CAPE ECONOMICS UNIT 1

Topic 1- The Central Economic

Problem
What is economics? Economics is the social
science that studies the production, distribution,
and consumption of goods and services
 Type of Economic Statements
There are two types of economics statement.
They are:
● Positive statement: statement the are factual
and can be proven/tested.
● Normative statement: statement that are
opinion-based which can be proven.
 Types of goods
● Free good: goods provided by nature without a price.
Examples: sun, air
● Economic good: goods that satisfy human wants.
Examples: clothing, car
● Giffen good: goods that are considered non-luxury and low
income. They are goods that as demand increase, the
price also increases, vice-versa. Examples: flour,rice,
bread
 Categories of free good
There are two categories of free goods. They
are:
● Goods supplied abundantly by nature such as:
air,sunlight
● Goods that are a by product of another such as:
bauxite from red mud.
 Economic Activity and Economic
Resource
● Economic activity refer to the production and
consumption of goods and services.
● Economic resource are factor used to produce
goods and services to satisfy human needs and
wants. These resources are referred to as
factors of production
 Factor of Production
Factors of production are resources used in the
production of good and services which are used to satisfy
human needs and wants. These factors of production are:
● Land
● Labour
● Capital
● Enterprise
 Factor of production
●
Land: anything above or below that is provided by nature. Examples:
air, sunlight, fish, minerals, etc. They are also called natural
resources
● Labour: any human mental or physical effort of any kind such as:
skilled,unskilled or professional such as a brain surgeon.
●
Capital: producer goods used in aid of future production. They are
referred to as manufacture good. Example: machine
●
Enterprise: resources that organises and coordinate the other
factors of production.
 Scarcity
All humans have wants but unfortunately
resources to provide for these wants are
limited. This limited resource can be defined as
‘scarcity’. Scarcity by definition means the
excess of human wants over the availability of
limited resources.
 Scarcity and Choice
Because resources are limited economic agents are forced to
make choices.
● Economic agent: an economic agent is a person or entity that
plays an active role in an economic process. Economic agents
include: household, government, firm and the central bank.
● Choice: the ability of a consumer or producer to decide which
good, service or resource to purchase or provide from a range
of possible options.
 Productive Capacity
Before making a choice one needs to know
what and how much of a resource is there. This
is referred to as productive capacity. Productive
capacity is the amount of goods and services
that the economy is capable of generating.
Logically, this is determined by the amount of
resources producers have at their disposal.
 Three basic choices
There are three basic choices that any economy
must make. They are:
● What to produce?- This the self explanatory:)
● How to produce?- This is also self explanatory :)
● For whom to produce?- How good and service
should be distributed to the population.
 Opportunity Cost
As said before resources are limited therefore
choices have to be made. Since choices have
to be made that indicates a scarce of some
sort. This scarce is known as Opportunity Cost.
Opportunity Cost by definition means the giving
up of the next best choice.
 PPF or PPC
Opportunity Cost can be explained through the illustration
of a diagram. This diagram is called the production
possibility frontier (PPF) or the production possibility
curve(PPC). There are three types of PPF. They are:
● Increasing opportunity cost
● Decreasing opportunity cost
● Constant opportunity cost
 Increasing Opportunity Cost
Increasing Opportunity Cost means there is an
increase in the giving up of more and more unit
of one resource to produce another. This means
a decrease in returns. The shape of the curve of
an increasing opportunity cost PPF is a
concave shape ( outward shape).
Example of Increasing Opportunity
Cost PPF
 Decreasing Opportunity Cost
● Decreasing Opportunity Cost means that less
and less of one resource is given up to produce
another. This means increasing returns. The
shape