WEEK 1
Introduction to Economics
The Nature of Economics
You will learn about:
• the economic problem – wants, resources, scarcity
• the need for choice by individuals and society
• opportunity cost and its application through production possibility frontiers
• future implications of current choices by individuals, businesses and governments
• economic factors underlying decision-making by:
– individuals – spending, saving, work, education, retirement, voting and participation in the political process
– business – pricing, production, resource use, industrial relations
– governments – influencing the decisions of individuals and business
You will learn to:
Examine economic issues
• the economic problem – wants, resources, scarcity
• the need for choice by individuals and society
• opportunity cost and its application through production possibility frontiers
• future implications of current choices by individuals, businesses and governments
• economic factors underlying decision-making by:
– individuals – spending, saving, work, education, retirement, voting and participation in the political process
– business – pricing, production, resource use, industrial relations
– governments – influencing the decisions of individuals and business
You will learn to:
Examine economic issues
- identify the opportunity costs involved in economic decisions made by individuals, businesses and governments at local, state and national levels
- construct and interpret production possibility frontiers
- distinguish between equilibrium and disequilibrium situations in the circular flow of income model
- explain how an economy might return to an equilibrium situation from a disequilibrium situation
Every decision is, in fact, an economic decision. When you have to make a choice, you give something up, and what you give up is the opportunity cost of your decision. Thus every choice has a cost.
Teaching Economics in Troubled Times : Theory and Practice for Secondary Social Studies, edited by Mark C. Schug, and William C. Wood, Taylor & Francis Group, 2010.
Pre-learning quiz
Write the blue sentences in your workbook.
Write the blue sentences in your workbook.
Traditional economics sets out some basic premises. Let's think these through and see where they are happening in our everyday lives.
Reference: 2014 Pearson Education
Economics is a social science involving the study of how people make choices to satisfy their wants.
- Wants are all the things that people would consume if they had unlimited income.
- Because wants are unlimited and people cannot satisfy all their wants, individuals are forced to make choices about how to spend their income and how to allocate their time.
In an economy there are three fundamental questions that must be addressed:
i. What and how much will be produced?
ii. How will items be produced?
iii. For whom will items be produced?
How a nation goes about answering these three questions depends on its economic system.
i. In an economic system of centralised command and control, an authority such as the government decides how to answer the questions.
ii. In a price system, the answers to the questions are determined by private parties, and prices signal to everyone which resources are relatively scarce and which resources are relatively abundant.
Economists assume that individuals are motivated by self-interest and respond predictably to opportunities for gain.
a. The rationality assumption is that individuals act as if they were rational.
b. Self-interest often means a desire for material well-being, but it can also be defined to incorporate goals relating to love, friendship, prestige, power, and other human characteristics.
c. By assuming that people act in a rational, self-interested way, economists can generate testable theories concerning human behaviour.
Economics is a social science.
a. Economists develop models, or theories, which are simplified representations of the real world.
b. Models help economists to understand, explain, and predict real-world economic phenomena.
c. Like other social scientists, economists usually do not perform laboratory experiments. They typically examine what has already occurred in order to test their theories.
d. Economic theories, like all scientific theories, are simplifications—and hence are “unrealistic.”
e. Economists, as do all scientists, employ assumptions. One important economic assumption is “all other things being equal.”
f. Models are evaluated on their ability to predict and not on the realism of assumptions.
g. Economic models relate to behaviour, not thought processes.
Economists maintain that the unit of analysis is the individual. Members of a group are assumed to pursue their own goals rather than the group’s objectives.
Some economists have proposed an approach known as behavioural economics.
a. Behavioural economics emphasises psychological limitations and complications that inhibit
rational decision making by individuals.
b. Proponents of behavioural economics have proposed the bounded rationality hypothesis, which suggests that near, but incomplete, rationality leads people to utilise basic rules of thumb to choose among alternatives.
Reference: 2014 Pearson Education
Economics is a social science involving the study of how people make choices to satisfy their wants.
- Wants are all the things that people would consume if they had unlimited income.
- Because wants are unlimited and people cannot satisfy all their wants, individuals are forced to make choices about how to spend their income and how to allocate their time.
In an economy there are three fundamental questions that must be addressed:
i. What and how much will be produced?
ii. How will items be produced?
iii. For whom will items be produced?
How a nation goes about answering these three questions depends on its economic system.
i. In an economic system of centralised command and control, an authority such as the government decides how to answer the questions.
ii. In a price system, the answers to the questions are determined by private parties, and prices signal to everyone which resources are relatively scarce and which resources are relatively abundant.
Economists assume that individuals are motivated by self-interest and respond predictably to opportunities for gain.
a. The rationality assumption is that individuals act as if they were rational.
b. Self-interest often means a desire for material well-being, but it can also be defined to incorporate goals relating to love, friendship, prestige, power, and other human characteristics.
c. By assuming that people act in a rational, self-interested way, economists can generate testable theories concerning human behaviour.
Economics is a social science.
a. Economists develop models, or theories, which are simplified representations of the real world.
b. Models help economists to understand, explain, and predict real-world economic phenomena.
c. Like other social scientists, economists usually do not perform laboratory experiments. They typically examine what has already occurred in order to test their theories.
d. Economic theories, like all scientific theories, are simplifications—and hence are “unrealistic.”
e. Economists, as do all scientists, employ assumptions. One important economic assumption is “all other things being equal.”
f. Models are evaluated on their ability to predict and not on the realism of assumptions.
g. Economic models relate to behaviour, not thought processes.
Economists maintain that the unit of analysis is the individual. Members of a group are assumed to pursue their own goals rather than the group’s objectives.
Some economists have proposed an approach known as behavioural economics.
a. Behavioural economics emphasises psychological limitations and complications that inhibit
rational decision making by individuals.
b. Proponents of behavioural economics have proposed the bounded rationality hypothesis, which suggests that near, but incomplete, rationality leads people to utilise basic rules of thumb to choose among alternatives.
Watch this TEDEd 3:45 min clip on The Paradox of Value
Share what you have learned
Try the multiple choice questions under "Think", then answer this question in the padlet:
Is there any situation where the law of diminishing marginal utility may not hold true? Discuss.
Opportunity Cost and Production Possibility Frontiers (PPFs)
WATCH the following video clip about the PPC (14:11mins)
NOTE: In HSC Economics we refer to this graph as the Production Possibility Frontier (PPF)
NOTE: In HSC Economics we refer to this graph as the Production Possibility Frontier (PPF)
Read more here:
The following table shows a production possibility schedule for wheat and rice in a hypothetical economy using a fixed quantity of resources.
1. Construct a production possibility curve from the information in the table above.
2. State the opportunity cost of producing the first 20 kg of wheat and the opportunity cost of producing the last 20 kg of wheat.
20 kg Rice
3. Explain how the discovery of new resources and improvements in technology could affect wheat and rice production in this economy.
The PPF would move outwards in all directions, meaning the economy could produce more of everything.
4. On your diagram label a new point A (60 units of wheat and 60 units of rice). Explain why this point represents a waste of resources.
This is a waste of resources because it is inside the PPF meaning that all resources were not employed in producing goods for this economy.
5. Distinguish between consumer and capital goods.
Consumer goods are bought and used by consumers, while capital goods are traded by manufacturers for producing other goods.
6. Summarise (one page) the economic factors underlying decision-making by:
20 kg Rice
3. Explain how the discovery of new resources and improvements in technology could affect wheat and rice production in this economy.
The PPF would move outwards in all directions, meaning the economy could produce more of everything.
4. On your diagram label a new point A (60 units of wheat and 60 units of rice). Explain why this point represents a waste of resources.
This is a waste of resources because it is inside the PPF meaning that all resources were not employed in producing goods for this economy.
5. Distinguish between consumer and capital goods.
Consumer goods are bought and used by consumers, while capital goods are traded by manufacturers for producing other goods.
6. Summarise (one page) the economic factors underlying decision-making by:
- individuals – spending, saving, work, education, retirement, voting and participation in the political process
- business – pricing, production, resource use, industrial relations
- governments – influencing the decisions of individuals and business
Answers: Highlight to reveal under the questions with the exception of the following:
1. Construct a production possibility curve from the information in the table above.
What have you learned about the 'Nature of Economics?'
Watch this clip from NPR
The Price Of Coke Stayed The Same For 70 Years — Why?
The thing about prices is they tend to change. But for 70 years, between 1886 and the late 1950s, the price of a Coca-Cola was a shiny nickel.
Think about how crazy that is: Between 1886 and the late '50s, you had two world wars, Prohibition and the Great Depression. But through it all, one constant in life was the nickel Coke.
This is the story of how two lawyers from Chattanooga struck a deal with the president of Coca-Cola that led to the company's pricing lockdown. With re-enactments from our very own Robert Smith & Nick Fountain, it's the fourth episode of Planet Money Shorts.
Listen to the original Planet Money podcast episode here! Subscribe to our video series here — and, while you're at it, subscribe to our podcast.
Think about how crazy that is: Between 1886 and the late '50s, you had two world wars, Prohibition and the Great Depression. But through it all, one constant in life was the nickel Coke.
This is the story of how two lawyers from Chattanooga struck a deal with the president of Coca-Cola that led to the company's pricing lockdown. With re-enactments from our very own Robert Smith & Nick Fountain, it's the fourth episode of Planet Money Shorts.
Listen to the original Planet Money podcast episode here! Subscribe to our video series here — and, while you're at it, subscribe to our podcast.
Write a response in your workbook explaining how Coke's prices didn't change and how this breaks all the rules.
