Microeconomics Topic 1 Higher Economics - PowerPoint Presentation

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Microeconomics Topic 1

Higher Economics

2013-14

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The Basic Economic Problem

Microeconomics

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BASIC NEEDS

Everyone in the world has four basic needs:

Food

Water

Clothing

Shelter

Without these we would not survive

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WANTS

When we have our basic needs met we can then start wanting luxuries

A want is something that we do not need in order to survive.

Once one want has been achieved we just want something else.

We say that WANTS ARE UNLIMITED

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FACTORS OF PRODUCTION

There are four factors of production

Land – all natural resources

Labour – all human resources

Capital

(Industrial, Social, Private, Financial)–

all man-made resources

Enterprise – the idea

The resources need to produce goods and services are LIMITED.

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WHY DO WE HAVE LIMITED RESOURCES

Resources are limited for two reasons.

Occupational Mobility – this is the ability of a resources to change the job it does.

Some resources are more flexible than others

.

(Industrial Capital vs. Land)

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WHY DO WE HAVE LIMITED RESOURCES

Geographical Mobility – the ability of a resource to change its location

Again some resources are more flexible than others

.

(Capital vs. Land)

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WAYS TO IMPROVE AVAILABILITY OF RESOURCES

Land – discovery of new resources e.g. a new oil field

Using spare land to build a new factory

Labour – immigration could increase number of employees

Training could be used to reduce the level of occupational immobility

Capital – research and development into new types of machinery etc.

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THE BASIC ECONOMIC PROBLEM

As a result of UNLIMITED WANTS and LIMITED RESOURCES we have what is called the BASIC ECONOMIC PROBLEM.

The basic economic problem is

SCARCITY

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SCARCITY Vs.

SHORTAGE

Scarcity

and a

shortage

are not the same thing.

Scarcity

is when there is not enough resources to produce goods and services people want.

Shortage

is when there is not enough supply of goods and services to meet peoples’ wants

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CHOICES

Because of scarcity all individuals, firms and governments have to make choices.

Individuals have to choose what to buy from limited income

Firms have to choose what to produce with limited resources

Governments have to choose what services to provide from limited taxes

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OPPORTUNITY COST

All choices result in something being sacrificed or not being chosen

The item that is sacrificed is called the

OPPORTUNITY COST

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OPPORTUNITY COST FOR INDIVIDUALS

The opportunity cost for individuals is the next item on their list of preferences.

For example if an individual had the choice between a bag of crisps or a bar of chocolate. If they chose the bag of crisps then the bar of chocolate would be the opportunity cost.

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OPPORTUNITY COST FOR FIRMS

The opportunity cost for a firm is the next most profitable item that could be produced with the available resources.

For example if they had the choice of producing denim shirts or denim jackets and chose denim shirts then the jackets would be the opportunity cost

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OPPORTUNITY COST FOR GOVERNMENTS

The opportunity cost for a government is the next best service it could have provided.

For example if they had the choice of a new school or a new hospital and they chose the hospital, the school would be the opportunity cost.

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ECONOMIC GOODS -V- FREE GOODS

Economic goods

– these are goods that have a price. Something has to be given up in order to obtain them. These goods have an opportunity cost.

Free goods

– these are goods where there is enough to meet everyone’s wants. E.g. Air. These goods do not have an opportunity cost

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ECONOMIC EFFICENCY

As a result of limited resources it is important that countries/firms find ways to make the best use of them

E.g. A machine that is designed to produce 1000 jackets but only produces 100 is not being use to its

best

Using a resource to its maximum potential is called ECONOMIC EFFICIENCY

Economic Efficiency can only be achieved when three conditions are met.

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ECONOMIC EFFICENCY

Technical Efficiency

– when the fewest resources are used to produced each product

Allocative

Efficiency

– using resources to produce the goods and services that people want

When

all resources are employed

– all resources should be used and not lying idle

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EQUITY

Economic efficiency

should be

achieved through SOCIAL JUSTICE and FAIRNESS – this means that it has to be fair and just to everyone in society

.

However Equity and Economic Efficiency often conflict.

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BASIC ECONOMIC QUESTIONS

Every country has the problem of scarcity.

Each country therefore has to answer four basic economic questions when deciding on allocating its scarce

resources. These

are

:

What to produce?

How much to produce?

How to produce it?

Who to produce it for?

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In order to answer these questions each country will have an economic system.

There are 3 types of economic system and each answers the economic questions differently

.

PLANNED ECONOMY

FREE MARKET ECONOMY

MIXED ECONOMY

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PLANNED ECONOMY

In a planned economy the government is in complete control of how resources are allocated.

This type of system is often found in communist nations but the UK has had a planned economy.

All resources are owned and controlled by the state

.

Examples:

Cuba, North Korea

and to a certain extent

China

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PLANNED ECONOMY

This system believes in re-distributing income and wealth so that all member of society are the same.

They think that having resources owned by private individuals leads to inequality within a society.

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plANNED Economy -

ANSWERING

THE QUESTIONS

What to produce?

- this is decided by government planners, who estimate what they think the population needs.

How much to produce?

– they decide on a fixed quantity of each product

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Planned Economy –

Answering the questions

How to produce?

– government sets quotas for each factory and allocates the necessary resources.

For whom?

– prices and incomes are controlled by the government so that every member of society is the same

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TASK

Research countries that are mostly planned economies (repressed)

Find out relevant economic information about them

Find out advantages and disadvantages of being a planned economy

Examples

www.heritage.org.uk/index/rankings

www.s-cool.co.uk/a-level/economics

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FREE MARKET ECONOMY

Market forces deal with the basic economic problem.

The government plays little or no part in the economy.

No country

has a pure free market economy as governments always have to be

involved to an extent.

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SIX ESSENTIAL ELEMENTS

To

be a free market economy, six characteristics need to be met:

Resources are owned by private

individuals

Consumers

have CONSUMER SOVEREIGNTY (the consumer is King). What consumers want

producers will produce.

Decisions

are made on the basis of self interest. Producers want to maximise profits. Consumers want to maximise value for money.

Producers are free to produce what they

wish.

Competition

exists between producers and also between

consumers

Resources

are allocated by the PRICE MECHANISM.

Increase

in demand for a product will increase the price, meaning more producers will want to make that good, which leads to more resources being needed.

A

decrease in demand will mean producers moving the resources to more profitable products

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Free Market economy -

ANSWERING THE QUESTIONS

What to produce?

– decided by consumers. What they want to buy, the producer will produce.

How much to produce?

– decided by the consumers

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Free Market economy - ANSWERING THE QUESTIONS

How to produce?

– decided by the producer. Will use the most efficient method of production in order to keep cost down and maximise profits

For Whom?

- decided by the buying power of the consumers who have the highest incomes.

IF YOU CAN AFFORD IT YOU CAN HAVE IT!

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MIXED ECONOMY

All countries in reality have a mixed economy. Some though will be more planned and some more free market.

In mixed economy the private sector and the public sector (government) work together in order to meet the needs and wants

of

the

country.

Countries like

USA, UK

and

Hong Kong

have mixed economies of varying level.

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TASK

Research countries that are mostly mixed economies (free)

Find out relevant economic information about them

Find out advantages and disadvantages of being a mixed/free

economy

Compare and contrast these findings with those of your planned economy

Examples

www.heritage.org.uk/index/rankings

www.s-cool.co.uk/a-level/economics