LECTURE 1

ECONOMICS

2025-04-0 1
3
Expected Learning Outcomes

1. Discuss the concepts of scarcity, choice and opportunity cost in the production
of goods and services.

2. Describe the PPF

3. Explain how resources can be utilised to maximise production

2025-04-03 2
 What is Economics?
• On a clean sheet of paper write down things you would like to have and
give an estimate of the cost.
• On the other side of the sheet write down the resources you can use to
buy what you would like to have.
• What is/are your observation(s)?
• Your observation(s) explains three phenomena.
• Our wants are many and unlimited
• The resources available to us for the satisfaction of our wants are limited
• Resources have alternative uses
• The above are true for individuals, firms, societies and governments
2025-04-03 3
 What is Economics
• How best can individuals, business firms, societies and
government use the limited resources to satisfy their
unlimited wants?
• Economics answers this question.
• Therefore, Economics is a discipline that is concerned
about the allocation of limited resources to satisfy
unlimited wants

2025-04-03 4
 Economics

• A good definition of economics

• Study of choice under conditions of
scarcity
• Scarcity
• Situation in which the amount of
something available is insufficient to 2025-04-03 5

satisfy the desire for it

 Scarcity
• There are an unlimited variety of scarcities, however they are all
based on two basic limitations
• Scarce time
• Scarce spending power
• Limitations force each of us to make choices
• Economists study choices we make as individuals, and
consequences of those choices
• Economists also study more subtle and indirect effects of
individual choice on our society
2025-04-03 6
 Scarcity and Economics
• The scarcity of resources and the choices it forces us to
make, are the source of all the problems studied in economics
• Households allocate limited income among goods and services
• Business firms’ choices of what to produce and how much to are
limited by costs of production
• Government agencies work with limited budgets and must carefully
choose which goals to pursue
• Economists study these decisions to
• Explain how our economic system works
• Forecast the future of our economy
• Suggest ways to make the future even better 2025-04-03 7
 Micro Vs Macroeconomics
• Microeconomics
• Study of behavior of individual households, firms, and governments
• Choices they make
• Interaction in specific markets
• Focuses on individual parts of an economy, rather than the whole
• Macroeconomics
• Study of the economy as a whole
• Focuses on big picture and ignores fine details
2025-04-03 8
 Opportunity Cost
• The forgone opportunity of consuming a good or service
• Represents an alternative that is given when a decision is made
• Between leisure and work
• More consumption now and less consumption at retirement
• Between consumption and capital goods
• Clothing and food
• Between a highway and military hardware (Infrastructure and defence)
• A choice between several mutually exclusive alternatives, and assuming that the
best choice is made, opportunity cost is the second-best alternative that was not
chosen.
• Very important in economics
2025-04-03 9
 Opportunity Cost
• Decisions involve tradeoffs. When you make a choice, you
give up an opportunity to do something else.
• Decision to study for a masters degree, by giving up the
opportunity to work
• The highest-valued alternative you give up is the
opportunity cost of your decision.
• Limited government budget: decision between university
sponsorship and provision of training facilities for existing
workers.
2025-04-03 10
 Measuring Opportunity Cost
• An Engineering Firm can undertake two activities
(construction and manufacturing) using all its limited
resources. The major decision for the year is how much
manufacturing and construction to do. Look at the various
combinations

2025-04-03 11
 CONSTRUCTION VERSUS
MANUFACTURING
COMBINATION CONSTRUCTION MANUFACTURING
1 0 60
2 60 50
3 80 40
4 100 30
5 110 20
6 120 10
7 125 0

2025-04-03 12
 Opportunity Cost
• The above information tell us how many units of manufacturing must be given
up to produce an extra unit of construction.
• For example; to move from combination 1 to 2 requires giving up 10 units of
manufacturing to produce 60 units of construction. This implies that to
produce an extra unit of construction one sixth of manufacturing must be
giving up.
• From 2 to 3 requires giving up 10 units of manufacturing to produce an extra
20 units of construction., implying that MRS of construction for manufacturing
is 0.5. if we compute the trade-off between construction and manufacturing for
all the various points, we find that and increasing MRS..
• What are the economic implications?
2025-04-03 13
 Production Possibilities
Frontier/Curve (PPF/C)
• Recall the concept of opportunity cost
• We cannot have more of both goods or services.
• To increase the level of production of one good, the level of
production of the other good must decrease provided that:
• All resources are efficiently used and exhausted
• Level of technology remains unchanged.
• If we represent all these combinations on a graph the resulting curve
is called the production possibilities curve or frontier.
2025-04-03 14
 Production Possibilities Curve
• Look at the various combinations of construction and
manufacturing
• We can represent all these combinations on a graph
• That graph is called the PPC or PPF

2025-04-03 15
 PRODUCTION POSSIBILITIES
FRONTIER
PRODUCTION POSSIBILITIES CURVE
130
140
120
CONSTRUCTION

120 110
100
100
80
80
60
60
40
20
0
0
0 10 20 30 40 50 60 70
MANUFACTURING
2025-04-03 16
 Marginal Opportunity Cost
• Moving from one combination to the other, one output must be
given up to produce more of the other.
• Therefore, this movement has an opportunity cost of 10 units of
manufacturing.
• This could also be called the Marginal Rate of Product
Transformation (MRT)
• The number of units of manufacturing that must be given up to
produce an extra unit of construction with the utilization of all
available resources
2025-04-03 17
 PPF, Investment VS
Consumption Goods
Production Possibilities Frontier/Curve
Consumption Goods

0
0 2 4 6 8 10 12

Investment Goods

2025-04-03 18
 Economics and Development
• An outward shift in PPF represents economic development
• This usually happens when there is:
• Investments in research and development
• Producing more capital goods at the expense of consumer goods
• The rate of economic development in any country depends on the
starting point on the PPF.
• A country that invests in innovative technological research is more
likely to grow faster than the one which replicates the current level of
technology
2025-04-03 19
Shifts in the Production
Possibility Curve
Innovative Research in Technology

Consumption Goods
C
A

0 B D
Investment Goods
Shifts in the Production
Possibility Curve
Replication of Existing Technology

Consumption Goods
C

0 B D Investment Goods
 PPC and Economic Growth
• The level of investment in research and innovative
technology is matter of social choice.
• This depends on the public development agenda and
choice of the population, through legislative
representatives

2025-04-03 22