ECONOMICS: A SOUTHERN AFRICAN CONTEXT
1
,CHAPTER 1: THE WHY AND WHO OF ECONOMICS
n economist, if asked, will advise the government on how to spend taxpayers’ money
A
efficiently. The selection will probably be based on the availability of funds, cost of projects, time
frames, skills to perform and sustain the project, the outcomes and benefits to society. They will
also make choices and advise accordingly.
conomics: is the study of how individuals, businesses and institutions make choices, to
E
optimize their level of satisfaction under conditions of scarcity.
‘There is no such thing as free lunch’.
ociety possesses productive resources, such as labour and managerial talent, tools and
S
machinery, land and mineral deposits. These resources, employed in the economic system, help
us produce goods and services that satisfy many of our economic wants. → The blunt reality is
that our economic wants far exceed the productive capacity of our scarce resources.
HE ECONOMIC PERSPECTIVE
T
Economic perspective: a viewpoint that envisions individuals and institutions making rational
decisions by comparing the marginal benefits and marginal costs associated with their actions.
.Scarcity and choice
1
Scarce economic resources mean limited goods and services. → Scarcity restricts options and
demands choices.
Economic resources: the land, labour, capital and entrepreneurial ability that are used in the
production of goods and services, productive agents, factors of production.
.Opportunity cost
2
Opportunity cost: the amount of other products that must be forgone or sacrificed to produce a
unit of a product.→ The opportunity cost of an activityis the value of the next best alternative
that is forfeited to undertake the activity.
he so-called ‘free lunch’ is never free. The consumer making a choice bears a cost - and,
T
ultimately, so does society.
.Rational behaviour
3
Economists often assume that human behaviour reflects ‘rational self interest’. Individuals look
for and pursue opportunities to increase their level of satisfaction when obtaining or consuming
an article. → Economists call this level of satisfaction utility.
tility: the want satisfying power of a good or service.→ The utility is the pleasure, happiness or
U
satisfaction obtained from consuming a good or service.
2
, onsumers allocate their time, energy and money to maximize their satisfaction. Because they
C
weigh costs and benefits, their economic decisions are ‘rational’ or ‘purposeful’, not ‘random’ or
‘chaotic’.
ational behaviour does not assume that people and institutions are immune from faulty logic
R
and therefore are perfect decision makers. Nor does it mean that people’s decisions are
unaffected by emotion or the decisions of those around them. Rational behaviour simply means
that people make decisions with some desired outcome in mind. Rational self interest is not the
same as selfishness.
Self interested behaviour is simply behaviour designed to enhance personal satisfaction.
.Rational consumers
4
A rational consumer is someone who maximizes utility subject to a budget constraint. → Any
consumer would naturally like to buy as many products as possible, but the resources at his or
her disposal are limited.
rational consumer will consequently think the matter over carefully before choosing the goods
A
and services on which to spend their income. The products and the quantities bought must
provide the consumer with the highest possible total utility.
This is the essence of optimal behaviour, and it consists of three elements, namely:
Calculation.
Negotiation.
Expenditure.
.Rational producers
5
A rational producer seeks to maximize the profit of the firm they happen to run.
rational producer must, therefore, likewise do some serious thinking about the production
A
process to reach the maximum output. The methods include production factors - and the
quantities thereof - used as inputs in the process. The producer must, therefore, choose the
production technique and the productive inputs that will yield the highest possible profit in the
end.
. Marginal analysis: Benefits and costs
6
Marginal analysis: the comparison of marginal benefits and marginal costs, usually for decision
making. → To economists, ‘marginal’ means ‘extra’,‘additional’ or ‘a change in’.
In a world of scarcity, the decision to obtain the marginal benefit associated with some specific
option always includes the marginal cost of forgoing something else. Opportunity costs are
present whenever alternative options are available and scarcity forces you to choose.
3
, HEORIES, PRINCIPLES AND MODELS
T
Scientific method: the procedure for the systematic pursuit of knowledge involving the
observation of facts and the formulation and testing of hypotheses to obtain theories, principles
and laws.
conomists develop theories of the behaviour of individuals and institutions engaged in the
E
production, exchange and consumption of goods and services. → Theories, principles and
models are rational simplifications.
conomic principles: widely accepted generalizations about the economic behaviour of
E
individuals and institutions.→ They are tools forasserting cause and effect within the economic
system. (Good theories do a good job of explaining and predicting).
There are a few other things important to know about economic principles:
Generalizations.
Other things are equal assumptions.
Graphical expression.
eteris paribus (other things equal assumption): the assumption is that factors other than those
C
being considered do not change.
ACROECONOMICS AND MICROECONOMICS
M
Economists develop economic principles and models at two levels:
.Macroeconomics
1
Macroeconomics: the part of economics concerned with the economy as a whole, with such
major aggregates as the household, business and government sector, and with measures of the
total economy.
Aggregate: a collection of specific economic units treated as if they were one.
In using aggregates, macroeconomics seeks to obtain an overview, or general outline, of the
structure of the economy and the relationship of its major aggregates. Macroeconomics speaks
of such economic measures as total output, total employment, total income, aggregate
expenditure and the general level of prices in analysing various economic problems.
.Microeconomics
2
Microeconomics: the part of economics concerned with decision making by individual units such
as a household, a firm, an industry and with individual markets, specific goods and services and
product prices.
he macro - micro distinction does not mean that economics is so highly compartmentalized
T
that every topic can be readily labelled as either macro or micro; many topics and subdivisions
of economics are rooted in both.
4
1
,CHAPTER 1: THE WHY AND WHO OF ECONOMICS
n economist, if asked, will advise the government on how to spend taxpayers’ money
A
efficiently. The selection will probably be based on the availability of funds, cost of projects, time
frames, skills to perform and sustain the project, the outcomes and benefits to society. They will
also make choices and advise accordingly.
conomics: is the study of how individuals, businesses and institutions make choices, to
E
optimize their level of satisfaction under conditions of scarcity.
‘There is no such thing as free lunch’.
ociety possesses productive resources, such as labour and managerial talent, tools and
S
machinery, land and mineral deposits. These resources, employed in the economic system, help
us produce goods and services that satisfy many of our economic wants. → The blunt reality is
that our economic wants far exceed the productive capacity of our scarce resources.
HE ECONOMIC PERSPECTIVE
T
Economic perspective: a viewpoint that envisions individuals and institutions making rational
decisions by comparing the marginal benefits and marginal costs associated with their actions.
.Scarcity and choice
1
Scarce economic resources mean limited goods and services. → Scarcity restricts options and
demands choices.
Economic resources: the land, labour, capital and entrepreneurial ability that are used in the
production of goods and services, productive agents, factors of production.
.Opportunity cost
2
Opportunity cost: the amount of other products that must be forgone or sacrificed to produce a
unit of a product.→ The opportunity cost of an activityis the value of the next best alternative
that is forfeited to undertake the activity.
he so-called ‘free lunch’ is never free. The consumer making a choice bears a cost - and,
T
ultimately, so does society.
.Rational behaviour
3
Economists often assume that human behaviour reflects ‘rational self interest’. Individuals look
for and pursue opportunities to increase their level of satisfaction when obtaining or consuming
an article. → Economists call this level of satisfaction utility.
tility: the want satisfying power of a good or service.→ The utility is the pleasure, happiness or
U
satisfaction obtained from consuming a good or service.
2
, onsumers allocate their time, energy and money to maximize their satisfaction. Because they
C
weigh costs and benefits, their economic decisions are ‘rational’ or ‘purposeful’, not ‘random’ or
‘chaotic’.
ational behaviour does not assume that people and institutions are immune from faulty logic
R
and therefore are perfect decision makers. Nor does it mean that people’s decisions are
unaffected by emotion or the decisions of those around them. Rational behaviour simply means
that people make decisions with some desired outcome in mind. Rational self interest is not the
same as selfishness.
Self interested behaviour is simply behaviour designed to enhance personal satisfaction.
.Rational consumers
4
A rational consumer is someone who maximizes utility subject to a budget constraint. → Any
consumer would naturally like to buy as many products as possible, but the resources at his or
her disposal are limited.
rational consumer will consequently think the matter over carefully before choosing the goods
A
and services on which to spend their income. The products and the quantities bought must
provide the consumer with the highest possible total utility.
This is the essence of optimal behaviour, and it consists of three elements, namely:
Calculation.
Negotiation.
Expenditure.
.Rational producers
5
A rational producer seeks to maximize the profit of the firm they happen to run.
rational producer must, therefore, likewise do some serious thinking about the production
A
process to reach the maximum output. The methods include production factors - and the
quantities thereof - used as inputs in the process. The producer must, therefore, choose the
production technique and the productive inputs that will yield the highest possible profit in the
end.
. Marginal analysis: Benefits and costs
6
Marginal analysis: the comparison of marginal benefits and marginal costs, usually for decision
making. → To economists, ‘marginal’ means ‘extra’,‘additional’ or ‘a change in’.
In a world of scarcity, the decision to obtain the marginal benefit associated with some specific
option always includes the marginal cost of forgoing something else. Opportunity costs are
present whenever alternative options are available and scarcity forces you to choose.
3
, HEORIES, PRINCIPLES AND MODELS
T
Scientific method: the procedure for the systematic pursuit of knowledge involving the
observation of facts and the formulation and testing of hypotheses to obtain theories, principles
and laws.
conomists develop theories of the behaviour of individuals and institutions engaged in the
E
production, exchange and consumption of goods and services. → Theories, principles and
models are rational simplifications.
conomic principles: widely accepted generalizations about the economic behaviour of
E
individuals and institutions.→ They are tools forasserting cause and effect within the economic
system. (Good theories do a good job of explaining and predicting).
There are a few other things important to know about economic principles:
Generalizations.
Other things are equal assumptions.
Graphical expression.
eteris paribus (other things equal assumption): the assumption is that factors other than those
C
being considered do not change.
ACROECONOMICS AND MICROECONOMICS
M
Economists develop economic principles and models at two levels:
.Macroeconomics
1
Macroeconomics: the part of economics concerned with the economy as a whole, with such
major aggregates as the household, business and government sector, and with measures of the
total economy.
Aggregate: a collection of specific economic units treated as if they were one.
In using aggregates, macroeconomics seeks to obtain an overview, or general outline, of the
structure of the economy and the relationship of its major aggregates. Macroeconomics speaks
of such economic measures as total output, total employment, total income, aggregate
expenditure and the general level of prices in analysing various economic problems.
.Microeconomics
2
Microeconomics: the part of economics concerned with decision making by individual units such
as a household, a firm, an industry and with individual markets, specific goods and services and
product prices.
he macro - micro distinction does not mean that economics is so highly compartmentalized
T
that every topic can be readily labelled as either macro or micro; many topics and subdivisions
of economics are rooted in both.
4
