GRADE 11 IB Economics First Theory Lesson

WHAT IS ECONOMICS? Economics is about how society uses its scarce resources to try to achieve maximum progress towards all objectives and improve the overall welfare of the community. OR Economics is about scarcity and how we use the world’s limited resources in an attempt to satisfy what appears to be unlimited human wants.

WHAT IS ECONOMICS? Economists study the way people make decisions about how to allocate scarce resources to provide themselves with goods and services the problems that arise in this allocation process. They analyse the relationship between the supply and demand of goods and services and the ways in which goods are produced, distributed and consumed within an economic system.

How is Economics used in our Society? Personal Level Economic and financial advice is useful when making decisions regarding the purchases of goods and services or determining investments in the share market. Business Level Business managers need to consider costs and benefits before making decisions on issues such as the expansion of a firm, agreeing to wage increases for staff or extending domestic sales to international markets. Government Level Economic decisions in government can involve issues such as the setting of a Federal or State Budget.

SCARCITY & CHOICE If something is to be called scarce, in the Economic sense, two conditions have to be satisfied: People must want the item. The amount of the item must be limited. Some things have a negative, rather than positive economic value. (for example polluted air or water) – we may be willing to pay someone to eliminate these problems. Who should pay for such problems presents a dilemma?

SCARCITY & CHOICE The Economist holds value judgements like anyone else. However, it is his or her primary job as an Economist to figure out the ramifications of an alternative course of action, given a particular set of values or goals.

TYPE OF WANTS Competitive Wants Goods and services which can be substituted for each other. Complimentary Wants Wants which go together. Recurrent Wants Wants which are never satisfied and keep recurring.

CLASSIFICATION OF WANTS Classify each of the following wants: Competitive, Complementary or Recurrent Butter and Margarine Books and Bookcases Coke and Pepsi Bread and milk Cars and Petrol Holiday and Home improvements.

OPPORTUNITY COST The best alternative option foregone when a choice is made – often referred to as `real cost` or `economic cost`. Eg: If the Federal Government chooses to increase its spending on roads, there is not only a monetary cost, but an opportunity cost. It may mean less money for university places. Opportunity cost is about trade offs. If we increase spending in one area, it is often at the expense of another.

OPPORTUNITY COST By increasing funds for roads this may result in less road accidents and less congestion, but by reducing university places this may mean less opportunities for young people to pursue careers. Which of these priorities is more important?

THE BASIC ECONOMIC PROBLEM What should be produced and in what quantities? How should things be produced? Who should things be produced for?

Labour (British spelling) Capital Management (Entrepreneurs) FACTORS OR PRODUCTION There are four resources that allow an economy to produce its output. They are: Land Labour (British spelling) Capital Management (Entrepreneurs)

FACTORS OF PRODUCTION LAND In economics, land is not just the physical land of which something is built. Land includes all natural resources – this is everything that grows on the land (eg: cultivated products like wheat, sugar & everything under the land (eg: basic raw materials like coal and oil) Land also includes all resources in the sea (eg: fish, whales, seafood products)

FACTORS OF PRODUCTION LABOUR Labor is the human factor. It is the physical and mental contribution of the existing workforce to production.

FACTORS OF PRODUCTION CAPITAL Physical Capital Manufactured resources, such as factories, machinery, and tools. This physical capital is used to produce goods & services in an economy. Human Capital Is the value of the workforce, in regard to theirs skill, abilities, and health. Investments in human capital through education, or health care may be a significant contributor to economic growth. Social Overhead Capital Infrastructure that is essential for the operation of a modern economy – eg: railways, ports, airports, electricity plants. Governments usually provide these utilities.

FACTORS OF PRODUCTION Management (Entrepreneurship) Management is the organizing and risk taking factor of production. Entrepreneurs organize the other factors of production to produce goods and services. They use their personal money and the money of other investors to buy the factors of production, produce the goods and services and hopefully make a profit.