MODULE NAME:

PRINCIPLES OF ECONOMICS

TOPIC:
SCOPE AND METHODS OF
ECONOMICS

PREPARED BY: KENANI MWAKANEMELA 1

 Meaning
 Definition of Economics
 We can have a good idea about the nature and scope of
economics by studying some of the important definitions of
economics given by the leading economists like Adam Smith,
Alfred Marshall, Lionel Robbins and Samuelson (Refer to the
notes).
 These definitions are facing with a couple of weaknesses
 Economics is, therefore, rightly considered as the study of
how best scarce resources are allocated to satisfy unlimited
wants.

PREPARED BY: KENANI MWAKANEMELA 2

 Basic economic concepts

 Scarcity, Choice and Opportunity cost.

 Scarcity means resources are insufficient to satisfy all human
wants. Scarcity is the main/fundamental economic problem.
The major causes of scarcity are limited stock of resources,
unlimited wants, resources have an alternative uses,
population growth, and natural disaster.
 As a result of scarcity, individuals and societies must make
choices among competing alternatives.
 This gives rise to opportunity cost. Opportunity cost is the
highest-valued option forgone (given up)/ the cost of not
selecting the "next-best" alternative. The opportunity cost of
an item is what you give up to get that item.

PREPARED BY: KENANI MWAKANEMELA 3

 Concept Map
. Unlimited
limited
human
resources
wants

Scarcity

Choice Opportunity Cost

PREPARED BY: KENANI MWAKANEMELA 4

 Opportunity cost: Examples
1. Assume you have three options:
 Option 1 going to a 1 hour concert and pays $200 for
a ticket, Option 2 working as a salesperson earning
$30 per hour, and Option 3 working as a tutor earning
$100 per hour. Find the opportunity cost of attending
the concert.
solution
• Opportunity cost of attending the concert = price of
ticket + net income/benefit of the next-best alternative
activity forgone (highest-valued option forgone)
• Opportunity cost of attending the concert = $200 +
$100 = $300

PREPARED BY: KENANI MWAKANEMELA 5

 Self-test question
• You have bought a ticket for $30 to see an
Chan concert. Lau is performing on the same
night and is your next-best alternative activity.
Ticket to see Lau costs $50.On any given day,
you would be willing to pay up to $70 to see
Lau. Assume there are no other costs of
seeing either performer. Based on this
information, what is the opportunity cost of
seeing the Chan concert?

PREPARED BY: KENANI MWAKANEMELA 6

 The Three Basic Economic Questions that
Society Must Answer

Every society/ firm is faced with several questions

that must be answered due to scarcity of resources.
These are:
 What to produce– This is concerned with how we
allocate our scarce resources. Should we produce
bananas or oranges? Capital goods (e.g. factory
equipment) or Consumption goods?
 How to produce– Do we use more labour than
capital (labour intensive)? More capital than labour
(capital intensive)?

PREPARED BY: KENANI MWAKANEMELA 7

 Cont.…
 For whom to produce– This is really concerned
with how the goods and services are allocated or
distributed to society.
• Others questions includes:
– When to produce (Whether to produce now or in
future) and
– Where to produce (This is the decision on location of
the firm whether to locate the firm near the source of
raw materials or near the market)

PREPARED BY: KENANI MWAKANEMELA 8

Economic Systems and the Solutions to the Central Economic
Problems (Solving the problem of scarcity)

Economic System
 An economic system is a mechanism which
deals with the production, distribution and
consumption of goods and services in a
particular society.
 The question about what to be produced, how
to be produced, and for whom to be produced
can be answered differently according to
different economic systems.
PREPARED BY: KENANI MWAKANEMELA 9
 Cont.…
Market Economy/ free market economy
 A market economy a is an economic system in which the
production and distribution of goods and services takes place
through the mechanism of free markets guided by a free price
system.
– Here the question of what to produce is solved by
producing and supplying those goods and services for
which consumers are willing and able to pay a price per
unit, sufficiently high to cover at least the cost of
production in the long run.
– How to produce in a market economy is solved by using
the best available technique that usually results in the
least cost of production.
– For whom to produce in a market economy is solved by
producing those commodities that satisfy the wants of
those people who have money to pay for them
PREPARED BY: KENANI MWAKANEMELA 10
 Cont.…
Command/ Socialist/Planned Economy
 Is an economic system in which a single agency
makes all decisions about the production and
allocation of goods and services and about the
distribution of income.
– In short, in a command economy, a planning
commission appointed by the president or ruling
party determine exactly what to produce, how to
produce and for whom to produce

PREPARED BY: KENANI MWAKANEMELA 11

 Cont.…
Mixed Economy
 A mixed economy means that one part of the entire
economy is being controlled and run by a certain
country’s government, while the other half is left to
the free market. Most economies of the countries all
over the world are mixed, and they only differ in
terms of intervention by the state.
– Under mixed economic system. Both market
forces of demand and supply and central planning
organ decides what to produce
PREPARED BY: KENANI MWAKANEMELA 12
 Production Possibility Flontier/Curve

 A PPF/PPC is the graph which shows the combination of two

different goods that a country can produce when all resources
in the economy are fully utilised or employed. Or
 The PPF is a graph that shows the various combinations of
two different goods (say, cars and computers)that an economy
can possibly produce given the available factors of production
and the available production technology.
 The following figure shows a PPF of a country producing only
two goods ( computers and cars)

PREPARED BY: KENANI MWAKANEMELA 13

 Cont..

PREPARED BY: KENANI MWAKANEMELA 14

 Cont..
 In this economy, if all resources were used in the car industry, the
economy would produce 1,000 cars and no computers. If all
resources were used in the computer industry, the economy would
produce 3,000 computers and no cars.
 Point A and C represents efficient levels of production/ attainable
combinations (feasible region) when resources are full utilised.
 Point D shows unattainable combinations. why?
 Because resources are scarce to produce such amount: The economy does
not have enough of the factors of production to support that level of
output. In other words, the economy can produce at any point on or inside
the PPF, but it cannot produce at any points outside the frontier.

PREPARED BY: KENANI MWAKANEMELA 15

 Cont..

 Pont B shows underutilisation of the available resources

(inefficient). Why?
 It may be due to poor technology employed or the widespread
unemployment
 At point B the economy is producing only 300 cars and1,000
computers. If the source of the inefficiency were eliminated,
the economy could move from point B to point A, increasing
production of both cars (to 700) and computers (to 2,000).

PREPARED BY: KENANI MWAKANEMELA 16

 QUESTIONS
1. Atlantis is a small, isolated island in the South
Atlantic. The inhabitants grow potatoes and catch
fish. The accompanying table shows the maximum
annual output combinations of potatoes and fish
that can be produced. Obviously, given their limited
resources and available technology, as they use
more of their resources for potato production,
there are fewer resources available for catching fish.

PREPARED BY: KENANI MWAKANEMELA 17

 Cont…
. Maximum Annual Quantity of Quantity
Output Options Potatoes ($) of Fish ($)

A 800 0
B 600 200
C 400 400
D 200 600
E 0 800

PREPARED BY: KENANI MWAKANEMELA 18

 Cont…
a. Draw a production possibility frontier with potatoes on
the horizontal axis and fish on the vertical axis illustrating
these options, showing points A–E.
b. Can Atlantis produce 400 pounds of fish and 800 pounds
of potatoes? Explain. Where would this point lie relative
to the production possibility frontier?
c. What is the opportunity cost of increasing the annual
output of potatoes from 600 to 800 pounds?
d. What is the opportunity cost of increasing the annual
output of potatoes from 200 to 400 pounds?

PREPARED BY: KENANI MWAKANEMELA 19

 Cont.…
2. Some important economic terms are scarcity, choice andc1
opportunity cost. What are the causes of scarcity to arise?
3. Jane owns a kiosk business in Mwanza. As a kiosk owner and
seller, she pays herself an annual salary of Tsh 300,000. TIA
Mwanza campus wants to hire Jane as an assistant
accountant for Tsh 600,000 per year. What is the opportunity
cost to Jane for owning and managing kiosk?. Should Jane
accept employment with TIA Mwanza campus or continuec3
c2

with her kiosk as owner and seller?

4. Define the term ‘ Economic problem’ and ‘opportunity cost’

PREPARED BY: KENANI MWAKANEMELA 20

Slide 20

c1 causes of scarcity are (i) Limited stock of resources (ii) Unlimited wants, (iii) Resources have an alternative uses
client, 14-Sep-15

c2 (a) Opportunity cost is the Tsh 600, 00/=

client, 14-Sep-15

c3 (b) Jane should take up the employment with TIA Mwanza campus and hire a Manager for the Kiosk at annual salary of Tsh 300,000?=
client, 14-Sep-15
 Cont.…
5. You won a free ticket to see a Mr. Nice concert.
Diamondis performing on the same night and is your
next-best alternative activity. Ticket to see Diamond
costs $40/ticket. On any given day, you would be
willing to pay up to $50 to see Diamond. Assume
there are no other costs of seeing either performer.
Based on this information, what is the opportunity
cost of seeing the Mr. Nice concert? (a) $10, (b) $0, (c)
$40, or (d) $50.
 NOTE: Willingness to pay reflects how much you
could benefit from the action

PREPARED BY: KENANI MWAKANEMELA 21

 Cont..
6. You have bought a ticket for $30 to see an Chan
concert. Lau is performing on the same night
and is your next-best alternative activity. Ticket
to see Lau costs $50.On any given day, you
would be willing to pay up to $50 to see Lau.
Assume there are no other costs of seeing either
performer. Based on this information, what is
the opportunity cost of seeing the Chan
concert? (a) $30, (b) $10, (c) $40, or (d) $50.

PREPARED BY: KENANI MWAKANEMELA 22

 .

THANK YOU

PREPARED BY: KENANI MWAKANEMELA 23