1. Chapter 1
ECONOMICS 1- WORKSHOP1

2. INTRODUCTION
 Economic questions arise due to the
principle that resources are scarce ie: not
sufficient.
 People have unlimited needs and wants that
they try to satisfy with these limited
resources. Economics focuses on how these
needs and wants are satisfied with the most
efficient outcome possible.

3. • Economics is regarded as a social science
because it tries to predict human behavior
and measure the impact of human behavior
on the economy by using economic models.
• Economics can be classified into two main
categories: Micro economics which focuses
on the study of choices made by individuals
and firms. And the those choices impact on
the markets and influence government
decisions.
• Macro economics is the study of the national
and global economy and how they are
influenced by individuals, firms and
government.

4.  There are two questions that summarize
economics-
 1)what, how, when, where and for
whom goods and services get
produced?
 2)When do choices made in the pursuit of
self-interest also promote the social
interest?

5. • What, How, When, Where and For Whom?
• Goods and services are the objects that people
value and produce to satisfy wants.
• What?
• What we produce changes over time as changes in
technology allow us to produce more.
• Today, most people in the rich industrial countries
produce services.
• How?
• Goods and services are produced by using productive
resources that economists call factors of production,
which are grouped as:
• Land
• Labor
• Capital
• Entrepreneurship

6.  When?
 Sometimes production slackens off in a
recession and other times it expands
rapidly in a business cycle.
 What makes production rise and fall? Can
government action prevent recession?
 Economics helps us to answer questions
about when things are produced.
 Where?
 Volkswagen produces cars in several
countries and sells them throughout the
world.

7. • Financial services are concentrated in Frankfurt and
London, while telecommunications industries
concentrate in Finland.
• Economics helps us to answer questions about where
things are produced.
• For Whom?
• Who gets the goods and services depends on the
incomes that people earn.
• Land earns rent.
• Labor earns wages.
• Capital earns interest.
• Entrepreneurship earns profit.
• Land, labour, capital and entrepreneurship are known
as the factors of production and different people own
them.

8. • When is the Pursuit of Self-Interest in
Society’s Interest?
• Every day, millions of South Africans and 6.1
billion other people make economic choices
that result in ―What‖, ―How‖, ―When‖,
―Where‖ and ―For Whom‖ goods and
services get produced.
• You make choices that are in your self-
interest—choices that you think are best
for you.
• Choices that are best for society as a whole
are said to be in the social interest.
• Is it possible that when each one of us makes
choices that are in our self-interest, it also
turns out that these choices are also in the
social interest?

9. • A few issues in today’s world illustrate the
importance of this question:
• Do the technological advances in the ―new
economy‖ bring benefits to all?
• Corporate scandals show that big business
works against the social interest?
• Who will bear the cost of global warming?
• The argument of responsibility for global
warming is very complex as it is generally
thought that the main contributors to pollution
are 1st world countries and this aided their
economic growth, should 3rd world countries
slow down their growth and bear the higher
cost of being environmentally sensitive while
achieving economic growth at a higher cost?

10. • 1.1 The Fundamental Economic Challenge
• Choices and Trade-offs
• The economic way of thinking places scarcity and its
implication, choice, at centre stage. Because we face scarcity,
we must make choices. And when we make a choice we
select from the available alternatives. You can think about
every choice as a trade-off—giving up one thing to get
something else. ―Books versus butter‖ is a simple trade-off.
―Books‖ and ―butter‖ can stand for any two goods.
Whatever choice you make, you could have chosen
something else instead.
• In making choices, we have to make decisions about the best
possible choices in terms of allocating resources efficiently
and effectively. This includes incurring opportunity costs. Thus
for every decision we take, we incur opportunity costs.
• The highest-valued alternative that we give up to get
something is the opportunity cost of the activity chosen.

11.  The concept of opportunity costs
 Refers to the best option forgone. It is simply, giving up something to
gain something else. For example, as a business manager you are
constantly faced with the problem of choosing among alternative
methods of production, pricing of products, and maximizing profits
and minimizing losses. Other decisions may relate to aspects of
budgeting, human resources, and a range of other firm activities.
Understanding economics and employing economic tools can help
you solve many business problems.
 Thinking about a choice as a trade-off emphasizes cost as an
opportunity forgone.

12.  Choosing at the Margin
 People make choices at the margin, which means that they
evaluate the consequences of making incremental changes in
the use of their resources.
 The benefit from pursuing an incremental increase in an activity is its
marginal benefit.
 The opportunity cost of pursuing an incremental increase in an
activity is its marginal cost.
 By evaluating marginal benefits and marginal costs and choosing
only those actions that bring greater benefit than cost, we use our
scarce resource in the way that makes us as well off as possible.
 Human Nature, Incentives and Institutions
 Economists take human nature as given and view people as acting
in their self-interest.
 Self-interested

13.  Human Nature, Incentives and Institutions
 Economists take human nature as given and view people as acting
in their self-interest.
 Self-interested actions are not necessarily selfish actions. 8 Regent
Business School But if human nature is given and people pursue
self-interest, how can the social interest be served?
 Ceteris Paribus
 This is a Latin term that means ―other things being equal‖ or ―if
all other relevant things remain the same‖ (Parkin et al 2005:15).
Economic models enable us to determine the influence of one factor
at a time in the ‗imaginary world‘ of the model.

14. PRODUCTION POSSIBILITIES FRONTIER
 The quantities of goods and services that we can produce are limited by both
our available resources and by technology. If we want to increase our production
of one good, we must decrease our production of something else – we face
trade-offs.
 The production possibilities frontier (PPF) is the boundary between those
combinations of goods and services that can be produced and those that
cannot, that is, it is the limit to what we can produce (Parkin, Powell, and
Mathews 2005:32).
 To illustrate the PPF, we focus on two goods and hold the quantities of all other
goods constant.
 That is, we look at a model economy in which everything remains the same
(ceteris paribus) except the two goods we‘re considering. Figure 1.1 shows the
PPF for CDs and pizza, which stand for any pair of goods and services.
 Points on the frontier, such as points A, B, C, D, E and F and points inside the
frontier, such as Z, are attainable. Points outside the frontier are unattainable.

15. PPF-
FIG1.1
The PPF makes the concept of opportunity cost precise.
If we move along the PPF from C to D, the opportunity cost of the increase in
pizza is the decrease in CDs. Note that the opportunity cost of a CD is the
inverse of the opportunity cost of a pizza.
One pizza costs 3 CDs.
One CD costs 1/3 of a pizza. All the points along the PPF are efficient. To
determine which of the alternative efficient quantities to produce, we compare
costs and benefits.

16. The PPF and Marginal Cost
The PPF determines opportunity cost.
The marginal cost of a good or service is the opportunity cost of producing
one more unit of it.
Figure 1.2 illustrates the marginal cost of pizza.
As we move along the PPF in part (a), the opportunity cost and the marginal cost
of pizza increases. Fig1.2 below

17. In figure 1.3 the blocks illustrate the increasing opportunity cost of pizza. Fig 1.3
below

18. The black dots and the line labeled MC shows the marginal cost of pizza.
Preferences and Marginal Benefit
Preferences are a description of a person‘s likes and dislikes. Economists
use marginal benefit and the marginal benefit curve to describe them.
The marginal benefit of a good is the benefit received from consuming one
more unit of it.
We measure marginal benefit by the amount that a person is willing to pay for an
additional unit of a good or service. It is a general principle that the more we
have of any good or service, the smaller is its marginal benefit and the less we
are willing to pay for an additional unit of it.
We call this general principle the principle of decreasing marginal benefit.

19. Figure 1.4 illustrates the marginal benefit curve which shows the
relationship between the marginal benefit of a good and the quantity of
that good consumed.
The marginal benefit curve slopes downward to reflect the principle of
decreasing marginal benefit.
At point A, with pizza production at 0.5 million, people are willing to pay 5 CDs
per pizza. At point E, with pizza production at 4.5 million, people are willing to
pay 1 CD per pizza. Fig 1.4 below

20. Efficient Use of Resources
When we cannot produce more of any one good without giving up some other
good, we have achieved production efficiency, and we are producing at a point
on the PPF.
When we cannot produce more of any one good without giving up some other
good that we value more highly, we have achieved allocative efficiency, and
we are producing at the point on the PPF that we prefer above all other
points. The following figure illustrates allocative efficiency. Fig 1.5 below

21. The point of allocative efficiency is the point on the PPF at which marginal
benefit equals marginal cost. This point is determined by the quantity at which
the marginal benefit curve intersects the marginal cost curve which is shown in
figure 1.6 below.

22. If we produce less than 2.5 million pizza, marginal benefit exceeds marginal
cost. We get more value from our resources by producing more pizza. Looking at
figure 1.7, on the PPF at point A, we are producing too many CDs, and we are
better off moving along the PPF to produce more pizza.

23. From Figure 1.5, if we produce more than 2.5 million pizzas, marginal cost
exceeds marginal benefit. We get more value from our resources by producing
less pizza. On the PPF at point C, we are producing too much pizza, and we are
better off moving along the PPF to produce less pizza.
Economic Growth
There are two factors that influence economic growth:
a) Technological Change- Development of new goods and improved ways to
manufacture new goods
b) Capital accumulation- Growth of capital resources,
includes human capital.
To use resources in research and development
we must decrease our production of consumption
goods and services.

24. We can produce pizza or pizza ovens along PPF0.
By using some resources to produce pizza ovens, the PPF shifts outward in the
future.

25. Gains from trade
Comparative Advantage
A person has a comparative advantage in an activity
if that person can perform the activity at a lower
opportunity cost than anyone else. In other words, it refers to the ability of
a party (an individual, a firm, or a country) to produce a product with the
highest relative efficiency given all the other products that could be
produced. It can be contrasted with absolute advantage which refers to the
ability of a party to produce a particular good at a lower absolute cost than
another.
Comparative advantage explains how trade can create value for both parties
even when one can produce all goods with fewer resources than the other. The
net benefits of such an outcome are called gains from trade. It is the main
concept of the pure theory of international trade.

26. Gains from trade continued…..
Table 1.1 Possibility
Discs (thousands per hour) Cases
(thousands per hour)
A 0 4
B 3 3
C 6 2
D 9 1
E 12 0
Production Without Trade
Suppose that Ace and Galaxy produce two components: case and discs.
Each firm produces its own cases and discs.
Total production at each factory is 3,000 CDs an hour. Table 1.1 shows their
production possibilities.
The table shows Ace‘s production possibilities.
Ace produces 3,000 discs and 3,000 cases at possibility B.
If Ace increases production of discs by 3,000 an hour, it must decrease
production of cases by 1,000.

27. Table 1.2 shows Galaxy‘s production possibilities. Possibility
Discs (thousands per hour) Cases (thousands per hour)
E' 0 12
D' 1 9
C' 2 6
B' 3 3
A' 4 0
Galaxy produces 3,000 discs and 3,000 cases at possibility B'.
If Galaxy increases production of discs by 1,000 an hour, it must decrease
production of cases by 3,000.

28. Differences in Opportunity Cost Fig 1.9 below
Ace can produce 3,000 discs and
3,000 cases at point B.
Along its PPF, Ace‘s opportunity
cost of a disc is 1/3 case and its
opportunity cost of a case is 3 discs.
Galaxy can produce 3,000 discs
and 3,000 cases at point B'.
Along its PPF, Galaxy‘s opportunity
cost of a disc is 3 cases and its
opportunity cost of a case is 1/3 of a
disc.

29. If Ace and Galaxy exchange cases
and discs at one case per disc (one
disc per case), they exchange along the
Trade line, figure 1.10.
Ace ends up at point F with 6,000
CDs—twice what it can achieve
without specialization and trade.
Galaxy ends up at point at point at
point F' with 6,000 CDs—twice
what it can achieve without specialization
and trade
Fig 1.10

30. Absolute Advantage
A person (or nation) has an absolute advantage if that person (or nation) can
produce more goods with a given amount of resources than another
person (or nation) can.
Because the gains from trade arise from comparative advantage, people can
gain from trade in they also have an absolute advantage.
Dynamic Comparative Advantage
Learning-by-doing occurs when a person (or nation) specializes and by
repeatedly producing a particular good or service becomes more
productive in that activity and lowers its opportunity cost of producing that
good over time.
Dynamic comparative advantage occurs when a person (or nation) gains a
comparative advantage from learning-by-doing.

31. END OF CHAPTER 1
Thank you