RI H1 Economics Lecture Notes 2024 Central Problems of Economics

CENTRAL PROBLEM OF ECONOMICS CONTENTS: 1. What is Economics? 2. Scarcity, Choice and Opportunity Costs 3. The Decision-Making Framework 4. The Production Possibility Curve (PPC) Model This series of lectures provides an introduction to economics and the central problem of economics: scarcity. Faced with limited resources and unlimited wants, economic agents have to make choices. However, this results in trade-offs and opportunity costs. RAFFLES INSTITUTION YEAR 5 ECONOMICS 2024 LECTURE NOTES ECONOMICS

Raffles Institution Economics Department RAFFLES INSTITUTION YEAR 5 ECONOMICS 2024 CONTENTS 1 WHAT IS ECONOMICS? ........................................................................... 4 1.1 INTRODUCTION TO ECONOMICS ................................................... 4 1.2 MICROECONOMICS VS. MACROECONOMICS .............................. 4 2 SCARCITY, CHOICE AND OPPORTUNITY COST.................................. 5 2.1 SCARCITY .......................................................................................... 5 2.2 RESOURCES ...................................................................................... 6 2.3 INEVITABILITY OF CHOICES – MAKING RATIONAL CHOICES .... 6 3 THE DECISION-MAKING FRAMEWORK ................................................ 8 3.1 RATIONAL DECISION-MAKING BY ECONOMIC AGENTS ............ 9 3.2 RATIONAL DECISION-MAKING ON AN ECONOMY-WIDE PERSPECTIVE ............................................................................................ 12 4 THE PRODUCTION POSSIBILITY CURVE (PPC) MODEL ................. 14 4.1 SCARCITY ....................................................................................... 14 4.2 CHOICE............................................................................................ 15 4.3 OPPORTUNITY COST .................................................................... 15 4.4 EFFICIENCY .................................................................................... 15 4.5 MOVEMENT FROM A POINT WITHIN TO A POINT ON THE PPC 16 4.6 FACTORS CAUSING SHIFTS OF THE PPC.................................. 16 5 CONCLUSION......................................................................................... 17 APPENDIX 1: THE ECONOMIC DECISION-MAKING PROCESS ............... 18 CENTRAL PROBLEM OF ECONOMICS

Raffles Institution Economics Department References 1 Sloman, J., Economics, 8th Edition, Hertfordshire: Prentice Hall* 2 Beardshaw, J., Economics: A Student’s Guide, 5th Edition, Pearson Education* 3 Mankiw, Quah& Wilson, Principles of Economics: An Asian Edition: Cengage Learning* Lipsey & Courant, Economics, 11th Edition, Harper Collins 4 Colin Bamford & Susan Grant, Cambridge International AS & A Level Economics, 2nd Edition, Cambridge 5 Joycelyn Blink and Ian Dorton, IB Diploma Program, Economics (Course Companion), Oxford Lecture Objectives / Checklist After the series of lectures, students should be able to: • Differentiate between microeconomics and macroeconomics • Differentiate between positive and normative statements • Explain the central problem of economics (scarcity) and the inevitability of choice by economic agents • Define and explain the concept of opportunity cost and the nature of trade-offs in the allocation of resources • Explain rational decision making by economic agents • Use the PPC model to explain and illustrate: o Scarcity, choice and opportunity cost o Attainable and unattainable points o Efficiency • Explain and illustrate the effects of changes on the PPC curve

Year 5 Economics Lecture Notes 2024 Central Problem of Economics Raffles Institution Economics Department 4 1 WHAT IS ECONOMICS? 1.1 INTRODUCTION TO ECONOMICS Economics is a science that studies human behaviour. It studies how individuals and societies deal with scarcity – the central problem of economics . Or, more commonly, it is understood as a decision science that is concerned with production, distribution and consumption of goods and services: • The production of goods and services: how much the economy produces, both in total and of individual items; how much each firm or person produces; what methods of production are used; how many people are employed. • The consumption of goods and services: how much the population as a whole spends on purchasing goods and services (and how much it saves); what the pattern of consumption is in the economy; how much people buy of particular items; what particular individuals choose to buy; how people’s consumption is affected by prices, advertising, fashion and other factors. Economists often attempt to construct theories, frameworks or models which are then used to simplify, explain and predict various economic phenomena. For example, a demand and supply model for the bubble tea market shows the relationships between the demand for bubble tea by consumers, the supply of bubble tea by producers and its market price and sales quantity. Although most models can be described verbally, many can be represented more precisely or succinctly in diagrammatic or mathematical forms. However, it is important to note that most models or frameworks have shortcomings as they are based on a set of assumptions and hence are unable to perfectly represent what happens in the real world all the time. 1.2 MICROECONOMICS VS. MACROECONOMICS Economics is traditionally divided into two main branches – microeconomics and macroeconomics, where ‘micro’ means small and ‘macro’ means big. • Microeconomics is concerned with the individual parts of the economy such as the behaviours and decisions of individua ls and firms in particular markets. It is concerned with the demand and supply of particular goods and services . For instance, we can study the demand and supply in the market for designer shoes as well as those in the market for shipping services separately. • Macroeconomics is concerned with the economy as a whole. It is thus concerned with aggregate demand and aggregate supply in an economy . ‘Aggregate demand’ means the total amount of spending in the economy (on all goods and services), whether by domestic consumers, by overseas consumers for our exports, by the government, or by firms when they buy capital equipment or stock up on raw materials. And by ‘aggregate supply’ we mean the total national output of goods and services. For instance, we can study the economy of Singapore and the European Union to examine how and how well they grow and trade. Think: What makes it important for me to distinguish between micro - and macro-economics in A Level Economics? It is a critical skill to identify whether the economics problem in a question is under the realm of microeconomics or macroeconomics. It helps you to correctly analyse the question and select the appropriate economic models (or frameworks ) to construct your economic arguments and to make judgements. In the examples above, using the demand and supply framework (a microeconomic model) to study the economy of Singapore (a macroeconomic concept) would be inaccurate and counterproductive. Instead, aggregate demand and aggregate Note: We will be focusing on Microeconomics in Year 5 and Macroeconomics in Year 6. Note: Throughout the course of A Level Economics, you will learn many different frameworks (or models) such as the demand and supply model, the marginal cost and marginal benefit model, etc.

Year 5 Economics Lecture Notes 2024 Central Problem of Economics Raffles Institution Economics Department 5 supply framework (a macroeconomic model) should be used to analyse the performance of the Singapore economy. Think: What are two important types of economic statements that can help me with my own arguments and writing? As you study more deeply into economics, you