EDEXCEL IGCSE
ECONOMICS
Lecture 1: The Economic Problem
Teacher: Mehnaz Khan
Any country there is a
finite quantity of these
resources, which means
that the quantity available
is limited.
These resources are often
referred to as the four
factors of production:
1. Land
2. Labor
3. Capital
4. Enterprise
Eg.
◾ Individuals have to choose how to spend their limited budgets. For example, a
university student, after all living costs have been met, may have £50 left at the
end of the week. This student would like to buy some new books (£20), get the
train home for the weekend (£30), go out for a meal with ends (£30), buy some
new computer software (£20) or buy a new pair of designer jeans (£50). Clearly, a
choice has to be made because all of these goods together would cost £150.
◾ Producers may have to choose between spending £100 000 on advertising,
training its workforce or buying a new machine.
◾ A government may have to decide whether to spend £5000 million on
increasing welfare benefits, building new hospitals, providing better care for the
mentally ill or building a new motorway
Assume that the government’s spending desires are placed in order of
preference as below:
1 New motorway
2 New hospital
3 Increase welfare benefit
4 Improve care for the mentally ill.
In this example, the new motorway is the government’s preferred choice.
Therefore, the £5000 million will be allocated to this project. The
opportunity cost in this case is the benefit lost from not building the new
hospital, that is, the benefit lost from the next best alternative.
Every society, due to limited resources, must address three fundamental economic
questions:
1.What to Produce?
1. Societies must prioritize which goods and services to produce based on factors like
consumer demand, resource availability, and government policy. This decision involves
trade-offs, as choosing to produce more of one good often means producing less of
another.
2.How to Produce?
1. This question focuses on the methods and processes used to produce goods and
services. Societies must decide how to organize the factors of production (land, labor,
capital, and entrepreneurship) and choose between different production techniques,
considering efficiency, technology, and sustainability.
3.For Whom to Produce?
1. Once goods are produced, they must be distributed among the population.
Distribution can be based on income, need, or government policy, and it raises
important issues of equity and social justice.
WHAT DID YOU SACRIFICE TO ATTEND CLASS???
A PPC shows the different
combinations of two goods that can
be produced if all resources in a
country are fully used.
It shows the maximum quantities of goods
that can be produced.
A PPC for a country is shown in Figure 1.6.
It is assumed that the country can produce
consumer goods or capital goods.
What does the PPC show?
WHAT HAPPENS WHEN AN ECONOMY MOVES FROM ONE
POINT ON THE PPC TO ANOTHER?
For example, what happens if the economy in Figure 1.6
moves from B to C? By moving along the PPC, an
opportunity cost is incurred.
At point B, 14 million units of consumer goods are being
produced and 4 million units of capital goods.
By moving to C, the production of capital goods rises to 7
million units but production of consumer goods falls to 8
million units. To gain another 3 million units of capital
goods, 6 million units of consumer goods are being
sacrificed. The lost production of consumer goods (6
million units) is the opportunity cost. The choice between
different combinations of consumer goods and capital goods
is an important one for a country. If a country produces
more capital goods, it will probably be able to produce more
consumer goods in the future.
Understanding the Production Possibility Curve (PPC):
•Definition: The PPC is a graphical representation that shows the
maximum possible combinations of two goods or services that an
economy can produce, given its available resources and technology.
•PPC and Economic Growth:
•In the short term, the economy operates within the limits of the
PPC.
•Over the long term, economic growth can shift the PPC outward,
allowing for higher levels of production for all goods.
Factors Contributing to Economic Growth ( outward shift in PPC)
•1. New Technology:
• Explanation: Technological advancements play a vital role in boosting an
economy's productive capacity. Innovations in machinery, robotics,
computing, telecommunications, and the internet lead to more efficient
production processes.
• Example: Automation in manufacturing through the use of robots increases
output and reduces the cost per unit.
•2. Improved Efficiency:
• Explanation: Efficiency improvements in resource utilization allow for more
output with the same or fewer inputs. Production methods like kaizen
(continuous improvement) and lean production (minimizing waste) are
instrumental in this regard.
• Example: Lean manufacturing techniques help firms reduce waste and
streamline processes, leading to cost savings and higher productivity.
•3. Education and Training:
•Explanation: A more educated and skilled workforce can perform tasks more
efficiently and effectively. This boosts productivity and, in turn, the economy's overall
output.
•Balancing Academic and Vocational Education: Ensuring that the workforce has the
right mix of academic knowledge and practical skills is crucial for sustainable
economic growth.
•Example: Vocational training programs tailored to industry needs can quickly upskill
workers, making them more employable and productive.
•4. New Resources:
•Explanation: The discovery of new resources or the development of previously
untapped resources can significantly enhance an economy’s production capacity.
•Example: The USA's use of fracking technology to extract shale oil has dramatically
increased its oil production, reducing dependence on imports and boosting its energy
sector.
Shifting the PPC Outwards:
• The original PPC1 represents the
economy's production limits.
• As the economy grows, the PPC shifts
outwards to PPC2, indicating that the
economy can now produce more of
both goods.
• Combinations of goods not
previously possible can now be
enjoyed.
• To generate economic growth in this
way, a government needs to ensure
that investment levels are adequate.
Role of Government in Economic Growth:
•Investment in Infrastructure: Governments can stimulate
economic growth by investing in infrastructure, such as
roads, bridges, and communication networks, which
facilitates business operations.
•Supporting Innovation and Education: By funding research
and development and supporting education, governments
can lay the groundwork for long-term growth.
1 . Inward Shifts of the PPC:
•Definition: An inward shift of the PPC represents a decrease in the production capacity of
an economy, meaning it can produce less of all goods than before.
•CAUSES OF NEGATIVE ECONOMIC GROWTH:
•Causes of Inward Shifts:
1. Resource Depletion:
• Explanation: When a country exhausts its natural resources, like oil, coal, or
minerals, its ability to produce goods declines.
• Example: A country that heavily relies on fossil fuels may experience negative
growth if these resources run out or become too costly to extract.
2. Adverse Weather Patterns:
• Explanation: Severe weather conditions, such as droughts or floods, can devastate
agricultural production, reducing the overall output of an economy.
• Example: Prolonged droughts in agricultural regions can lead to significant food
shortages, affecting both domestic consumption and exports.
3. Brain Drain:
• Explanation: When a large number of skilled and educated workers emigrate to other
countries in search of better opportunities, the home country’s productive potential
decreases.
• Example: If engineers, doctors, and IT professionals leave a country for higher-paying
jobs abroad, the remaining workforce may struggle to maintain previous production
levels.
4. Wars and Conflict:
• Explanation: Wars and civil conflicts can destroy infrastructure, disrupt production, and
displace populations, leading to a significant reduction in economic output.
• Example: Countries embroiled in prolonged conflicts often see declines in industrial
output, agricultural production, and overall economic stability.
5. Natural Disasters:
• Explanation: Earthquakes, hurricanes, tsunamis, and other natural disasters can cause
widespread damage to infrastructure, homes, and businesses, leading to a drop in the
country’s productive capacity.
• Example: The 2011 earthquake and tsunami in Japan significantly impacted the
country's manufacturing and energy sectors.
Visualizing an Inward Shift of the PPC:
•(The original PPC1 represents the
economy’s initial production capacity.
• An inward shift to PPC3 indicates
that the economy can now produce
less of both goods, reflecting a
decrease in productive potential.
Long-Term Implications of Negative Economic Growth:
•Impact on Living Standards: A reduction in the economy’s output can lead to lower
living standards, with fewer goods and services available to the population.
•Government Response:
• Policy Interventions: Governments may need to intervene through policies that
address the root causes of negative growth, such as investing in alternative energy
sources, rebuilding after natural disasters, or implementing measures to retain
talent within the country.
• International Assistance: In cases of severe decline, international aid and support
might be necessary to help countries recover from negative growth situations.
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