1. Lecture 1 The Economic Problem
Key Points
Scarcity
Choice
Rational Decisions
Opportunity Cost
Lecture 1
The Economic Problem

2. How to organise Production and Consumption of goods and services?
The Problem….
Scarcity
How to organise Production and Consumption of goods and services?

3. A consequence of scarcity
Choice
A consequence of scarcity
Compare
Costs
Benefits
Rational choice maximises benefit relative to cost

4. Microeconomic Problems
Choices
Rational economic decision making
Opportunity cost

5. Macroeconomic Problems
Growth
Unemployment
Inflation
International Trade - Balance of Payments problems

6. Imagine that you won millions of pounds on the National Lottery
Imagine that you won millions of pounds on the National Lottery. Would your `economic problem' be solved?

7. Imagine that you won millions of pounds on the National Lottery
Imagine that you won millions of pounds on the National Lottery. Would your `economic problem' be solved?
It would not be solved. Many things would still be scarce. For example, you would still have only a finite amount of time to enjoy what the money could buy: there are only 24 hours in a day, and we do not live for ever.

8. Assume that you are looking for a job and are offered two
Assume that you are looking for a job and are offered two. One is unpleasant to do but pays more. How would you make a RATIONAL choice between the two?

9. Assume that you are looking for a job and are offered two
Assume that you are looking for a job and are offered two. One is unpleasant to do but pays more. How would you make a RATIONAL choice between the two?
You should weigh up whether the extra pay (benefit) from the better paid job is worth the extra hardship (cost) involved in doing it..

10. Opportunity Cost
The cost of any activity measured in terms of the best alternative forgone

11. Illustrating choice & opportunity cost
Rice
The Production Possibility Curve
Peas

12. Illustrating choice & opportunity cost
Rice
Production possible y
not all resources used x
Peas

13. Illustrating choice & opportunity cost
Rice
Production boundary y1
All resources are used x x
Peas

14. Illustrating choice & opportunity cost
Rice
Possible choices y1 y2 x1 x2
Peas

15. Illustrating choice & opportunity cost
Impossible choices
Rice y2 y1 x2
Peas

16. Suppose you have a choice of spending Saturday afternoon studying economics or working for £20.00 or watching television. What is the opportunity cost of choosing to study?

17. Suppose you have a choice of spending Saturday afternoon studying economics or working for £20.00 or watching television. What is the opportunity cost of choosing to study?
The £20.00 wages foregone (probably)…
The difficulty here is the VALUATION of the ‘watching television’.

18. Problems of a Social Science
Economic reasoning
Compare with natural sciences (physics)
Used to explain or predict
Economic methodology constructs theories or models
Problems of a Social Science
Controlled experiments not possible
Human behaviour unpredictable

19. Statements about the economy
Positive
Normative
either
Statement of fact
May be tested
The statement may be true or false
Statement of fact
May be tested
Statement of fact
Statement of what is desirable, ought to be or what is good or bad
Not testable
Statement of what is desirable, ought to be or what is good or bad

20. 1 Is the statement below Positive, or Normative or could it be either?
“It is wrong that inflation should be reduced if this means that there will be higher unemployment.”.

21. 2 Is the statement below Positive, or Normative or could it be either?
“Current Government policies should reduce unemployment”.

22. 3 Is the statement below Positive, or Normative or could it be either?
“Cutting the higher rate of income tax will redistribute incomes from the poor to the rich”.

23. Subjective -difficult to value
Summary
Opportunity Cost
Finite resources
Scarcity
Costs
Benefits
compare
Choices
Subjective -difficult to value