis of ownership of resources. These are: ? Capitalistic economy ? Command economy ? Mixed economy Capitalistic Economy (Capitalism) Capitalism is the oldest formal economic system in the world. It became widespread in the middle of the 19th century.
In this economic system, all means of production are privately owned, and production takes place at the initiative of individual private entrepreneurs who work mainly for private profit. Government intervention in the economy is minimal. This system is also called free market economy or market system or laissez faire. Main Features of Capitalistic Economy ? The Right to Private Property: The right to private property is a fundamental feature of a capitalist economy. As part of that principle, economic or productive factors such as land, factories, machinery, mines etc. re under private ownership. 1. 3 econoMIc SySteMS Unit 1: ConCEpts of EConomiCs 25 ? Freedom of Enterprise: Each individual is free to engage in any economic activity that he or she considers to be desirable, profitable, etc. ? Freedom of Choice by Consumers: Consumers can buy the goods and services that suit their tastes and preferences. Producers produce goods in accordance with the wishes of the consumers. This is known as the principle of consumer sovereignty. ? Profit Motive: Entrepreneurs, in their productive activity, are guided by the motive of profit-making. Competition: In a capitalist economy, competition exists among sellers or producers of similar goods to attract customers. Among buyers, there is competition to obtain goods. Among workers, the competition is to get jobs. Among employers, it is to get workers and investment funds. ? Price Mechanism: All basic economic problems are solved through the price mechanism. ? Minor Role of Government: The government does not interfere in dayto-day economic activities and confines itself to defence and maintenance of law and order. ? Self-Interest: Each individual is guided by self-interest and motivated by the desire for economic gain. Inequalities of Income: There is a wide economic gap between the rich and the poor. ? Existence of negative externalities: A negative externality is the harm, cost, or inconvenience suffered by a third party because of actions by others. In capitalistic economy, decision of firms may result in negative externalities against another firm or society in general. Advantages of Capitalistic Economy ? Flexibility or Adaptability: It successfully adapts itself to changing environments. ? Decentralisation of Economic Power: Market mechanisms work as a decentralising force against the concentration of economic power. Increase in Per-Capita Income and Standard of Living: Rapid growth in levels of production and income leads to higher per-capita income and standards of living. ? New Types of Consumer Goods: A variety of new consumer goods are developed and produced at large scale. ? Growth of Entrepreneurship: Profit motive creates and supports new entrepreneurial skills and approaches. ? Optimum Utilisation of Productive Resources: Full utilisation of productive resources is possible due to innovations and technological progress. 1. 3 econoMIc SySteMS 26 Grade 11 Economics High Rate of Capital Formation: The right to private property helps in capital formation. ? Reward According to Ability: The most efficient and dynamic entrepreneurs are amply rewarded, while those who are inefficient are eliminated from the field. Disadvantages of Capitalistic Economy ? Inequality of Income: Capitalism promotes economic inequalities and creates social imbalance. ? Too Much Waste: There is considerable waste in capitalism due to high levels of competition. ? Unbalanced Economic Activity: As there is no check on the economic system, the economy can develop in an unbalanced way in terms of different geographic regions and ifferent sections of society. ? Emphasis on Materialism: Capitalism promotes materialism. Every activity is motivated by monetary considerations and might not be related to human welfare. ? Exploitation of Labour: In a capitalistic economy, exploitation of labour (for example by paying low wages) is common. ? Trade Cycles of Economic Booms and Depressions: Because, at the national level, saving, investment and production are unplanned and uncoordinated, overproduction and underproduction can occur. ? Negative externalities: are problems in capitalistics economy where profit maximization is the main objective of firms.
If economic makes sense for a firm to force others to pay the leal of negative externalities such as pollution. Command Economy (Socialism) Command economy is also known as socialistic economy. In it, the economic institutions that are engaged in production and distribution are owned and controlled by the state and are put to use under a centralised plan. Beginning with Russia (in 1917), many countries of the world, including China, Vietnam, former East Germany, Poland, Hungry, and Cuba, adopted socialism. Many of them adopted this system after the Second World War.
However in the recent past, socialism has lost its popularity and most of the socialist countries are trying free market economies. H. D. Dickenson defines socialism as “an economic organisation of society in which the material means of production are owned by the whole community 1. 3 econoMIc SySteMS Unit 1: ConCEpts of EConomiCs 27 according to a general economic plan, all members being entitled to benefit from the results of such socialised planned production on the basis of equal rights”. Main Features of Command Economy ? Collective Ownership: All means of production are owned by the society as a hole, and there is no right to private property. ? Clear Social and Economic Objectives: A command economy has clear objectives and attains them through conscious efforts. The socioeconomic goals might include rapid industrialisation, raising the standard of living of the weaker sections of the society, etc. ? Central Economic Planning: Planning for resource allocation is performed by the controlling authority according to given socioeconomic goals. ? Government strong role: Government has complete control over all economic activities. Maximum Social Welfare: Command economy aims at maximising social welfare and does not allow the exploitation of labour. ? Relative Equality of Incomes: Private property does not exist in a command economy, the profit motive is absent, and there are no opportunities for accumulation of wealth. All these factors lead to greater equality in income distribution, in comparison with capitalism. Advantages of Command Economy ? Best Utilisation of Resources: Since a command economy is a planned economy, it can ensure the best utilisation of economic resources. Absence of Wasteful Competition: There is no place for wasteful use of productive resources through unhealthy competition. ? Smooth Working of the Economy: A command economy faces no cyclic fluctuations in business activity and works smoothly. There are no chances of overproduction or underproduction. ? Balanced Economic Growth: Allocation of resources through centralised planning leads to balanced economic development. Different regions and different sectors of the economy can develop equally. Elimination of Private Monopolies and Inequalities: Command economies avoid the major evils of capitalism such as inequality of income and wealth, private monopolies, and concentration of economic, political and social power. Disadvantages of Command Economy ? Absence of Automatic Price Determination: Since all economic activities are controlled by the government, there is no automatic price mechanism. 1. 3 econoMIc SySteMS 28 Grade 11 Economics ? Absence of Incentives for Hard Work and Efficiency: The entire system depends on bureaucrats who are generally considered inefficient in running businesses.
There is no financial incentive for hard work and efficiency. The economy grows at a relatively slow rate. ? Lack of Economic Freedom: Economic freedom for consumers, producers, investors, and employers is totally absent, and all economic powers are concentrated in the hands of the government. ? Red-Tapism: Red-tapism is widely prevalent in a command economy because all decisions are made by government officials. Mixed Economy A mixed economy is an attempt to combine the advantages of both the capitalistic economy and the command economy.
It incorporates some of the features of both and allows private and public sectors to co-exist. Definition: A mixed economy is an economy containing the characteristics of both capitalism and socialism: a combination of private and public ownership of the means of production, with some measures of control by the government. The concept of mixed economy is of recent origin and many developing countries have adopted the system of mixed economy. Main Features of Mixed Economy ? Co-existence of Public and Private Sectors: Public and private sectors co-exist in this system. Their respective roles and aims are well-defined.
Industries of national and strategic importance, such as heavy and basic industry, defence production, power generation, etc. are set up in the public sector, whereas consumer-goods industry and small-scale industry are developed through the private sector. ? Economic Welfare: Economic welfare is the most important criterion of the success of a mixed economy. The public sector tries to remove regional imbalances, provides large employment opportunities and seeks economic welfare through its price policy. Government control over the private sector leads to economic welfare of society at large. Economic Planning: The government uses instruments of economic planning to achieve co-ordinated rapid economic development, making use of both the private and the public sector. 1. 3 econoMIc SySteMS Unit 1: ConCEpts of EConomiCs 29 ? Price Mechanism: The price mechanism operates for goods produced in the private sector, but not for essential commodities and goods produced in the public sector. Those prices are defined and regulated by the government. ? Economic Equality: Private property is allowed, but rules exist to prevent concentration of wealth. Limits are fixed for owning land and property.
Progressive taxation, concessions and subsides are implemented to achieve economic equality. Advantages of Mixed Economy ? Private Property, Profit Motive and Price Mechanism: All the advantages of a capitalistic economy, such as the right to private property, motivation through the profit motive, and control of economic activity through the price mechanism, are available in a mixed economy. At the same time, government control ensures that they do not lead to exploitation. ? Adequate Freedom: Mixed economies allow adequate freedom to different economic units such as consumers, employees, producers, and investors. Rapid and Planned Economic Development: Planned economic growth takes place, resources are properly and efficiently utilised, and fast economic development takes place because the private and public sector complement each other. ? Social Welfare and Fewer Economic Inequalities: The government’s restricted control over economic activities helps in achieving social welfare and economic equality. Disadvantages of Mixed Economy ? Ineffectiveness and Inefficiency: A mixed economy might not actually have the usual advantages of either the public sector or the private sector.
The public sector might be inefficient due to lack of incentive and responsibility, and the private sector might be made ineffective by government regulation and control. ? Instability: Over time, a mixed economy might change to one of the other types of economies. It would become a command economy if the public sector expanded to such an extent that it took over the private sector. On the other hand, a mixed economy could turn into a capitalistic system if the public sector failed to produce desired results and economic institutions and decision-making passed into private hands. . 3 econoMIc SySteMS 30 Grade 11 Economics ? Economic Fluctuations: If the private sector is not properly controlled by the government, economic fluctuations and unemployment can occur. ? Corruption and Black Markets: Usually, if government policies, rules and directives are not effectively implemented, corruption and black markets appear. To Sum Up: Although, in concept a mixed economy is ideal because it incorporates the advantages of both capitalism and socialism, its success depends totally on government efficiency and effectiveness.
The system has been successfully adopted by some countries, including Sweden, Denmark and Switzerland, but it has not given appropriate results in many other countries. Note: The capitalist (market) and socialist (command) economies are two extremes. In actuality, no contemporary society falls completely into either of these polar categories. Rather, all societies today are mixed economies, with elements of both capitalism and socialism. Activity 1. 4 1 In the Ethiopian context, which one is more favorable to development – command economy, mixed economy, or capitalist economy?
Explain and justify your answers. What are the central questions of an economics? Identify the differences between labour-intensive techniques and capitalintensive techniques 2 3 1. 5 DECISION-MAKING UNITS AND CIRCULAR FLOWS OF ECONOMIC ACTIVITIES Key Terms and Concepts ? Household ? Business firms ? Decentralization of economic power ? Economic booms and depression At the end of this section, you will be able to: ? construct circular flows of economic activities and interpret them. Startup Activity Discuss decentralization of economic powers, using the government FDRE’s policy as a case study. 1. decISIon-MakIng unItS and cIrcular flowS of econoMIc actIvItIeS Unit 1: ConCEpts of EConomiCs 31 Production, exchange and consumption are three important activities of an economy. As people carry out these economic activities, transactions between different sectors of the economy occur. Because of these transactions, income and expenditure move in a circular way in an economy. This is called circular flow of income or circular diagram. Before we illustrate and explain the circular flow of income in an economy, let’s consider the different sectors into which an economy is divided for this purpose.
These sectors are also sometimes referred to as decisionmaking units of the economy. Generally they are referred to as economic agents. The Decision-Making Units of an Economy Household Sector Households are the main owners of factors of production – land, labour, capital and entrepreneurship. They sell the services of these factors (called factor service) to producers and, in return, receive their income in the form of rent, wages, interest, etc. They spend a large part of their income purchasing goods and services from the producers. However, they save part of their income, and also they pay taxes to the government out of their income.
Business Sector (Firms) In economics, we use the terms business sector, producers and firms interchangeably. Firms hire services of factors of production from households to produce commodities that they sell to households, to other firms, to the government or to other countries. Firms are the principal buyers of factors of production and they are the main producers of commodities. The business sector consists of both private and government enterprises. Government Sector In economics, government is taken in the sense of ‘general government’ so as to exclude government enterprises.
General government gets its income largely from taxes imposed on households and on the business sector in the form of direct and indirect taxes. General government buys goods and services from the producers and factor services from the households. It uses these commodities and factor services to provide free services, such as police, education, medical facilities, sanitation facilities, judicial services, etc. , to the people so as to satisfy their collective wants for those services. 1. 5 decISIon-MakIng unItS and cIrcular flowS of econoMIc actIvItIeS 32 Grade 11 Economics The Rest of the World
Different sectors of an economy have transactions not only with each other, but also with foreign countries – the rest of the world. A country exports goods and services to other countries, and similarly it imports goods and services from other countries. Note: For the sake of simplicity, we shall limit our future discussion in this section to a closed economy, which is an economy that does not interact with the rest of the world and therefore is not engaged in the import or export of goods and services. Activity 1. 5 Perform these tasks: 1 2 Identify the decision-making units of an economy.
Discuss the objectives of each decision-making unit. Definition: A circular flow of income is a visual model of an economy that shows how a currency, such as the Birr, flows through markets among decision-making units. Circular Flows of Income and Expenditure A circular flow is a pictorial representation of the continuous flow of payments and receipts for goods and services and factor services between different sectors of the economy. Flow Types Economic transactions, like the sale and purchase of goods and factor services, generate two kind of flows – real flows and money flows see Figure 1. . Note that real flows and money flows are two sides of the same coin. A real flow of goods and services is matched by an equal but reverse money flow. Real Flows Real flows consist of the flows of ? factor services from the owners of factor services to the producers and ? goods and services from the producers to the buyers. 1. 5 decISIon-MakIng unItS and cIrcular flowS of econoMIc actIvItIeS Unit 1: ConCEpts of EConomiCs 33 Money (Financial) Flows Money flows consist of the flows of ? money incomes from factor services such as rent, wages, interest, etc. , and ? he money expenditures incurred for the purchase of goods and services. Figure 1. 4: Circular Income Flows – Real Flow and Money Flow Models of Circular Flow For closed economies, we have two models of circular flow: ? Two-sector model, consisting of the flows between households and the business sector (firms). ? Three-sector model, consisting of the flows among households, the business sector, and the government sector. Two-Sector Models of Circular Flow The two-sector model represents a private closed economy with only two sectors – the household sector and the business sector (firms).
It can further be divided into these two types: i Two-sector economy without savings ii Two-sector economy with savings I Two-Sector Economy without Savings ? There are only two sectors in the economy: the household sector and business firms. ? Household sectors are owners of factors of production and they supply factor services to the firms. ? Firms produce goods and services and sell their entire output to households. 1. 5 decISIon-MakIng unItS and cIrcular flowS of econoMIc actIvItIeS In this model our assumptions are: 34 Grade 11 Economics Households receive income for their factor services and spend the entire amount on consumption. ? There is no savings in the economy. ? There is no government sector. ? It is a closed economy, and therefore there are no exports or imports. The circular flows in a two-sector economy without savings are illustrated in Figure 1. 5. Factor Services (Land, Labour, Capital, Entreprenuer) Figure 1. 5: Circular flow of income in a two-sector economy without savings Note that Figure 1. 5 shows the two types of flows – real flow (of factor services and of goods and services) and money flow.
There is a continuous flow of factor services (in the form of land, labour, capital and entrepreneurship) from households to firms in the economy. Firms produce goods and services with the help of these factors and supply them to the households for consumption. This is called real flow of goods and services. The inner circle of the diagram shows that real flow. Since, in a monetary economy, all payments are made in money, the real flow is also the money flow of income, which is shown as the outer circle of Figure 1. 5. When firms get factor services from households, they make monetary payments against them to the households.
Households spend this income on the purchase of goods and services from the firms for their consumption. Because, in this model, the households spend all their income on consumption of goods and services, the 1. 5 decISIon-MakIng unItS and cIrcular flowS of econoMIc actIvItIeS Unit 1: ConCEpts of EConomiCs 35 total money receipts of the firms is the same as the total income of the households. Thus, money flows from firms to households (as payments for factor services) and back from households to firms (as payments for goods and services).
This is the money flow of income shown by the outer circle of the diagram in Figure 1. 5. II Two-Sector Economy with Savings In the real world not all income is spent on consumption. Part of it is saved. For the sake of simplicity, we assume that savings are made by the household sector only. These savings are deposited in the capital market or in the financial system (such as banks, insurance companies, financial institutions, etc. ). From the capital market, these savings flow to the firms for investment. The circular flow of income in a two-sector economy with savings is illustrated in Figure 1. . Factor Services (Land, Labour, Capital, Entreprenuer) Figure 1. 6: Circular flow of income in a two-sector economy with savings Three-Sector Model of Circular Flow In the three-sector model of circular flow, the economy has the following three sectors: households, firms, and government. In this model, activities of the government (as well as of the other two sectors) influence the flow of income. There are two main categories of economic government activities: government revenue and government expenditure. The circular flow of income in a three-sector economy is shown Figure 1. 7. 1. decISIon-MakIng unItS and cIrcular flowS of econoMIc actIvItIeS 36 Grade 11 Economics Figure 1. 7: Circular flow of income in a three-sector economy The figure shows that firms make payments to households against factor services received from them. And households make payments to firms for goods and services purchased from them. Household savings are deposited in the capital market and, in turn, they are given to the firms for investment. Government gets its revenue by imposing taxes on households and on firms. Government pays back this revenue to the firms and households by purchasing oods and services from them. Also, government gives subsidies to the firms and transfer payments to the households. In this way, national income flows in a circular form among the three sectors of the economy. Entrepreneurs An entrepreneur is a person who organises the other factors (resources) and undertakes the risks and uncertainties involved in production. He or she hires the other three factors, brings them together, and organises and coordinates them in a way that results in the earning of maximum profit. For example, Mr. X, who takes the risk of manufacturing television sets, is an entrepreneur.
An entrepreneur acts as the leader and decides how the business shall run. He or she decides in what proportion factors should be combined. The entrepreneur is 1. 5 decISIon-MakIng unItS and cIrcular flowS of econoMIc actIvItIeS Unit 1: ConCEpts of EConomiCs 37 loosely identified as the owner, speculator, innovator or inventor, and organiser of the business. Entrepreneurship is practiced by the entrepreneur is a production resource that coordinates labor, capital, natural resources and technology. Characteristics of Entrepreneurs
An entrepreneur must possess these characteristics, and must exercise them with both mind and heart, to create and run a successful business: ? Far sightedness: The entrepreneur must be far-sighted. He should possess the ability to foresee changes in the market place. ? Courage: The entrepreneur must be courageous in order to meet the challenges and difficulties of business. ? Quality of leadership: An entrepreneur must be a leader and able to influence people and win their confidence. He or she must also be thoughtful and skilled. ? Ability to organise labour: An entrepreneur must be a good organiser.
He or she must be sympathetic, flexible and helpful in order to recognise and solve genuine problems of the business’s labour force. ? Experience: The entrepreneur must be experienced and skilled. Experience can make even a person of average intelligence an effective entrepreneur. ? Knowledge of business: The entrepreneur must be familiar with business activities and master of his or his trade. ? Moral quality: The entrepreneur must have good morals and confidence in them. ? Knowledge of psychology: The entrepreneur must be a good administrator and understand the psychology of the workers. Decision-Making Ability: Proper analysis of risks and prudent decisionmaking is another essential requirement for being a good entrepreneur. Roles of the Entrepreneur in Economic Development ? Performs the Role of an Administrator: A primary factor in modern economic development is the emergence of dynamic, intelligent, enterprising entrepreneurs. An entrepreneur shoulders the responsibility for the entire business, starting with the planning stage and continuing through expanding it from its foundation to full development. 1. 5 decISIon-MakIng unItS and cIrcular flowS of econoMIc actIvItIeS 38
Grade 11 Economics ? Performs the Role of a Coordinator: In co-ordinating and guiding different factors of production, the entrepreneur makes use of land for building construction and invests his or her money capital in the buildings, machinery, equipment, tools and raw materials. Simultaneously, the entrepreneur organizes the workers and directs them in performing the required tasks. ? Proper Utilisation of Labour Force: Utilizing skilled, semi-skilled and unskilled workers in appropriate proportions is another important enterpreneurial function, as is the correct and equitable allocation of duties. Distributes Appropriate Remuneration to Each Factor of Production: The entrepreneur distributes proper remuneration to each factor of production. ? Plays the Crucial Role of an Innovator: The entrepreneur is an innovator. An entrepreneur discovers and develops new ideas, techniques, products, markets, sources of supply of raw materials, opportunities, and methods of production and also develops new combinations of factors. ? Other (particularly relevant to under-developed and developing countries). ^ Generates new employment. ^ Helps ensure balanced regional development. ^ Provides economic leadership. Complements and supplements economic growth. ^ Helps to bring about social stability. The last qualities on the preceding list of desirable entrepreneurial characteristics are particularly relevant to entrepreneurs operating in under-developed and developing countries. Activity 1. 6 With your workgroup, perform these tasks: 1 2 Draw a two-sector economy circular flow diagram and discuss the roles of each economic agent – the households and firms. Define circular flow diagram. 1. 5 decISIon-MakIng unItS and cIrcular flowS of econoMIc actIvItIeS Unit 1: ConCEpts of EConomiCs 39 Unit Review UNIT SUMMARY
Definition of Economics ? The study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future among various people and groups of society. (Samuelson) Nature of Economics ? Economics is not a science only or an art only. It is both a science and an art. Main Branches of Economics – Microeconomics and Macroeconomics ? Microeconomics deals with the economic behaviour of individual economic units and individual economic variables. Macroeconomics deals with the functions of the economy as a whole. Methods used to Study Relationships between Economic Variables ? Deductive and inductive reasoning ? Use of economic laws ? Building economic models ? Application of statistical methods (econometrics) ? Avoidance of or use of value judgments (positive and normative economics) Nature of Economic Laws ? Are very close to being statements of tendencies : ? they are conditional and associated with qualifications and assumptions, ? they establish relationships between causes and effects, ? they are less exact and less definite than the laws of physical sciences, ? hey are not permanent and general. 1. 5 decISIon-MakIng unItS and cIrcular flowS of econoMIc actIvItIeS 40 Grade 11 Economics Basic Economic Concepts ? Economy – An economy is a system that provides people with the means to work and earn a living. ? Economic problem – The economic problem is how to use scarce resources among alternative human wants and how to use these resources towards the end of satisfying the peoples’ wants as fully as possible. ? Scarcity – Limitation of supply of a commodity in relation to the need for it. ? Choice – The economic problem is a problem of choice.
Every economy must make choices between various types of goods that can be produced with given limited resources. ? Opportunity cost – The opportunity cost of any good is the amount of the next-best alternative good that is given up to produce the first good. Opportunity cost of a commodity = the amount of the next-best alternative given up the amount of the commodity produced ? Efficiency – Optimum utilisation of existing resources or making the best use of available resources. ? Free resources – Resources that are free gifts of nature, are unlimited in supply, and do not have a price. ? Economic

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