© Thomas Kabalin
Introduction to Economics
Basic Concepts
Defining Economics
There is not a single definition of Economics, as it can be viewed from different perspectives
with different focuses
It does not focus on “economic variables” that we hear about in the media, like share prices,
the exchange rate, and interest rates
Economic forecasts, such as if the rand will strengthen or weaken against the dollar, are often
not accurate
Economics is about life & our interactions with others
This includes power dynamics, producing and consuming, wealth and poverty
The focus is on scarcity, on the fact that resources (money and time) are in limited supply,
and that we must make choices between alternatives
Two critical concepts are production (what & how is it produced) and distribution (who will
consume the goods & services)
Scarcity and Choice
Economic problems involve scarcity and choice, or needs vs wants
Both people and society have needs and wants (clean air, functioning government)
Needs and wants are infinite, but resources to make goods & services are scarce
People do not have enough time and money
Example: national budget
o There is a large amount of money to distribute, but must still be divided
o Every department wants more money/higher salaries
If there was no scarcity, people would not have to make choices, and economics would not
exist
3 Basic Economic Questions
Goods & services must be produced & distributed between people
Have to consider 3 questions:
What to produce (output question)
How to produce (input question)
For whom to produce (distribution question)
Output Question
In capitalistic system, this question is answered by supply & demand
o If demand increases, this increases the price, which incentives business to produce
more
o If demand is low, businesses will not sell it & will be forced to reduce the price,
causing manufacturers to switch to more profitable products
o Demand is determined by people with money (“vote” with money, causing more or
less to be produced)
, © Thomas Kabalin
In command economy, the government decides what & how much to produce
o Whether people want the things is immaterial
o Officials might try to align planned production with what they think consumers want
Input Question
Focus is on combinations of labour and machinery (equipment aka capital) used to produce
Also includes operational details, including production lines & recipes
Example: production of cars in SA vs Japan
o Can be produced in a labour-intensive way (South Africa) or capital-intensive way
(robots – Japan)
If labour is cheap, it makes sense to adopt a more labour-intensive production approach
Opposite in countries with expensive labour – capital is cheaper & more abundant
Distribution Question
Related to production question as, in a market economy, people who buy products are the
ones who determine what is produced (“money votes”)
People with more money can buy more goods & services – considered unfair by some
Government can influence – take away resources from rich & distributes to the poor
Common method is using taxation (different tax percentages for different income)
o Government then provides services to the population
o People who pay more tax do not get better services from the government
o Grants are also used
o Tax reduce & grants increase people’s disposable income – changes the way people
can vote with money
Goods and Services (Types of Output)
Goods can be divided into:
o Durable goods (cars, fridges)
Provide a service for a long time
Investment goods – yield a high return
o Semi-durable goods (clothes, tyres)
o Non-durable goods (cleaning products, food)
The poorer a family, the greater the percentage of income is spent on non-
durables)
Services are intangible
Include financial, personal (doctor, lawyer), transport and wholesale services
Example: supermarkets
o They do not produce the products
o They use their purchasing network to buy products, transport them & make
shopping experience more pleasurable
o Even though they sell goods, they produce a service
, © Thomas Kabalin
Inputs/Factors of Production
Goods & services are the outputs of the production process
4 inputs are required:
o Land
Includes renewable & non-renewable natural resources
Owners of land earn rent
o Labour
Time, effort & knowledge or skills devoted to production
Owners of labour earn wages
o Capital
Physical equipment used in the production process
Owners of capital earn interest
o Entrepreneurship
Not merely labour – it’s a person with ideas, initiatives & who is willing to
take risks
Take other inputs & combine them to create or improve a product/services
Earn profit
Economic Systems
Economic systems are designed to address the 3 basic questions
Since communism collapsed (in Soviet Union & China), capitalism has become even more
dominant
When the Berlin Wall fell, republics of the USSR in Eastern Europe became independent &
adopted capitalism (as well as what has now become Russia)
China switched to a capitalist system, even though it is run by the Communist Party
Political systems (democracy, dictatorship) are different from economic systems (capitalist,
command)
The Chinese capital revolution has been successful & is beginning to compete with US
The Financial Crisis of 2008 was a major threat to the capitalist system, like Great Depression
in 1930s
System has continued to adapt & survive and is followed in almost all countries
2 most important parts of economic systems:
o How property rights are defined
o How decisions (regarding 3 basic questions) are made
Land & what you produce can either belong to you or society/government
If property rights are secure, ownership can be enforced by courts otherwise might get taken
away
Expropriation without compensation refers to when the government takes someone’s land
without compensating the owner (some people stand to lose/gain from it)
Undermines property rights in South Africa – was not voted into law
Traditional
Important characteristic: things do not change (inflexible)
Economy was dominated by agriculture/subsistence farming
No social mobility – stay in same class/job (e.g. farming) for many generations
, © Thomas Kabalin
Extreme poverty was the norm (low standard of living) meaning no resources (money) for
luxuries
People did not travel
Technical and scientific improvements were frowned upon, especially by religious and
community leaders
Superstition, cultural beliefs, and religion trumped economic change
Progress was not thought to be possible (assumption means it does not adapt) or desirable
Advantage is that it is predictable for people who live in it – gives security
Differences in Traditional Systems
Hunter/gather societies were egalitarian – no hierarchy of status
o Each person contributed according to their skills & role expected from them
o “Primitive communism” – Karl Marx
Slave-based societies of Greek and Roman empires had definite hierarchical status
o Mostly decided at birth – born as a slave, citizen, or even more privileged
Feudalism (in Middle Ages of in Europe) is a very hierarchical form of society
o Serfs (free workers – small scale farmers) lived on the feudal lord’s land and were
indebted
o Not slaves, but similar relationship
o Born as either serf or lord – no social mobility
Capitalist
Developed in England (late 18th century) with the Industrial Revolution
People were pushed off farmland to live & work in factories in cities
New social class (capitalists) emerged – now called entrepreneurs
Used either own or money from shareholders to build & operate factories
Goods produced were desired & lead to higher standard of living
Name derived from capital – resources & machines used to manufacture products
Critical characteristic: private ownership (own means of production, decide what to
produce)
Guided by profit motive – produce what yields higher profit
Produced material welfare at cost of environmental degradation & social disruption
Increase in income inequality within & between countries
Command (Planned)
Started in 1917
Czar of Russia was overthrown & USSR (Union of Soviet Socialist Republics) was formed
Government owns factors of production & decides how to employ them in the production
process
Decides what to produce, how to produce and distribute it
Consumers in capitalist society are sovereign – not told what they should consume
State is sovereign in command system – decide what to produce & consumers must buy
Quality of goods suffer:
o Targets set are for a certain quantity
o No incentive to produce higher quality products as it is not rewarded
Shortages of consumer products:
Introduction to Economics
Basic Concepts
Defining Economics
There is not a single definition of Economics, as it can be viewed from different perspectives
with different focuses
It does not focus on “economic variables” that we hear about in the media, like share prices,
the exchange rate, and interest rates
Economic forecasts, such as if the rand will strengthen or weaken against the dollar, are often
not accurate
Economics is about life & our interactions with others
This includes power dynamics, producing and consuming, wealth and poverty
The focus is on scarcity, on the fact that resources (money and time) are in limited supply,
and that we must make choices between alternatives
Two critical concepts are production (what & how is it produced) and distribution (who will
consume the goods & services)
Scarcity and Choice
Economic problems involve scarcity and choice, or needs vs wants
Both people and society have needs and wants (clean air, functioning government)
Needs and wants are infinite, but resources to make goods & services are scarce
People do not have enough time and money
Example: national budget
o There is a large amount of money to distribute, but must still be divided
o Every department wants more money/higher salaries
If there was no scarcity, people would not have to make choices, and economics would not
exist
3 Basic Economic Questions
Goods & services must be produced & distributed between people
Have to consider 3 questions:
What to produce (output question)
How to produce (input question)
For whom to produce (distribution question)
Output Question
In capitalistic system, this question is answered by supply & demand
o If demand increases, this increases the price, which incentives business to produce
more
o If demand is low, businesses will not sell it & will be forced to reduce the price,
causing manufacturers to switch to more profitable products
o Demand is determined by people with money (“vote” with money, causing more or
less to be produced)
, © Thomas Kabalin
In command economy, the government decides what & how much to produce
o Whether people want the things is immaterial
o Officials might try to align planned production with what they think consumers want
Input Question
Focus is on combinations of labour and machinery (equipment aka capital) used to produce
Also includes operational details, including production lines & recipes
Example: production of cars in SA vs Japan
o Can be produced in a labour-intensive way (South Africa) or capital-intensive way
(robots – Japan)
If labour is cheap, it makes sense to adopt a more labour-intensive production approach
Opposite in countries with expensive labour – capital is cheaper & more abundant
Distribution Question
Related to production question as, in a market economy, people who buy products are the
ones who determine what is produced (“money votes”)
People with more money can buy more goods & services – considered unfair by some
Government can influence – take away resources from rich & distributes to the poor
Common method is using taxation (different tax percentages for different income)
o Government then provides services to the population
o People who pay more tax do not get better services from the government
o Grants are also used
o Tax reduce & grants increase people’s disposable income – changes the way people
can vote with money
Goods and Services (Types of Output)
Goods can be divided into:
o Durable goods (cars, fridges)
Provide a service for a long time
Investment goods – yield a high return
o Semi-durable goods (clothes, tyres)
o Non-durable goods (cleaning products, food)
The poorer a family, the greater the percentage of income is spent on non-
durables)
Services are intangible
Include financial, personal (doctor, lawyer), transport and wholesale services
Example: supermarkets
o They do not produce the products
o They use their purchasing network to buy products, transport them & make
shopping experience more pleasurable
o Even though they sell goods, they produce a service
, © Thomas Kabalin
Inputs/Factors of Production
Goods & services are the outputs of the production process
4 inputs are required:
o Land
Includes renewable & non-renewable natural resources
Owners of land earn rent
o Labour
Time, effort & knowledge or skills devoted to production
Owners of labour earn wages
o Capital
Physical equipment used in the production process
Owners of capital earn interest
o Entrepreneurship
Not merely labour – it’s a person with ideas, initiatives & who is willing to
take risks
Take other inputs & combine them to create or improve a product/services
Earn profit
Economic Systems
Economic systems are designed to address the 3 basic questions
Since communism collapsed (in Soviet Union & China), capitalism has become even more
dominant
When the Berlin Wall fell, republics of the USSR in Eastern Europe became independent &
adopted capitalism (as well as what has now become Russia)
China switched to a capitalist system, even though it is run by the Communist Party
Political systems (democracy, dictatorship) are different from economic systems (capitalist,
command)
The Chinese capital revolution has been successful & is beginning to compete with US
The Financial Crisis of 2008 was a major threat to the capitalist system, like Great Depression
in 1930s
System has continued to adapt & survive and is followed in almost all countries
2 most important parts of economic systems:
o How property rights are defined
o How decisions (regarding 3 basic questions) are made
Land & what you produce can either belong to you or society/government
If property rights are secure, ownership can be enforced by courts otherwise might get taken
away
Expropriation without compensation refers to when the government takes someone’s land
without compensating the owner (some people stand to lose/gain from it)
Undermines property rights in South Africa – was not voted into law
Traditional
Important characteristic: things do not change (inflexible)
Economy was dominated by agriculture/subsistence farming
No social mobility – stay in same class/job (e.g. farming) for many generations
, © Thomas Kabalin
Extreme poverty was the norm (low standard of living) meaning no resources (money) for
luxuries
People did not travel
Technical and scientific improvements were frowned upon, especially by religious and
community leaders
Superstition, cultural beliefs, and religion trumped economic change
Progress was not thought to be possible (assumption means it does not adapt) or desirable
Advantage is that it is predictable for people who live in it – gives security
Differences in Traditional Systems
Hunter/gather societies were egalitarian – no hierarchy of status
o Each person contributed according to their skills & role expected from them
o “Primitive communism” – Karl Marx
Slave-based societies of Greek and Roman empires had definite hierarchical status
o Mostly decided at birth – born as a slave, citizen, or even more privileged
Feudalism (in Middle Ages of in Europe) is a very hierarchical form of society
o Serfs (free workers – small scale farmers) lived on the feudal lord’s land and were
indebted
o Not slaves, but similar relationship
o Born as either serf or lord – no social mobility
Capitalist
Developed in England (late 18th century) with the Industrial Revolution
People were pushed off farmland to live & work in factories in cities
New social class (capitalists) emerged – now called entrepreneurs
Used either own or money from shareholders to build & operate factories
Goods produced were desired & lead to higher standard of living
Name derived from capital – resources & machines used to manufacture products
Critical characteristic: private ownership (own means of production, decide what to
produce)
Guided by profit motive – produce what yields higher profit
Produced material welfare at cost of environmental degradation & social disruption
Increase in income inequality within & between countries
Command (Planned)
Started in 1917
Czar of Russia was overthrown & USSR (Union of Soviet Socialist Republics) was formed
Government owns factors of production & decides how to employ them in the production
process
Decides what to produce, how to produce and distribute it
Consumers in capitalist society are sovereign – not told what they should consume
State is sovereign in command system – decide what to produce & consumers must buy
Quality of goods suffer:
o Targets set are for a certain quantity
o No incentive to produce higher quality products as it is not rewarded
Shortages of consumer products:
