PART 1 Economics 101 Semester 1 2024

PART 1

Introductory Economic Concepts

 Why have the prices of digital cameras and iPods fallen so much in recent years, even
though the demand for these products has risen?
 Why has Tiger Brands been ordered to pay a R98,7 million penalty by the Competition
Commission after admitting to participating in price fixing in the bread and milling
industry? Why have bread prices not fallen after this episode?
 Should air travellers be expected to pay more, as part of their air tickets, for the
environmental costs of the emissions produced by the engines of jet aircraft?
 Why can only one school leaver out of every ten in South Africa expect to find
immediate formal sector employment?
 Why should credit concerns in housing and property markets in the USA impact
negatively on markets thousands of kilometres away from the US, including the
Johannesburg Securities Exchange (JSE)?
 Should a Basic Income Grant be made available to all South Africans as a way of
addressing widespread poverty?
 Should the State provide tertiary education free to all South African school-leavers who
qualify for admission? …or should free university only be provided for those who are
financially needy? …or perhaps to those who have the best matric results? …or should
all expect to pay?
 How is South Africa’s successful bid to host the 2010 Football World Cup likely to
benefit the poor and unemployed?

This is a very tiny sample of the kinds of questions and issues that occupy the minds of
economists. The objectives of this first Part in Economics 101 are both very simple and highly
ambitious. We will introduce you to these kinds of problems and questions, we will show you
just what it is that makes problems and questions like these specifically economic questions,
and we will begin to introduce you to the toolkit used by economists when tackling them.

This Part will introduce you to:

 some of the central concepts and techniques used in the discipline of economics;
 the ways in which economists build simple theories of economic behaviour, and how
they cope with problems different from those that face physical or natural scientists;
 the ways in which economists use simple mathematical and graphical techniques to
represent and illustrate important economic relationships;
 the structure and working parts of simple model economies;
 the way basic economic decision-making is effected in different economic systems;
but in particular
 the basic mechanisms whereby market forces address economic problems; and
 the kinds of problems that unassisted market forces may not be good at solving.

At its very simplest, the objective of this Part is to begin the process of getting you to think like
economists.

Page 1 of 7
PART 1 Economics 101 Semester 1 2024
Reading

The bulk of the reading material for this introductory Part will be drawn from Chapters 1 and 2
(together with very small sections of Chapters 13, 16 and 17) of Parkin: Global and South
African Perspectives (2nd Edition). The main text is supplemented by one additional reading
taken from Economics, by P.A. Samuelson & W. Nordhaus. A copy of this excerpt is included
in your course pack and forms part of your prescribed readings. In tests and examinations,
it will be assumed that you have read ALL the prescribed material.
You will notice that the teaching sessions do not always follow the exact order in which the
material is presented in the textbook. This illustrates that the goal of the teaching sessions
is not merely to offer a simple summary of the text; rather, the principal purpose of lectures
is to provide a coherent overview of material that can sometimes be complex, even in the first
weeks of Economics 101. Several of the lecture sessions will also be used to highlight
applications, examples and case studies. It is therefore absolutely essential that you read
the relevant sections of the text(s) before each classroom session.

Specific objectives for Part 1

By the end of this Part, you should be able to:

 Explain what makes questions or problems specifically economic questions or

problems, understand how the basic concepts of choice in the face of scarcity underlie
economic decisions, and identify economic questions in a wide range of applications.
 Explain the pivotal concept of opportunity cost, and be able to apply this conception to
a range of issues and applications (such as decisions relating to time, money, the use
of economic resources, the environment etc.)
 Show how economics tackles the difficult task of constructing models or theories that
aim to illuminate complex real-world economic interactions. You should be able to
recognise some of the common pitfalls in economic reasoning; to discuss how models
are built and tested; how assumptions are used to produce more accessible and
understandable models; and how ceteris paribus techniques are applied to highlight
particular economic relationships. You should also be able to identify statements as
either positive or normative, and understand the differences between them.
 Show how economic theories can be expressed as functional relationships. Explain
the concept of a functional relationship as a rule. Describe a specific functional
relationship in words and graphically. Express the concept of slope in words and
graphically. Calculate slope both for linear and non-linear functions. Understand
increasing and decreasing slope. Be in a position to apply this “pure maths” to
economic theories.
 Discuss how the central concepts of scarcity, choice and opportunity cost may be
captured by the production possibility frontier (PPF). Be able to use the PPF to shed
light on the behaviour of rich and poor economies. Be able to explain the shape of the
PPF through the law of increasing opportunity costs; and to use the PPF to illustrate
problems of resource allocation, capital formation, technological change and growth in
a wide range of contexts.
 Perceive the importance of analysing economic behaviour in marginal terms, and use
this analysis at the margin to illustrate concepts of marginal cost, marginal benefit and
efficiency.

Page 2 of 7
PART 1 Economics 101 Semester 1 2024

 Identify the component parts of a simple model economy, and discuss the manner in
which households and firms interact in terms of a simple “circular flow” of economic
activity.
 Show how this interaction differs in different simple economic systems such as central
economic planning & decentralised markets and analyse areas where these systems
may not find it easy to “solve” allocation, production and distribution questions.
 In rather more detail, explain what markets are and analyse how market forces can
interact to solve the fundamental economic questions of WHAT, HOW and FOR
WHOM to produce, without the need for overt government intervention. Identify the
different roles played by consumers and producers, and be able to show how the price
signalling mechanism operates to co-ordinate decision-making between them.
 Discuss why, despite the apparent attractions of the “free” market, real-world economic
decision-making is almost never left entirely to market forces. You should be able to
discuss in detail the areas where a pure market economy may be deficient in its ability
to “solve” the basic economic questions. You should be able to recognise the problem
of market failure, discuss its basis, give examples and comment on various ways of
dealing with market failure at a policy level. Further, you should be able to discuss why
government intervention may be justified on grounds of equity; and to discuss more
briefly the stabilisation role of the state.

Page 3 of 7
PART 1 Economics 101 Semester 1 2024

Outline for sessions in Part 1

Session 1: What is economics?

Reading: Parkin (3ed), Ch 1 pp. 1 – 2 & p. 6 – 8

Parkin (2ed), Ch 1 pp. 1 – 2 & p. 6 - 8

This session will introduce the subject of economics by posing some of the central questions
economists grapple with. Just what it is that makes them economic questions will be explored
by introducing the key concepts of scarcity, choice and opportunity cost.

Key concepts

 The concept of scarcity

 The economic problem: choice (trade-offs) in the face of scarcity
 The coexistence of unlimited human wants versus scarce economic resources
 The relevance of the economic problem to all communities
 Individuals and aggregates: microeconomics versus macroeconomics
 Opportunity cost: sacrifice of the next best alternative
Session 2: Basic economic questions: WHAT, HOW and FOR WHOM to produce; and
WHEN is the pursuit of SELF-INTEREST in the SOCIAL INTEREST?
Reading: Parkin (3ed), Ch 1 pp. 2 – 6

Parkin (2ed), Ch 1 pp. 2 – 6

This session will re-examine the basic economic question of choice in the face of scarcity by
introducing several central economic functions: the allocation function (WHAT to produce?),
the production function (HOW to produce?) and the distribution function (FOR WHOM to
produce?). Additionally, the unevenness of economic activity over time (WHEN to produce?)
and the unevenness of economic activity across the global community (WHERE to produce?)
are examined. These fundamental issues are explored, through a series of recent and current
global events and directions of change, to illustrate where the pursuit of self-interest on the
part of individual economic actors may or may not lead to outcomes that are in the social
interest. The role of incentives and institutions that may generate a greater consonance
between individual and social interest are examined.

Key concepts

 WHAT to produce: different types of goods and services

 HOW to produce: factors of production and ways of combining them
 The basic factors of production: land, labour, capital and entrepreneurship
 FOR WHOM to produce: issues of distribution
 SELF-INTEREST versus the SOCIAL INTEREST: consonance or dissonance?

Session 3: Simple economic theory-building

Reading: Parkin (3ed), Ch 1 pp. 9 – 10

Parkin (2ed), Ch 1 pp. 8 – 10

Page 4 of 7
PART 1 Economics 101 Semester 1 2024

This session will show how economists tackle the problem of translating complex real-world
economic behaviour into simple, understandable yet useful models and theories.

Key concepts

 Economics as a human and behavioural science

 Positive and normative economic statements: WHAT IS and WHAT OUGHT TOBE
 Some common mistakes and pitfalls in reasoning about economic issues
 The “scientific method” and simple model-building in economic analysis
 Coping with complex reality: assumptions and ceteris paribus techniques in economic
models
 Testing economic theories: predictive power as the principal goal?
 Why economists disagree
 Graphical techniques in economics

Sessions 4 and 5:
Reading: Parkin (3ed), Ch 1 Appendix pp. 13 – 26

Parkin (2ed), Ch 1 Appendix pp. 15 – 24

Graphical representation of data and functional relationships. Linear functions: vertical
intercept and slope. Non-linear functions: increasing and decreasing slopes; marginal values
and tangents. Functions of many variables.

Key concepts

 Graphs used in economic models

 The function as a rule: a constant and a variable
 Definition and calculation of the slope of a straight line
 Positive and negative slope, slope of a curve: across an arc and at a point
 Slope of a curve, marginal values and tangents

Session 6: The production possibility frontier: productive efficiency

Reading: Parkin (3ed), Ch 2 pp. 30 –33
Parkin (2ed), Ch 2 pp. 28 – 31

This session will revisit the central concepts of scarcity, choice and opportunity cost by
introducing the production possibility frontier (PPF). This first session will be used to explain
the concept of productive (or, as Parkin calls, it ‘production’) efficiency.

Session 7: The production possibility frontier: allocative efficiency

Reading: Parkin (3ed), Ch 2 pp. 33 – 36

Parkin (2ed), Ch 2 pp. 31 – 34

This session starts with revision of concepts by first covering the PPM readings from Session
6 before introducing the concepts of marginal cost and marginal benefit. These two concepts
are then used to explain the concept of allocative efficiency

Session 8: The production possibility frontier: growth

Page 5 of 7
PART 1 Economics 101 Semester 1 2024
Reading: Parkin (3ed), Ch 2 pp. 36 – 38
Parkin (2ed), Ch 2 pp. 34 – 36

This session first completes the material of Session 7 before examining how capital formation
and technological change may be represented by shifts of the production possibility frontier
and how growth can enhance the choices open to real economies.

Key concepts covered in sessions 6, 7 and 8

 Scarcity, choice and opportunity cost revisited

 A graphical representation of an economy’s production possibilities
 Concave versus linear frontiers: the “law” of increasing opportunity costs
 Full employment and unemployment of resources
 Marginal costs and marginal benefits
 An introduction to productive & allocative efficiency
 Capital formation, technological progress and economic growth
 Production possibilities in rich and poor countries

Sessions 9 and 10: Solutions to the basic economic questions

Reading: Parkin (3ed),Ch 2 pp. 42 – 44 (Excerpt: Samuelson & Nordhaus Ch 3A pp. 42 - 46)
Parkin (2ed), Ch 2 pp. 40-42 (Excerpt: Samuelson & Nordhaus Ch 3A pp. 42 - 46)

These sessions will revisit the basic economic questions of WHAT, HOW and FOR WHOM to
produce by examining very briefly how these questions are addressed in different simple
economic systems. Then in more detail, the focus will shift to the way the functioning of
MARKETS can address the fundamental ALLOCATION, PRODUCTION and DISTRIBUTION
questions that must be answered in all economies.
Key concepts:

 An introduction to different economic coordination systems: Central economic planning

& decentralised markets
 A simple circular flow of economic activity
 A simple model economy without a government sector
 Markets as places that facilitate exchange (trade)
 Product (Goods) markets and factor markets
 The role of prices as allocative signals: measures of willingness to pay and indicators
of scarcity
 Early ideas of “free” market mechanisms: Adam Smith’s “Invisible Hand” and the notion
of laissez faire
 Are “free” market forces the optimal way of solving the basic economic questions?

Sessions 11 and 12: The mixed economy and the role of government

Reading: Parkin (3ed), Ch 13 pp. 294 - 295, Ch 16 pp. 362 - 363 & Ch 17 pp. 380 – 381.
Parkin (2ed), Ch 13 pp. 281 – 282, Ch 16, p. 343 – 344 & Ch 17, p. 360 – 362.

These sessions will examine why the pure market solution to the basic economic questions is
universally seen to be deficient. It will explore reasons why governments intervene in the

Page 6 of 7
PART 1 Economics 101 Semester 1 2024
operation of mixed economies, and will assess briefly the nature and consequences of such
intervention.

Key concepts
 Shortcomings of the “free” market solution
 The role of government in a mixed economy
 Market failure: the partial or total breakdown of the price signalling mechanism
 Sources of market failure #1:private versus public goods and the operation of the
exclusion principle
 Sources of market failure #2: externalities - negative and positive spill overs from the
market
 Sources of market failure #3: monopolies and the breakdown of competitive forces
 Equity and re-distribution as a basis for government intervention
 The business cycle and the need for stabilising intervention

Session 13: Test Revision and MCQ preparation

This session, which will be scheduled before the first class test is written, will offer brief revision
of the relevant material in preparation for the test.

Page 7 of 7