Economics (CIA4U)

Introduction to Economics

- Economics is a social science that studies how individuals and organizations in society engage in the production, distribution, and consumption of goods and services

- the task is to use scarce economic inputs in a way to best satisfy the needs and wants of the people of that society

Scarcity

• wants are unlimited• resources however are limited

• land, labour, capital, entrepreneurship

– known as “factors of production”

• this necessitates choice• choice involves tradeoffs

Opportunity Cost

• the cost of choosing one thing is giving up another

• the cost of the most expensive alternative not chosen becomes the opportunity cost

• Two types of costs:

•explicit costs– out of pocket costs (dollar value)

•implicit costs– value of resources that could be used elsewhere

Three Basic Decisions All Economies Must Make

1. What to produce?

- consumption goods - do not help to produce future goods

- capital goods - help in the production of future goods

2. How to produce it?

- How to combine the scarce resources?

- seeking efficiency (getting the most output per unit of input)

- this is a question of production methods - manual labour or automation

3. Who gets what?

- this is a question of distribution

- to each goes what they can afford

How these basic decisions are

made:

Tradition- a group or community owns the resources

- decisions are made according to tradition

Command System- the government decides the three basic questions

Market System- economic decisions are decentralized- individuals make the decisions

The Production Possibility Curve

The PPC shows the maximum amount of alternative combinations of goods and services that a society can produce

- it assumes only two commodities are being produced; resources are fixed and fully employed; productivity is fixed; technology is fixed

The PPC depicts:- a limited productive capacity (scarcity) - the concept of opportunity cost

Note that the cost of transforming the production of food into that of computers is steadily increasing- this is because non-homogenous resources are not equally suited to the production of both and some factors of production are more efficient in one industry than in the other

• What trade-offs are involved?

• Why is the PPC concave, or bowed out, from the origin?

• What does a point inside the PPC illustrate?

• What is the significance of a point outside the PPC?

• Under what conditions can a point outside the PPC be reached?

Absolute Advantage andComparative Advantage

ABSOLUTE ADVANTAGE - One nation can produce more output with the same resources as the other

COMPARATIVE ADVANTAGE - One nation can produce a good at a lower opportunity cost than the other

ex) lawyer and secretary when the lawyer can type faster than the secretary

Determining ComparativeAdvantage (using the output method)

1. Which nation has an absolute advantage in producing CDs?

2. Which nation has an absolute advantage in producing beef?

3. Which nation has a comparative advantage in producing CDs?

4. Which nation has a comparative advantage in producing beef?

5. Should Japan specialize in CDs or beef?

6. Should Canada specialize in CDs or beef?

The Circular Flow of Resources,Goods, Services and Money Payments

Putting it into practice

•Complete pages 7 to 11 and pages 19 to 21 of your AP exercise books

•Read pages 23 to 25 then complete the exercises on pages 26 to 28

•This concludes Unit One

Putting it into practice

•Read pages 23 to 25 then complete the exercises on pages 26 to 28

•This concludes Unit One