RI 2022 Central Problem 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 2022 LECTURE NOTES ECONOMICS

Raffles Institution Economics Department RAFFLES INSTITUTION YEAR 5 ECONOMICS 2022 Outline of Contents 1 What is Economics? 1.1 Introduction to Economics 1.2 Microeconomics vs. Macroeconomics 2 Scarcity, Choice and Opportunity Costs 2.1 Scarcity 2.2 Resources 2.3 Inevitability of Choices - Making Rational Choices 3 The Decision-Making Framework 3.1 Rational Decision-Making by Economic Agents 3.2 Rational Decision-Making on an Economy-Wide Perspective 4 The Production Possibility Curve (PPC) Model 4.1 Scarcity 4.2 Choice 4.3 Opportunity Cost 4.4 Efficiency 4.5 Movements from a point within to on the PPC 4.6 Factors causing shifts of the PPC 5 Conclusion Appendix Appendix 1: The Economic Decision-making Process 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 6 Tutor2u, www.tutor2u.net * Primary References Lecture Objectives: 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 2022 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 and 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 servic es: 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 or models which are then used to explain and predict. These models show simplified relationships between various economic phenomena. For e xample, a model for the bubble tea market shows the relationships between the demand for bubble tea, the supply of bubble tea and its price. Although most models can be described verbally, many can be represented more precisely in graphical or mathematical forms. However, it is important to note that many of these models 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 individuals and firms in particular markets . It is concerned with the demand and supply of particular goods and services. • Macroeconomics is concerned with the economy as a whole. It is thus concerned with aggregate demand and aggregate supply. ‘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. POSITIVE VS. NORMATIVE STATEMENTS As you read deeply into economic issues, it would be vital for you to able to distinguish between positive and normative statements. • A positive statement is a statement of fact. It may be right or wrong, but its accuracy can be tested or verified by appealing to the facts. Positive economics is a branch of economics that de scribes and explains economic phenomena, focusing on facts and cause -and-effect relationships and includes the development and testing of economic theories. • For instance, “Singapore's economy grew by 7.1 per cent year -on-year in the third quarter of 2021” is an example of a positive statement because you can verify whether it is right or wrong by checking our GDP growth data in 2021. • A normative statement, on the other hand, is a statement of value or opinion. It is a statement about what ought or ought not to be, about whether something is good or bad, desirable or undesirable. Such a statement cannot be proved or Note: We will be focusing on Microeconomics in Year 5 and Macroeconomics in Year 6.

Year 5 Economics Lecture Notes 2022 Central Problem of Economics Raffles Institution Economics Department 5 disproved by a simple appeal to the facts because it is often subjective and depends on different perspectives, feelings, opinions and value judgments . Normative economics is thus the branch of economics that expresses value judgements about economic fairness. • For example, “the richest in the world should pay more taxes” is a normative statement. Depending on your individual perspectives and op inions, you may agree or disagree with this statement. 2 SCARCITY, CHOICE AND OPPORTUNITY COST 2.1 SCARCITY All societies face the basic economic problem of scarcity which arises from limited resources and unlimited wants. 2.2 RESOURCES No matter how many goods and services we want or desire, at any one time the world can only produce a limited amount of them. This is because the world only has a limited amount of resources. These resources, or factors of production (FOPs) as they are often called in economics, are of four broad categories. • Capital Capital typically refers to physical capital. Capitals in economics are man-made resources and include machines, factories, transportation and other equipment. Physical vs. Financial Capital Economists are only concerned with physical capital used in the production of goods and services in the economy and NOT financial capital. Financial capital refers to financial assets such as bonds, stocks and bank deposits. • Entrepreneurship An entrepreneur is one who