Fundamentals

of

Economics

1

Learning Outcome

• To be able to define the factors of production

• To be able to clearly articulate and define key terms such as Opportunity cost, Scarcity, Basic economic problem

2

Discussion video

• Singapore A Case study: ECONOMIST

https://www.youtube.com/watch?v=5CUz81Y6LO0

– Identify two (2) set backs for Singapore in becoming an economic Success.

–How did Singapore improve on Economic performance?

3

Resources

• Resources would mean all the human, natural and manufactured or man made resources which are at our disposal and which we use to create wealth.

4 https://www.youtube.com/watch?v=SZ305__0e7U

Resources

• Types of resources

–Land

–Labour

–Capital

–Entrepreneurship

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Land

• Includes all natural resources –Oil –Mineral deposits – Cotton –Wood –Water – Seeds – Sea –Wind – Sunlight 6

Labour

• All forms of human effort both physical and mental directed towards the product of goods and services.

• Developed economies have a 70% GDP of services

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Capital

• Capital includes all manufactured or man made aids to production created by society, not as an end in themselves, but to improve the quality and quantity of the goods and services we produce.

• Fixed capital: Capital which is not consumed and does not change form during the process of production.

• Working capital: Partly processed raw materials such as steel, body parts of cars 8

Entrepreneurship

• An entrepreneur or enterprise is a person or group who will organise production, taking decisions regarding what to produce, the location of production and the techniques of production to be employed, in the hope of marking a profit.

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Factors of production and their

rewards

Factor • Land

• Labour

• Capital

• Enterprise

Income • Rent

• Wages/ Salaries

• Interest

• Profit

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What is money?

• For an economist, money does not qualify as

productive resources, have no value in itself.

The role of money is to act as a means of

exchange.

• The only value that money has is that it can be

used to obtain the wealth which we produce,

using our economic resources of land, labour,

capital and enterprise

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Barter System

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Functions of money

• Money is a unit of account

– Money is a unit of account because everything in the

economy is quoted in terms of it.

– Eg. Redbull 300 ml 295/-

– 1.5 Ltr Kick Cola 100/-

• Money is a medium of exchange

• Store of value

– Convenient to buy and sell assets and therefore can

store

13

Fundamental Economic Problem

• Scarcity, is the fundamental economic

problem.

• The cumulative total of all human wants

is unlimited but the resources available to

satisfy these wants are strictly limited.

Thus, the quantity of goods and services

which we can produce to satisfy our

wants is limited. 14

Opportunity cost

• Opportunity cost measures

the cost of using resources

in terms of foregone

opportunities.

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Production Possibility Frontier

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Answers the question: What is the Maximum Production Capacity

The Goal of this model is to maximize employment & minimize the resource utilization

Working example - PPF

17 http://www.investopedia.com/terms/p/productionpossibilityfrontier.asp

Cars Truck

100 0

0 80

50 40

75 20

• Points on line use the maximum use of resource

• Points above are unattainable

Rational economic behaviour

• Economists base their theories and predictions of human

behaviour on the assumption that economic agents, whether the

individual consumer, the firm, the local authority or government,

make decision in a rational way.

• Individual try to maximize the satisfaction of their wants through

consumption, the entrepreneur or business tries to maximize the

profits it makes from production, and local and central

government try to maximize the general welfare of their

respective populations. 18

Three basic economic problem

• What to produce and in what quantities?

• How and where to produce what we want?

• How will the output of goods and services

produced be distributed (Shared out) among

the population?

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CUBAN REVOLUTION

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• A revolt basis the Socialist principles – ideology that government should be responsible for the allocation of resources.

• Next Session – Economic Systems

WK 1 – Question Bank

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Students are required to attempt questions posted at the end of each section

Question 1

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Question 2

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Question 3

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Question 4

25

Question 5

26

Question 6

27

Question 7

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Question 8

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Question 9

30

Question 10

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Question 11

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Economic Systems

The way that fundamental economic problems is to be solved, is based on the

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Session 02

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International Foundation Diploma 393, Galle Road, Colombo Sri Lanka http://www.bms.lk/