Objectives;

At the end of the lesson

the students will be able
to:
1. Understand the concept and
principles of Economics
2. Analyse and observe critically the
issue happening in the country in
relation to normative and positive
economics
3. Plot the opportunity cost and identify
if it is constant opportunity cost or law
of increasing opportunity cost.
 Economics
Greek Word
•OIKOS “ a house”
•NEMEIN “ to manage”
“ managing an household”
 Economics
•The study of how individuals and societies
make decisions about ways to use
SCARCE RESOURCES to fulfil wants and
needs.
are the workers, equipment,
raw materials, and organizers
used to produce scarce goods
 The Study of Economics
•MACROECONOMICS
The big picture:
growth, employment
etc.
Choices made by
large groups ( like
countries)
 The Study of Economics
•MICROECONOMICS

How do
individuals make
economic
decisions
Four Economic Questions
Society ( we) must figure out..,

1. WHAT to produce ( make)

2. HOW MUCH to produce ( quantity)
3. HOW to produce it ( manufacturer)
4. FOR WHOM to produce ( who gets
WHAT)
 Opportunity Cost
•The Value of the Next Best Choice
 Opportunity Costs are Choices?
•How should I spend my money ?
•How should I spend my time ?
•Opportunity cost is always
measured by how much you give
up of the next best alternative to
get what you want.
 Opportunity Costs and Production
Possibilities
•The production possibility curve illustrates
the principle of opportunity cost for an
entire economy.
 shows all possible combinations of
goods and services available to entire
economy.
 principle of opportunity cost explains
 Opportunity Costs and Production
Possibilities
 shows all possible
combinations of goods and services
available to entire economy.
 principle of opportunity cost
explains why production possibility
curve is negatively sloped.
 Shifting the Production Possibilities
Curve
•The production possibilities curve will
shift as a result of:
1. An increase in the economy’s
production factor
1. natural resources
2. labor
 Shifting the Production Possibilities
Curve
3. physical capital
4. human capital
5. entrepreneurship
2. Technological innovation that
increases output from a given
amount of resources.
Thousands
of
computers Y PRODUCTION POSSIBILITY
per year CURVE
g
600

500
h
c
new

original

2 5
Number of Space Missions Per Year
X
The Principle of Opportunity Cost
•The primary concern of
economics is the problem of
RELATIVE SCARCITY -
resources are scarce relative
to wants and therefore
CHOICES must be made
The Principle of Opportunity Cost
•Production of one good means
foregoing the production of another
good.
•Similarly, consuming one good or
service reduces our purchasing power
and prevents us from consuming
another good or service
The Principle of Opportunity Cost
•Opportunity cost is the term
used to represent THE TRUE
COST OF AN ECONOMIC
DECISION and can be defined as
the VALUE OF THE NEXT BEST
ALTERNATIVE FOREGONE
 The Principle of Opportunity Cost
•For example, $ 20 spent on a
CD could have been used to
buy a T-shirt. The monetary
cost is $ 20 but the
opportunity cost is the T-
shirt.
The Principle of Opportunity Cost
•The concept of opportunity cost can be
easily illustrated using a model called
the PRODUCTION POSSIBILITY
FRONTIER.
The model is a graph which shows all the
combinations of goods and services that can be
produced by an economy given the available
resources and level of technology .
 Static Model
•This model is called a
‘static model’
because it refers to
one point in time.
 Static Model
•It is assumed;
1. That an economy’s resources are
fixed in both quantity and quality.
2. Technology is fixed.
3. The economy can only produce 2
types of goods.
 Static Model
•For example - assuming the economy can
produce consumer and capital goods, a
production possibility schedule may look as
follows:
Consumer
100 80 60 40 20 0
Goods
Capital Goods
0 15 30 45 60 75
 Static Model
•The schedule can be
shown graphically and is
known as ‘A Production
Possibility Frontier’ or
‘Production Possibility
Constant
Opportunity Cost
Production Possibility Frontier or Curve
•The production possibility
frontier or curve shows all
the combinations of output
an economy can produce.
Production Possibility Frontier or Curve
•The slope of the curve reflects
the law of increasing
opportunity cost - indicating
that resources are not equally
suited to different types of
production.
The Principle of Opportunity Cost
•No matter what we do, there are
always tradeoffs.
•Scarcity -- limited resources -- is the
reason.
“The opportunity cost of something
is what you sacrifice to get it.”
 3 E’s of Economy
•ECONOMY
The careful , thrifty
management of resources ,
such as money materials,
or labor
 3 E’s of Economy
•EFFICIENCY
A level of performance that
describes a process that uses the
lowest amount of inputs to create
the greatest amount of outputs.
“ dong the thing right”
 3 E’s of Economy
•EFFECTIVENESS
The degree to which
objectives are achieved and
the extent to which targeted
problems are solved.
“ doing the right thing”
 Positive Economics Normative Economics

Explain causes and consequences Discusses the rightness or wrongness of

things
Objective of establishment of uniformities Determination of ideals, economic goals
of public policy

Studies facts as they are and not as they Studies things as they ought to be
ought to be

More light- giving Light- giving and fruit- bearing

Makes critical analysis of the existing Judge whether it is socially justified or not
facts and draw conclusions

How economic problem is solved How economic problem should be solved

 What are positive statements?
•Positive statements are objective
statements that can be tested,
amended or rejected by referring to the
available evidence.
•Positive economics deals with
objective explanation and the testing
and rejection of theories.
 For example:
•A fall in incomes will lead to a rise in
demand for own-label supermarket foods
•If the government raises the tax on beer,
this will lead to a fall in profits of the
brewers.
•The rising price of crude oil on world
markets will lead to an increase in cycling
to work
 What are Normative Statements?
•A value judgment is a subjective
statement of opinion rather than a fact
that can be tested by looking at the
available evidence
•Normative statements are subjective
statements – i.e. they carry value
judgments.
 For example:
•Pollution is the most serious
economic problem
•Unemployment is more harmful
than inflation
•The congestion charge for drivers
of petrol-guzzling cars should
increase to £25
 Did you
learn
something
today?