BASIC MICROECONOMICS

ECO 1141/1541
SEMESTER1 2022
TOPIC: WHAT ECONOMICS IS ALL ABOUT

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  LEARNING OUTCOMES
Once you have studied this section you should be able
to :
explain what economics is all about
define economics
define the important concept of opportunity cost
describe a production possibilities curve or frontier
distinguish between microeconomics and macroeconomics
distinguish between positive and normative economics
explain why economics is a social science
identify some common mistakes in reasoning about economics

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  INTRODUCTION
 Economic issues are reported and analysed every day on
television
 There are many websites and television channels that deal with
economic issues
 Every newspaper has a large section which focuses on economic
and financial matters
 Economics is taught in our schools
 There is much greater awareness of economic issue today than in
the past
 Many people are convinced that economics is concerned,
 only with making money
 buying and selling shares on the JSE
 with the study of balance sheets and profits 3
 All these views are narrow and do not capture the essence of
  WHAT THEN IS ECONOMICS?
What is it concerned with ?
 We want more than we can get.
o We want a peaceful and secure world
o We want clean air, lakes and rivers
o We want long and healthy lives
o We want an enormous range of sports and recreational activities
o We want the time to enjoy sports, games, travel , and hanging out with
our friends
 What each one of us can get is limited by time, by the income we earn,
and by the prices we must pay. Everyone ends up with some unsatisfied
wants.
o What we can get as a society is LIMITED by our PRODUCTIVE
RESOURCES.
o These resources include the GIFTS of nature, Human labour , tools
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and
equipment that we have produced.
cont.

 Our inability to satisfy all our wants is called SCARCITY

 A child wants a R10,00 tin of cooldrink and 50c blocks of chewing gum
but he has only R10,00 in his pocket.
 A millionaire wants to spend the weekend playing golf and at the office
attending a business strategy meeting
 A society wants to provide improved health care, install a computer in
every classroom, clean polluted lakes and rivers, and so on.
 Faced with scarcity, we must CHOOSE among the available alternatives.
 The child must choose the cooldrink or the chewing gum
 The millionaire must choose the golf or meeting.
 As a society, we must choose between health care, national defense , and
education
 The choices that we make depend on the INCENTIVES that we have.
 An Incentive is a reward that encourages an action or a penalty that
discourages one.
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 If the price of cooldrink falls, the child has an incentive to choose more
cont.

 If a profit of R10 million is at stake, the millionaire has an incentive to skip

the golf game.
 As computer prices tumble, school boards have an incentive to connect more
classrooms to the Internet
 The central elements of economics are scarcity and choice.
 Economics deals with the choices that people have to make-
o What to eat?, what to wear?, what career to pursue?.
 It studies the decisions of businesses, government and other decision makers
in society.
o Should Toyota expand its production of motorcars?
o Should Burger King increase the price of its hamburgers? Or should it reduce
the price in attempt to increase sales?
o Should government spend more on education or on housing? Or should
health be a greater priority?
o Should taxes be raised or lowered?
o Should the government subsidies the prices of necessities such as bread 6
and
cont.
 These choices are necessary because they bring us to the basic fact of
economic life- SCARCITY- without scarcity it would not be necessary to
make choices.
o Individuals, businesses and government all want to do many things, but
the “MEANS” with which these wants can be met are “LIMITED”
 Wants are plentiful – we all want a lot of things , but means are scarce
 We therefore have to make choices all the time
 The relationship between unlimited wants and scarce resources is so
central to economics that most definitions of economics focus exclusively
on this relationship
o ECONOMICS is the social science that studies the choices that
individuals, businesses, governments, and entire societies make as they
cope with scarcity and the incentives that influence and reconcile those
choices.
o ECONOMICS is a social science that studies economic activities ( i.e.
Production, exchange and consumption of goods and services) 7
cont.

 ECONOMICS is “ what economists do”(Schumann) – economists study

how and why societies, nations, businesses and people distribute resources,
and the associated implications for human wellbeing.
 Some definitions of Economics ( Mohr & Associates, 2020:3)
SCARCITY, CHOICE AND OPPORTUNITY COST
 Economics is concerned with scarcity.
 The basic fact of economic life is that there are simply not enough goods
and services to satisfy everyone’s wants. Wants are unlimited but means
are limited.
 Wants are human desires for goods and services (unlimited), while needs
are necessities, things that are essential for survival( i.e. Food, water,
shelter and clothing)
 Demand differs from wants, desires or needs. There is a demand for a
good or service only if those who want to purchase it have the necessary
means to do so( It has to be backed by purchasing power)
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 Resources or factors of production are limited
cont.

o Hendrik Mathibela goes to the shop with R15 in his pocket.

 He wants an ice cream, a cool drink, a chocolate and packet of chips.
 But his resources are limited.
 He cannot buy all the things he wants with the R15.
 He therefore has to choose what to buy and what to sacrifice.
o It is Saturday night.
 Anne van der Merwe has to study for an examination on Wednesday.
 She also wants to watch television, go to the movies and visit her
friends.
 But she cannot do all these things at the same time.
 She has to choose what to do and what not to do.
o The South African government has, say, R100 billion to spend on new
development programmes during a given financial year.
 It wants to provide houses, jobs, free health services and free
education for all needy South Africans.
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 But the resources are limited.
cont.

 The government has to decide what it will do immediately and what will have to
be postponed until later years.
o In all these cases difficult choices have to be made.
 Some wants will be satisfied but many will be left unsatisfied
 In each case it has to be decided which of the available alternatives will have to
be sacrificed
 When we are faced with such choice we can measure the cost of the alternative
we have chosen in terms of the alternatives that we have to sacrifice ( i.e.
opportunity cost)
 The opportunity cost of a choice is the value to the decision maker of the best
alternative that could have been chosen but was not chosen.
 In other words, the opportunity cost of a choice is the value of the best forgone
opportunity.
 Every time a choice is made, opportunity costs are incurred and economists
always measure costs in terms of opportunity costs.
 The cost of something is what you have to give up to get it. 10
 ILLUSTRATING SCARCITY, CHOICE AND OPPORTUNITY COST : THE
PRODUCTION POSSIBILITIES CURVE

 Scarcity, choice and opportunity cost can be illustrated with the aid of a
production possibilities curve ( Production possibilities frontier).
 The concepts of Scarcity, choice and opportunity cost can be explained
with reference to the production possibility curve.
 Define PPC, Scarcity, Choice and opportunity cost
 Explain how PPC relates to scarcity, choice and opportunity cost
o Scarcity is the situation where limited resources are insufficient to produce
goods and services to satisfy unlimited human wants. Scarcity necessitates
choice.
o Due to scarcity, society chooses what goods and services to produce
o The opportunity cost of a course of action is the benefit forgone by not
choosing its next best alternative. In other words, when society chooses
what goods and services to produce, it is choosing what goods and services
not to produce.
o The Production possibilities curve indicates the combinations of any two
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goods or services that are attainable when the community’s resources are
Illustrating scarcity , choice & opportunity cost ( Production possibilities curve)

Table 1: Production possibilities for the wild coast community

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 INTERPRETAION OF THE PRODUCTION POSSIBILITIES CURVE
 According to the information depicted in the table above table,
o the economy produces only two different types of goods, fish and
potatoes given the total resources and technology available to produce
them .
 The combinations depicted in Table 1 above are represented by points
A,B,C, D, E and F which appear after joining the different points as
shown in the graph below in figure 1.
 It is evident that as we move along the production possibilities curve from
point A to point B through to point F, the production of fish increases
while the production of potatoes decreases.
 If we are to produce the first basket of fish, the community must
sacrifice 5 kilograms of potatoes( This is shown on the graph by a
movement from 100-95.
 To produce the second basket of fish, the sacrifice is an additional 10
kilograms of potatoes ( This is shown on the graph by the difference
between 95 -85.
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Interpretation of the production Possibilities Curve Cont .

 Likewise, to produce the third basket of fish, an additional 15

kilograms of potatoes have to forgone
o This is illustrated by the difference between 85-70.
 Therefore, the opportunity cost of each additional basket of
fish increases as we move along the PPC.
 It is for this reason that the curve bulges outwards from
the origin( i.e. the curve is concave to the origin)

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Figure 1: A production possibilities curve for the Wild Coast community
Production possibilities curve

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 Overview on how PPC reflects scarcity, choice and opportunity cost
o The diagram is a production possibility curve.
o Although the points inside and on the PPC such points A, B,C,D,E and F are
achievable( i.e. attainable and efficient combinations of potatoes & fish), the points that lay
outside the PPC such as point G are not.
 Scarcity is reflected by the unattainable points (such as G) that lie outside the PPC). It is
illustrated by the fact that we cannot move beyond the curve– how scarcity is reflected
by the PPC
 Choice is reflected by the need for society to choose among the series points on the PPC,
such as points B,D and C It is illustrated by the fact that a choice has to be made about
how much of good one and how much good 2 should be produced- how choice is
reflected by the PPC
o Opportunity cost is reflected by concave nature of the PPC[ It is illustrated by what we
refer to as the negative slope of the curve, which means that more of one good can be
obtained only by sacrificing the other good( It involves a trade off between the two goods).
It is illustrated by the fact that more of one product can only be produced by
sacrificing some of the other product. For example, a move from B to D, means that
more fish is produced but this occurs at the expense of producing less potatoes. – how
opportunity cost is reflected by the PPC
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Cont.

Figure 2: Improved technique for producing capital

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Cont.

Fig 3: Improved technique for producing consumer goods

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Cont.

Fig 4: Increase in the quantity or productivity of the available resources

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Table 2: The production possibilities curve (PPC): a summary

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 DIFFERENT CATEGORIES OF CONSUMER
GOODS
o Goods are tangible objects like food, clothing, houses, books and motorcars
o Consumer goods are goods that are used or consumed by individuals to satisfy wants
o Capital goods are goods that are not consumed in this way but are used in the production
of other goods
o Consumer goods can be classified into three groups: non-durable, semi-durable and
durable
 Non-durable goods are goods that are used once only. Examples are food, wine, tobacco,
petrol and medicine
 Semi-durable goods can be used more than once and usually last for a limited period.
Examples are clothing, shoes, sheets and blankets and motorcar tyres.
 Durable goods normally last for a number of years. Examples are furniture, refrigerators,
washing machines, dishwashers and motorcars.
o Apart from purchasing goods, individuals and households can also satisfy some of
their wants by purchasing services.
 Services are intangible things like medical services, legal services, financial services, the
services of an economics lecturer and the services provided by public servants
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cont.
o Final goods are the goods that are used or consumed by individuals, households
and firms. A loaf of bread consumed by household , for example, is a final
good.
o Intermediate goods are goods that are purchased to be used as inputs in
producing other goods
 Intermediate goods are thus processed further before they are sold to end users.
 Flour used by a baker is an intermediate good
o A private good is a good that is consumed by individuals or households.
 All typical consumer goods (like food, clothes, furniture and motorcars) are
private goods.
o A public good is a good that is used by the community or society at large.
 Consumption by individuals cannot be excluded.
 A traffic light, for example is a public good
 Other examples of public goods are national defence and weather forecasts.
o Economic goods and free goods : Produced at a cost from scarce resources 22
o Not scarce and has no price(air & sunshine)
 cont.
 Economics is a social Science
 Like any other science, economics involves a systematic attempt to discover
regular patterns of behavior.
o These patterns are used to explain what is happening, to predict what might
happen and to assist policy makers to devise or choose appropriate economic
policies.
 It studies the behavior of human beings , both individually and as groups. Other
social sciences include sociology , social psychology, anthropology and political
science
 Natural sciences differ from the social sciences in respect of what is studied.
o There are also differences in respect of how it studied
o In many natural sciences it is possible to conduct controlled laboratory
experiments.
 Another important difference between economics and a natural science like
physics is found in the nature of their generalizations
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o In the natural sciences certain natural laws can be identified.
 MICROECONOMICS AND MACROECONOMICS
o The study of economics is divided into two parts:
 Microeconomics deals with the analysis of individual parts of the economy.
 It concerns factors determining the behavior of a consumer, the behavior of a
firm, the demand for a good, the supply of a good, the price of a good, the
performance of the market.
 Macroeconomics deals with the analysis of the whole economy.
 It concerns factors determining aggregate variables such as aggregate demand,
aggregate supply, national output, unemployment, inflation, the balance of
payments, etc.
 As opposed to microeconomics which focuses on the individual parts of the
economy, macroeconomics looks at the big picture of the economy.

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 POSITIVE AND NORMATIVE ECONOMICS
o Economics often distinguish between positive economics and normative
economics
 Positive economics is concerned with facts.
 It tells us what was, what is or what will be.
 Disagreement over positive economics can be settled by an appeal to facts
 In other words, positive economics is verifiable
 consider the following statement:
“ A decrease in personal income tax will lead to a rise in unemployment”
In the above statement, both personal income tax and unemployment are
measured and hence the statement is verifiable. Therefore, the statement is a
positive statement. It is important to take note that appositive statement can be
true or false.

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cont.

 Normative economics is concerned with value judgements( Involves an

opinion or value judgement)
 It tells us what should be .
 Disagreement over normative economics cannot be settled by an appeal to
facts.
 In other words, normative economics is not verifiable.
 Consider the following statement
“ A redistribution of income from the rich to the poor will increase social
welfare”
In the above statement, although redistribution of income is measurable, social
welfare is not and hence the statement is not verifiable. Therefore, the
statement is a normative statement. It is important to take note that a normative
statement can be true or false. Although the statement is true, what makes it a
normative statement is not that it ii true but that it is not verifiable.

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cont.

 Identify positive or normative statements from the following:

1. Kaizer Chiefs won the PSL in 2019.
2. Nelson Mandela was the South African Newsmaker of the Year in 2013.
3. Tiger Woods won the US Open in 2018
4. In 2013, the average South African inflation rate, based on the consumer price
index, was 5.7 percent.
5. The rand appreciated against the euro in 2017.
6. Bafana Bafana can play much better than they did against Nigeria in 2019.
7. Economic policy in south Africa should be primarily aimed at reducing
unemployment.
8. Louis Oosthuizen is a better golfer than Char Schwartzel.
9. One flew over the cuckoo’s nest is one of the best movies ever made.
10.The South African inflation rate is too high.

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 OTHER POINTS TO NOTE
o The economic way of thinking:
 it is a structured way of thinking
 It is a way of thinking about everyday issues
o The blinkered approached ( biased thinking)
 interpretation of a scenario from one’s personal perspective.
o Fallacy of composition
 A second, related mistake often made in reasoning about economic issues is to
assume that the whole is equal to the sum of the parts.
 Argument is not necessarily correct
 Just because a certain result was given from taking an action from one person,
doesn’t mean that the result will occur if the next person does it.
o Post hoc ergo propter hoc
 The assumption that a second event is the consequence of the first event,
because the events follow each other closely in time.
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cont.
o Correlation and causation
 correlation does not imply causation
 A statistical correlation between two variables does not prove that one had
caused the other or that the variables have anything to do with each other.
o Levels and rates of change
 Levels of a variable shouldn’t be confused with the rate of change in the
variable

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  THEORY AND REALITY
o Theory involves simplification or abstraction
 A theory captures only details that are regarded essential or crucial for
analyzing a particular problem.
 All theories are simplifications of reality
 The aim is to make sense of an extremely complicated world by focusing on
the most important factors, while allowing all the unimportant details to fade
into the background.
 Theorising is a systematic attempt to understand the world around us.
 The main requirement or secret of good analysis or theorizing is to identify
the most important elements and relationships in the complex world that we
need to explain, and to ignore the rest.
 Theories are sometimes also called models, laws, principles, explanations or
hypotheses.

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cont.

 Economic theory has three main purposes:

 To explain or understand how different things are related in the complex real
economic world.
 To predict what will happen if something changes
 To serve as a basis for the formulation and analysis of decisions on economic
policy
These three purposes are interrelated. We first have to explain before we can
predict, and we have to do both before we can start analyzing or proposing
economic policy measures.

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DIFFERENT WAYS OF EXPRESSING A THEORY
o Any theory or relationship can be expressed in words ( i.e. verbally)
 We can say that there is a relationship between the total spending by households
on consumer goods and services and their income- as households’ income
increases, their spending also increases.
o The same relationship can also be expressed in numbers by using a numerical
table, which is called a Schedule.
o A third, very useful way of expressing a theory or relationship is to use symbols
and equations. This has three advantages:
 Using symbols is an efficient way of expressing a relationship. We can use C for
household spending on consumer goods and services and Y for household total
household income and write that C= f(Y). This means that C or spending is a
function of Y or household income.
 The second important advantage of expressing theories or relationships as
equations is that we can then use the rules of algebra to analyse the relationships
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 cont.

C=15 000+0.75Y
In this equation, each symbol has a specific meaning.
Expressing the relationship in this way should make it obvious that there is a positive
relationship between C and Y
 The third major advantage of using equations is that a large number of variables
can be analysed using the algebraic method.
o The fourth possible way of representing relationships or theories is by making the
use of graphs.

ELEMENTS AND TYPES OF FUNCTIONAL RELATIONSHIP

Variable
Functional relationship
Dependent and independent variables
EQUILIBRIUM, COMPARATIVE STATISTICS AND CETERIS PARIBUS
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