WHAT IS ECONOMICS?

15/08/25
Economics is the social science that examines the way people interact with each other to overcome
the problems that arise as a result of the basic economic problem of scarcity.

Alternatively, economics is the study of how scarce resources are used to satisfy infinite human
wants. Because there are finite resources available, scarcity exists, and this implies that choices have
to be made between competing uses of those scarce resources to meet unlimited needs and wants.

Economics is all about making choices. We make all kinds of choices every day.
-​ How much to spend on food?
-​ Bus or Taxi to school?
-​ Where should we go for dinner?
-​ Should I do geo or econ?
-​ What universities should I apply to?

Whenever a choice is made by an economic agent concerning the use of its resources, something is
given up or sacrificed. This leads to the key economic concept of opportunity cost. Opportunity cost
is defined as the value of the next best alternative for when an economic decision is made.

Example:
-​ The cost of studying economics may be not being able to study anthropology.
-​ The cost to the government of choosing to finance a new link on the MTR may be the new
hospital they now cannot afford to build and equip.

*Opportunity cost is never expressed in monetary terms

THE BASIC ECONOMIC PROBLEM 19/08/25
An economic good is limited in supply, such as oil, wheat, cotton, housing and cars. An opportunity
cost is involved in their production. Free goods are unlimited in supply, such as air, sea, rainwater,
and sunlight. They have zero opportunity cost.

Economics is the study of how resources are allocated to satisfy the unlimited needs and wants of
individuals, the government and the economy

The three main economic agents or decisions in an economy are:

-​ individuals or households
-​ firms (businesses that operate in the private sector of the economy)
-​ the government

The three basic economic questions addressed by economic agents are:

-​ what to produce
-​ how to produce it
-​ for whom to produce it

THE PUBLIC AND PRIVATE SECTORS

Firms and individuals produce goods and services in the private sector of the economy and the
government produces goods and services in the public sector. Governments, firms and individuals all
produce and consume goods and services. For example, the government might provide education
and healthcare services to the general public. Goods are physical items such as tables, clothing,
toothpaste and pens. Services are non-physical items such as haircuts, bus journeys, telephone calls
and internet access.

NEEDS VS. WANTS

Needs are the essential goods and services required for human survival. These include nutritional
food, clean water, shelter, protection, clothing and access to healthcare and education. All individuals
have a right to have these needs met, and this is stated in articles 25 and 26 of the United Nations
Universal Declaration of Human Rights, which was drafted in December 1948.

Wants are goods and services that are not necessary for survival. An individual’s wants. or desires
then to be unlimited, as most people are rarely satisfied with what they have and are always striving
for more. Wants are a matter of personal choice and human nature

World Bank figures (2012) suggest that 3 billion of the world's inhabitants live on less than $2.50 per
day and that their basic needs are not being met. In contrast, the richest 20 per cent of individuals
receive 75% of the world's income. The study of economics can explain why this happens and offer
possible solutions to the basic economic problem.

FACTORS OF PRODUCTION

Land These are all natural resources used in production, such as the land
itself, minerals, water, forests, and agricultural resources.
Furthermore, land is essential for agriculture and mining.

Labour Labour is all the human effort involved in the production process.
This includes both physical and mental work.

Enterprise Enterprise involves the entrepreneurial skills of individuals. These

people organise the other factors of production.

Capital Capital is the man-made tools, machinery, buildings, as well as

technology used to assist humans in the production of goods and
services.

For Example:

The factors of production required in the production of a can of Coca-Cola are as follows:

-​ Capital: machinery, tools, a factory building and trucks to transport the drinks.
-​ Enterprise: the skills necessary to organise the production process successfully and to
motivate workers so that they work to the best of their ability.
 -​ Labour: people to work on the production line, perform administrative tasks and manage the
company.
-​ Land: the natural resources required to make Coca-Cola (such as sugar, water and caffeine).

Each of the factors of production receives payment when they are engaged in the process of
production. This payment is known as a factor reward.

Rent: Owners of land require payment for their resource. Land for farms, mines, trees for wood
buildings, all require the payment of rent.

Wages: Labourers provide their time and effort to firms, and in return, they will receive wages.
Wages/salaries can be paid per hour, per week or per month, or alternatively per unit of output.
Their work will be valued differently depending on their education, training, productivity, where they
work and what they work at.

Interest: As mentioned earlier, interest is the payment for capital. Machinery and factory buildings
are expensive, and firms may take out loans in order to purchase them. Interest is paid on
investment in capital.

Profit: Profit is the reward for enterprise. The person who decides (takes the risk) to combine the
other factors of production in order to produce output must receive a reward for his/her efforts. This
reward is profit. An entrepreneur who sells the produce for a higher price than the average cost of
production will earn a profit. However, the risk is, they may also make a loss.

MACRO & MICROECONOMICS

Macroeconomics: Macroeconomics is the branch of economics that studies the behaviour and
performance of an economy as a whole. It focuses on aggregate indicators such as GDP (Gross
Domestic Product), unemployment rates, inflation, and national income. Policymakers utilise
macroeconomic principles to formulate strategies aimed at promoting economic health, managing
inflation, and reducing unemployment, ultimately striving for a balanced and sustainable economic
environment.

Microeconomics: Microeconomics, on the other hand, examines the individual components of the
economy, including households, firms, and industries. It focuses on the decision-making processes of
these entities and how they allocate resources in the production and consumption of goods and
services. Microeconomics analyses supply and demand dynamics, pricing strategies, and market
structures.

PRODUCTION
Production of all goods and services requires the four factors of production in varying proportions.
For example, in a school, capital resources and labour are required in greater quantities than land
(natural resources). By contrast, production of soft drinks, such as Coca-Cola, requires a large amount
of machinery and therefore this process is capital-intensive as it requires more machinery (a capital
resource) than labour.
An architectural practice designs buildings. It requires qualified architects to design the buildings and
technicians, skilled in using computer-aided design software, to produce drawings. Computers,
software, office space and enterprise are required to design high-quality creative buildings and to
attract customers. It is labour-intensive because it requires a larger amount of human resources
compared with technological resources and equipment.

CONSUMPTION
Consumption occurs when people use goods and services to satisfy their human wants and needs.
Eating food, watching Netflix, going to school, sleeping and using a computer are all consumption.
And the consumption of some goods automatically leads to the consumption of others. e.g. When
you are watching Netflix, you are consuming the programming but also consuming electricity and
your sofa.

Because goods and services are finite, people are unable to satisfy all their wants and so will have to
make choices about which goods and services to consume. Consumption also has an effect on other
people. If you consume a Snickers bar while watching Netflix, you are effectively stopping someone
else from consuming that Snickers bar.

Anyone who buys economic goods to consume in order to satisfy wants and needs is called a
consumer, and what they spend is called consumption expenditure.

EXHCHANGE
People cannot produce all the goods/services that they consume on a daily basis. Therefore,
consumers engage in trade–in economics, which is called exchange. People engage in labour for
which they earn a salary or a wage. They then use this to pay for goods/services that they cannot
produce themselves.

Consumer goods are goods that satisfy an immediate want or need. Consumer durables can be
consumed repeatedly over a period of time, like cars, washing machines and TVs. Non-durable
consumer goods can only be consumed once. Like food, petrol and beer.

Capital goods, as you have learned, are man-made aids to production. They do not satisfy any
needs/wants but are a means to an end in the production of other goods. Firms buying capital goods
are known as investors.

MOBILITY OF THE FACTORS OF PRODUCTION

The basic economic problem can never be solved. However, changing the way we use resources or
improving the quality or increasing the quantity of our resources can lead to increased production in
goods and services and, therefore, allow more wants and needs to be satisfied.

Mobility of the factors of production, or factor mobility, is the ease with which the factors of
production can be moved from one productive activity to another.
Moving factors of production from one use to another is not always simple. Some labour may have
very specialised skills which may not prove as productive if they were shifted to another use.
Retraining or re-education may be required, and this can be expensive and time-consuming.

GEOGRAPHICAL MOBILITY
Geographical mobility refers to the willingness and ability of a person to relocate from one part of a
country to another for work. Some people may not be geographically mobile for the following
reasons:

-​ Family commitments - People may not want to relocate as they want to be near their family
and friends. There may be other commitments, such as schooling arrangements for children
(it can be highly disruptive to the education of children who have to move to a school in a
different town or country).
-​ Costs of living may vary between regions - If the costs of living are too high in another
location, it may be uneconomical for a person to relocate there. For example, a bus driver
may find it impossible to relocate from the countryside to the city because house prices are
much higher in the city, and therefore, they would not be able to purchase a home. By
contrast, a banker may be offered a relocation allowance to move to another city, and his or
her potential earnings are much higher, so the banker has greater geographical mobility than
the bus driver.

OCCUPATIONAL MOBILITY
Occupational mobility refers to the ease with which a person is able to change between jobs. The
degree of occupational mobility depends on the cost and length of training required to change
professions.

Case Studies:
-​ A banker decides to retrain as an economics teacher. He takes a 12-month postgraduate
teacher training course, which typically involves two 7-week blocks of teaching in a school.
The banker is able to fund his training through savings earned while working in the banking
industry.

-​ An 18-year-old student decides to apply to a university to become a doctor. She is willing to

take out a student loan to pay for the 7-year course and cover her living expenses while she
is at university because of her career prospects and high potential earnings in the future.

-​ A coal miner loses his job in Chile when the mine closes. Having worked in the mine for over
30 years, he needs to consider retraining. He may find it difficult to be occupationally mobile
as he lacks other skills, and there are few jobs in the local area.

MODEL BUILDING IN ECONOMICS

A model can be used to represent a concept from the real world. Economists use models to
demonstrate economic principles. An economic model is like any other model. Models represent an
object or situation from the real world, but do not necessarily re-create the real thing perfectly. For
example, a model car looks similar to a real car, but you cannot use it to get to work, and it may lack
some of the smaller details. Likewise, a model of the solar system represents the relationship
between the sun and the planets, but the relationships are not to scale, nor are they realistic in the
scientific sense.

Economic models are not dissimilar to model cars and models of the solar system. Economists will
simplify reality in order to analyse human interactions in a model. (In economics, these models are
aka diagrams or graphs.)

OPPORTUNITY COST 22/08/25

Definition: Opportunity cost is the value of the next best alternative forgone (given up) when making
an economic decision

When we decide to do one thing, we are deciding not to do something else. To ensure that we make
the right decisions, it is important that we consider the alternatives, particularly the best alternative.
Opportunity cost is the cost of a decision in terms of the best alternative given up to achieve it.

For example, there are a variety of things you can do between 5 and 6 pm.
These may be:
-​ to go shopping
-​ to read a book
-​ to do some paid work
-​ to visit a friend

You may narrow those choices down to reading the chapter or visiting a friend. You will have to
consider which one will give you the best return. If you choose to read the book, you will not be able
to visit the friend and vice versa.

OPPORTUNITY COST & CONSUMERS

Consumers are buyers and users of goods and services. We are all consumers. The vast
majority of us cannot buy everything we like. You may, for example, have to choose which
economics dictionary to buy. You will probably consider a number of different ones,
taking into account their prices. The choice will then tend to settle on two of them. You
are likely to select the one with the widest and most accurate informative coverage.
The closer the two dictionaries are in quality and price, the harder the choice will be.

OPPORTUNITY COST & WORKERS

Undertaking one job involves an opportunity cost. People employed as teachers might also be able to
work as civil servants. They need to carefully consider their preference for the jobs available. This
would be influenced by a number of factors, including the wage paid, chances of promotion and the
job satisfaction to be gained from each job. If the pay of civil servants or their working conditions
improve, the opportunity cost of being a teacher will increase. It may even increase to the point
where some teachers resign and become civil servants instead. Therefore, undertaking one job
involves an opportunity cost.
OPPORTUNITY COST & PRODUCERS
Producers have to decide what to make. If a farmer uses a field to grow sugar beets, he cannot keep
cattle on that field. If a car producer uses some of his factory space and workers to produce one
model of a car, he cannot use the same space and workers to make another model of the car at the
same time. In deciding what to produce, private sector firms will tend to choose the option which
will give them the maximum profit. They will also take into account the demand for different
products and the cost of producing those products.

OPPORTUNITY COST & THE GOVERNMENT

Governments have to carefully consider their expenditure of tax revenue on various things. If it
decides to spend more on education, the opportunity cost involved may be a reduced expenditure
on healthcare. It could, of course, raise tax revenue in order to spend more on education. In this
case, the opportunity cost would be put on the taxpayers. To pay higher taxes, people may have to
give up the opportunity to buy certain products or to save. The government has to carefully consider
their expenditure of tax revenue on various things.

ECONOMIC GOODS & FREE GOODS

(b) Explain how opportunity cost differs for economic goods and free goods. [4]

As resources are used to produce economic goods, their production involves an opportunity cost. In
In contrast, no resources are used to produce free goods, and so they do not involve an opportunity
cost.

PRODUCTION POSSIBILITY CURVES 26/08/25

A production possibility curve is also known as a
production possibility frontier or an opportunity cost
curve.
Definition: The Production Possibility Curve (PPC)
shows the maximum output of a combination of two
types of goods that an economy can produce with the
existing quantity and quality of resources and
technology.

The diagram shows that a country can produce either 200 capital goods or 300 consumer goods, or a
range of combinations of these two types of goods.

PRODUCTION POINTS
While a PPC shows what is the maximum amount that
can currently be produced, a production point shows
what is actually being produced or what may be
produced in the future. Any point inside the curve
means there is not full use of resources. Point X on the
diagram shows that output is being produced where
there are unemployed resources.
MOVEMENTS ALONG A PPC
A movement along a PPC shows that resources are being
reallocated. It also shows the opportunity cost of that
decision. The diagram shows a country initially deciding
to produce 80 units of manufactured goods and 75 units
of agricultural goods. If it then decides to produce 100
units of agricultural goods, it will have to switch resources
away from producing manufactured goods. The diagram
shows the reduction of the output of manufactured
goods to 60 units. In this case, the opportunity cost of
producing 25 extra units of agricultural goods is 20 units
of manufactured goods.

THE SHAPE OF A PPC

PPCs are usually bowed outwards, as shown in the
diagrams so far. This is because the best resources
are used first to produce a particular type of product.
The opportunity cost of increasing the output of
manufactured goods from 60 to 80 was 25
agricultural goods. To increase the output of
manufactured goods by a further 20,100 would
involve a higher opportunity cost of 75. The last
resources switched from producing agricultural
goods would have been the least suited to producing
manufactured goods.

In the less common situation where resources are

equally suited to producing both types of products,
the opportunity cost remains constant. In this case,
the PPC is shown as a straight line, as in the diagram
below.

As you move toward the axis, the opportunity cost

usually increases.

SHIFTS IN A PPC
The PPC will shift to the right if there is an increase
in the quantity and/or quality of resources. For
example, if there is an increase in the size of the
labour force, the maximum output that a country
can produce will increase.

A shift to the left of the PPC will be caused by a

reduction in the quantity or quality of resources.
CONSEQUENCES OF A SHIFT IN A PPC
A shift to the right of the PPC increases a country's
productive potential. It will be capable of producing
more. This is referred to as potential economic growth.
To take advantage of this increased capacity, the extra
or better quality resources have to be employed. The
diagram shows both the PPC and the production point
moving to the right. Output increases. A rise in a
country's output is called actual economic growth.