THE BASIC ECONOMICPROBLEM SCARCITY, CHOICE AND OPPORTUNITY COST 11/7/15 DAVID AKO (DE MEANEST) 1 The Basic Economic Problem • • • • • • • • Key Lesson Objectives Differentiate between needs and wants Explain the basic economic problem Define opportunity cost and illustrate the concept with examples Identify and explain the classification of resources in economics Define economics Discuss the importance of studying economics Use PPF to illustrate the concept of opportunity cost 11/7/15 DAVID AKO (DE MEANEST) 2 Needs and Wants • Needs – the necessities of life e.g. Food, clothing, shelter, warmth, medical care • Wants – those things that make life enjoyable and pleasurable e.g. Designer clothes, cars, mansions Class Discussion: • Do needs and wants change over time? • Why is man never satisfied with material possessions? • Human wants are infinite/insatiable/unlimited 11/7/15 DAVID AKO (DE MEANEST) 3 • Every need or want can be satisfied through the consumption of a good or service • Goods and services are produced with resources ( factors of production) which are finite and have alternative uses. • The Basic /Fundamental economic problem is the scarcity of resources relative to human needs and wants a. Finite resources vrs infinite needs and wants 11/7/15 DAVID AKO (DE MEANEST) 4 11/7/15 DAVID AKO (DE MEANEST) 5 11/7/15 DAVID AKO (DE MEANEST) 6 11/7/15 DAVID AKO (DE MEANEST) 7 11/7/15 DAVID AKO (DE MEANEST) 8 11/7/15 DAVID AKO (DE MEANEST) 9 11/7/15 DAVID AKO (DE MEANEST) 10 Economic Resources • These are the factors of production that are used to produce goods and services. • Land – all natural resources that are used to produce goods and services E.g. rivers, forests, mineral deposits, etc. (receives rent) • Labour – physical or mental human contribution towards production. E.g. nurses, doctors, teachers, labourers (receives wages/salary) • Capital – man made resources that are used to produce goods and services . E.g. machinery, buildings, computers etc.(receives interest) • Entrepreneur – the individual who takes risk by employing other resources to produce goods and services. E.g. Bill Gates, Steve Jobs, (receives profit) 11/7/15 DAVID AKO (DE MEANEST) 11 11/7/15 DAVID AKO (DE MEANEST) 12 11/7/15 DAVID AKO (DE MEANEST) 13 11/7/15 DAVID AKO (DE MEANEST) 14 11/7/15 DAVID AKO (DE MEANEST) 15 11/7/15 DAVID AKO (DE MEANEST) 16 11/7/15 DAVID AKO (DE MEANEST) 17 11/7/15 DAVID AKO (DE MEANEST) 18 11/7/15 DAVID AKO (DE MEANEST) 19 Structured Questions 11/7/15 DAVID AKO (DE MEANEST) 20 11/7/15 DAVID AKO (DE MEANEST) 21 11/7/15 DAVID AKO (DE MEANEST) 22 Choice and Opportunity Cost • Choice is imperative because of scarcity • The exercise of choice implies the sacrifice or forgoing of some other need or want • Opportunity cost is the next best alternative forgone when choice is made or • The benefit that could have been derived from the next best alternative use of a given resource • Discussion When will opportunity cost be zero? 11/7/15 DAVID AKO (DE MEANEST) 23 11/7/15 DAVID AKO (DE MEANEST) 24 11/7/15 DAVID AKO (DE MEANEST) 25 11/7/15 DAVID AKO (DE MEANEST) 26 11/7/15 DAVID AKO (DE MEANEST) 27 11/7/15 DAVID AKO (DE MEANEST) 28 11/7/15 DAVID AKO (DE MEANEST) 29 11/7/15 DAVID AKO (DE MEANEST) 30 11/7/15 DAVID AKO (DE MEANEST) 31 Structured Questions 11/7/15 DAVID AKO (DE MEANEST) 32 Classwork 11/7/15 DAVID AKO (DE MEANEST) 33 11/7/15 DAVID AKO (DE MEANEST) 34 Homework 11/7/15 DAVID AKO (DE MEANEST) 35 Opportunity Cost and the Production Possibility Frontier • The PPF is a curve that shows the various maximum possible combinations of any two goods that can be produced in an economy given full employment • Assumptions of PPF a. There is full employment b. The economy produces only two goods c. There is a fixed resource endowment(limited resources) d. Technology is constant e. Resources are occupationally mobile 11/7/15 DAVID AKO (DE MEANEST) 36 Illustration of PPF • An economy can produce capital goods and food as illustrated in the table below: Option Capital Goods (tonnes) Food (tonnes) A 125 0 B 100 50 C 75 100 D 50 150 E 25 200 F 0 250 • These combinations of output can be illustrated as follows 11/7/15 DAVID AKO (DE MEANEST) 37 • Capital Goods X 125 A 100 B 75 F C 50 D J 25 E 0 Y 50 100 150 200 250 Food 11/7/15 DAVID AKO (DE MEANEST) 38 • What is the opportunity cost of increasing food production from 100 tonnes to 150 tonnes? • How much food must be given up if production of capital goods is increased from combination D to combination B? • Why is point F unattainable? • Note: a. opportunity cost is measured by the slope/gradient of the PPF b. The PPF above has a constant slope. Why is this so? •. Why is point J an inefficient combination? •. Any combination of output that lies on the PPF indicates efficiency in the allocation of resources •. Any combination of output that lies within the PPF indicates inefficiency it the allocation of resources 11/7/15 DAVID AKO (DE MEANEST) 39 11/7/15 DAVID AKO (DE MEANEST) 40 11/7/15 DAVID AKO (DE MEANEST) 41 11/7/15 DAVID AKO (DE MEANEST) 42 Food C A E 0 F B D • How does the slope of a concave PPF change as increasing quantities of one good is produced? 11/7/15 DAVID AKO (DE MEANEST) 43 Shifts in the PPF • Causes a. Technical progress – technological advancement b. Increased productivity (efficiency) of labour c. Increased capital investment d. Discovery and exploitation of new resources e. Reallocation of resources f. Producing in accordance with comparative advantage 11/7/15 DAVID AKO (DE MEANEST) 44