2024 SAJC JC1 H1 Scarcity as the Central Economic Problem Lecture Notes (final)

St. Andrew’s Junior College Economics Department 2024 ST ANDREW’S JUNIOR COLLEGE 2024 JC1 H1 ECONOMICS Scarcity as the Central Economic Problem The theme of the Central Economic Problem introduces you to the fundamental problem of economics. It provides an introduction to the study of economics and explains the importance of resource allocation in an economy. You may think that economics is all ab out the study of money, prices, unemployment, inflation and profit. However, you are only right to a certain extent. Economics is about the decision -making of different economic agents (consumers, producers and governments) to make the best use of the limited resources that we have to meet unlimited wants. You will learn more about the different considerations that econo mic agents have before they make their decisions and how these decisions often have both intended and unintended consequences. Important concepts and tools and analysis  Scarcity, choice and opportunity cost  Production Possibility Curve (PPC)  Marginalist principle  Marginal cost, marginal benefit  Maximisation of utility (for consumers)  Maximisation of profits: MR=MC (for producers)  Maximisation of social welfare: MSB=MSC (for government) Key questions to consider 1. What is the difference between positive economics & normative economics? 2. What is the Central Economic Problem and how does it relate to the concept of scarcity? 3. How can economic resources be broadly classified and what are the key characteristics of each category? 4. Why do economic agents like consumers, producers and the government need to make choices in the face of scarcity? 5. How are opportunity costs incurred when choices are made in the allocation of resources for the production and consumption of goods and services? 6. How do we allocate resources considering the challenges posed by the central economic problem- scarcity? 7. What is a PPC (Production Possibility Curve) and how does it illustrate the relationship between scarcity, choice and opportunity cost? 8. How would changes in the quantity and quality of resources and technology affect the PPC? 9. How do economic agents make decisions?

SCARCITY AS THE CENTRAL ECONOMIC PROBLEM St. Andrew’s Junior College Economics Department 2024 2 Contents Important concepts and tools and analysis ................................................................................................................................................. 1 Key questions to consider ............................................................................................................................................................................... 1 1. INTRODUCTION TO ECONOMICS .................................................................................................................................................... 3 1.1. What is Economics? ............................................................................................................................................................................. 3 1.2. Microeconomics and Macroeconomics ............................................................................................................................................ 4 1.3. Positive and Normative Economics .................................................................................................................................................. 4 2. CENTRAL ECONOMIC PROBLEM (CEP) ............................................................................................................................................. 5 2.1. Scarcity ................................................................................................................................................................................................. 5 2.2. Choice .................................................................................................................................................................................................... 7 2.3. Opportunity Cost ................................................................................................................................................................................ 7 2.4. Summary of the Central Economic Problem (CEP) ....................................................................................................................... 8 3. RESOURCE ALLOCATION ................................................................................................................................................................... 10 3.1. Three Basic Economic Questions ..................................................................................................................................................... 10 4. THE PRODUCTION POSSIBILITY CURVE ......................................................................................................................................... 11 4.1. Drawing a Production Possibility Curve ....................................................................................................................................... 11 4.2. Usefulness of the Production Possibility Curve ............................................................................................................................ 13 4.3. Shape of the Production Possibility Curve ................................................................................................................................... 14 4.3.1. How is increasing opportunity cost of producing a good being illustrated on a production possibility curve? 14 4.3.2. Why is the opportunity cost increasing? ..................................................................................................................... 15 4.4. Economic Growth and the PPC ....................................................................................................................................................... 16 4.4.1. How Potential Economic Growth can be Achieved ................................................................................................... 17 5. RATIONAL DECISION-MAKING BY ECONOMIC AGENTS ......................................................................................................... 22 5.1. Marginalist Principle ........................................................................................................................................................................ 22 5.2. Marginal Analysis for Different Economic Agents ..................................................................................................................... 23 5.2.1. Consumers use marginal analysis when purchasing goods and services ............................................................. 23 5.2.2. Producers/firms use marginal analysis to decide on the output level.................................................................. 23 5.2.3. Governments use marginal analysis when making policy decisions ..................................................................... 23 5.3. Decision-Making Approach ............................................................................................................................................................ 24 6. CONCLUSION....................................................................................................................................................................................... 29 7. CONCEPT MAP SUMMARY OF THE CENTRAL ECONOMIC PROBLEM .................................................................................... 30 8. APPENDIX .............................................................................................................................................................................................. 31 8.1. DIFFERENT ECONOMIC SYSTEMS...................................................