BASIC ECONOMIC CONCEPTS

The Economic Problem

WANTS NEEDS

What does this cartoon represent?

VIDEO: What is Economocs? https://www.youtube.com/watch?v=yoVc_S_gd_0

All societies face the economic problem of having to decide…

1. What goods and services to produce?

2. How best to produce goods and services?

3. Who is to receive goods and services?

1. What goods and services to produce?

2. How best to produce goods and services?

• Best use of land, labour, capital and enterprise?

• Replace labour with capital?

3. Who is to receive goods and services?

• Who will get expensive hospital treatment - and who will not?

VIDEO: Who Gets Health Care – The QALY calculation https://www.youtube.com/watch?v=bUay9DV__G0

Resources (Factors of Production)

Land - all the natural resources of the earth. Income from 'land' = rent.

Labour - all the human mental and physical effort that goes into production. Financial reward for labour = salaries and wages.

Capital - all the equipment, machinery and buildings that are not used for its own sake but for the contribution it makes to production. The 'price' of acquiring capital = interest.

Enterprise – the skills needed to organise the other resources into some form of production. The return for enterprise = profit.

Opportunity Cost

Limited resources + unlimited wants means choices must be made.

Choices = sacrifice.Sacrifice = opportunity cost of our decision. Opportunity cost: the cost expressed in terms of the next best alternative foregone or sacrificed.

Example…You recently bought a new pair of shoes which cost R900. What is the opportunity cost of this decision?

Five CDs A new sweater

A meal out for four. A flight from Cape Town to Durban.

• Shoes: 9/10 (because my existing shoes have a hole in the sole)

• 5 CDs: 6/10 - I do have plenty of other CDs but there are new releases by my favourite artists – but they will still be around next month.

• The sweater: 2/10. - Not bad but nothing better than I have already got.

• A meal out for four: 5/10 - nice but not essential at the moment

• Flight to Durban: 4/10 - a luxury but one I can manage without at the moment.