BTBE1033 / BTEM1093 PRINCIPLES OF ECONOMICS

TOPIC 1: INTRODUCTION
ECONOMICS

Definition: The social science concerned with how individuals, institutions, and society make optimal (best)
choices under conditions of scarcity - efficient use of our limited or scarce resources to achieve maximum
satisfaction of human materials wants (McConnel, Brue and Flynn, 2015).

CONSTRUCTION ECONOMICS

Definition: Construction economics is a branch of general economics. It consists of application of techniques

and expertise of economics of study of the construction firm, the construction process and the construction
industry (Hillebrandt, 1985).

LEVELS OF ECONOMIC STUDIES

MACRO MICRO
Big picture - examines the economy as a whole, i.e.,
Looks at specific economic units (small segment), i.e.,
Total output, GDP, total employment/
unemployment, inflation, etc. i. Demand and supply
ii. Consumer behaviour and utility maximisation
iii. The cost of production
iv. Market models
a) Pure competition
b) Pure monopoly
c) Monopolistic competition
d) Oligopoly

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The Economising Problem

Two (2) fundamentals facts contribute the economising problem and provide a basis for the study of
economics.
1. Society’s material want
The material wants of people is virtually unlimited and insatiable.

2. Economic resources are limited

Examples:
 Land
 Capital
 Labour
 Entrepreneurial ability

Society’s Unlimited Wants

 Material wants – luxury versus necessity.
 Business wants – factory, plants, labour, etc.
 Government wants – Infrastructure, military weapons, etc.

Scarce Economics Resources

 Land
 Natural resources – gift of nature.
 Usable in production process. Examples: arable land, forests, mineral and oil deposits and water
resources.

 Capital (capital goods or investment goods)

 Manufactured aids to production. Examples: tools, machinery, equipment, factory, storage,
transportation, distribution facilities.
 Investment – the process of producing and purchasing capital goods.
 Real capital – not money, is an economic resources (money or financial capital is not an economic
resource).

 Labour
 Physical and mental talents of individuals.
 Available and usable in producing goods and services.

 Entrepreneurial Ability
 Special talent
 Takes initiative in combining the resources of land, capital and labour to produce goods or
services.
 Makes basic business-policy decision.

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 Innovator.
 Risk bearer.

Land

Capital
Relative Entrepre-
neurial
Scarcity ability

Labour

The four types of economic resources (a.k.a. factors of production or inputs) have one significant characteristic
in common – they are scarce and limited in supply. Our planet contains only finite and therefore limited amount
of arable land, mineral deposits, capital equipment and labour. Their scarcity constrains productive activity and
output.

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The Three Production Questions

1. WHAT commodities are to be produced and WHAT quantities?

2. HOW shall goods be produced?
3. FOR WHOM shall goods be produced?

ECONOMICS: EMPLOYMENT AND EFFICIENCY

Economics is concerned with the problem of “using scarce resources to attain the maximum fulfillment of
society’s unlimited wants”. Economics is concerned with “doing the best with what we have”. Economics is
thus a science of efficiency – the best use of scarce resources. To realize this outcome, it must achieve both
full employment and full production.

Full Employment – Using Available Resources

 The use of all available resources.
 No workers should be involuntarily out of work.
 The economy should provide employment for all who are willing and able to work.

Full Production – Using Resources Efficiently

 All employed resources should be used so that they provide the maximum possible satisfaction of our
material wants.
 Productive efficiency – the production of any particular mix of goods and services in the least costly way.
 Allocative efficiency – the production of that particular mix of goods and services most wanted by society.

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Production Possibilities Curve (PPC)

 Resources are scarce – full employment, full production economy cannot have an unlimited output of
goods and services.
 People must choose which goods to produce and which to forgo.
 The necessity and consequences of these choices can best be understood through a PPC model.

Production Possibilities Curve

Quantities

E
A
Unattainable
Lathe machine

B
Y

D
Unemployed

Quantities
X C
Butter

PPC for an economy to produce lathe machine and butter with scarce resources, a full employment and full
production economy.

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Assumptions:
 Full employment and productive efficiency;
 Fixed resources;
 Fixed technology and.
 Two goods.
i. Butter: consumer goods
ii. Lathe machine: capital goods

Point A All resources devoted to produce lathe machine.

Point C All resources devoted to produce butter.
Point B Resources are divided to produce X quantities of butter and Y quantities of lathe machine.
Point A, B, Economy has achieved full employment and is fully efficient with nothing going to waste.
C
Point D Economy is inefficient and under employed.
Point E Unattainable with current supplies of resources and technology.
*Note: Refer to Production Possibilities Curve on Page 5

PPC – Principle
At any point in time, an economy achieving full employment and productive efficiency must sacrifice some of
one good to obtain more of another good. Scarce resources prohibit such an economy from having more of
both goods.

Opportunity Cost
 People must choose among alternatives. Example: more of lathe machines or more of butter.
 The amount of other products which must be foregone or sacrificed to obtain 1 unit of a specific good is
the opportunity cost.

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Allocative Efficiency: MB = MC

MB / MC MC

MB=MC

MB

Quantity

Allocative efficiency: MB=MC

Resources are being allocated efficiently to a product when its output quantity is such that its marginal benefit
(MB) equals its marginal cost (MC).

Sizes of PPC Curves

Small – poor country Large – rich country

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Growth of the PPC Curve

Growth of the PPC curve

Goods A

Goods A

The expanding resource supplies, improved resource quality and technological advances which occur in a
dynamic economy move the PPC outward and to the right, allowing the economy to have larger quantities of
both types of goods.

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ECONOMIC SYSTEMS

Definition: A particular set of institutional arrangements and a coordinating mechanism to respond to the
economising problem.

Economic systems can differ as to:

1. Who owns the factors of production and
2. The method used to coordinate and direct economic activity.

TYPE OF ECONOMIC SYSTEM

Pure capitalism/ Market System

 The private ownership of resources and the use of a system of markets and prices to coordinate and direct
economic activities (laissez-faire).
 Economic power widely spread.
 No government intervention in the economy.
 Government’s role is limited to protecting of private property and establishing an environment to the
operation of the free market system.

Command Economy / Communist System

 The polar alternative to pure capitalist.
 Characterised by public (government) ownership of virtually all property resources and economic decision
making through central economic planning.
 Government intervention in all economic decisions. Examples: production goals of each enterprise,
allocation of resources, division of output between consumer and capital goods, etc.

Mixed System
 Pure capitalism and command economy are extremes. The real world economy fall between the two.
 U.S. economy leans towards pure capitalist but government actively participates in the economy by
promoting economic stability and growth. Example: fiscal policies.
 The former Soviet Union and China historically approximate the command economy but recent reforms of
its markets shift toward the free market options.
 Authoritarian capitalism and market socialism are sample of the mixed system.

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THE CIRCULAR FLOW MODEL

 The model provides an overview of how market prices reconcile household transaction with business
needs.
 The model shows two groups of decision makers – households and business. The market system brings
the decisions of households and business into alignment with one another in particular resource and
product market.
 The upper part of the model describes or portrays the resource market. Here, households, which directly
or indirectly own all economics resources, supply these resources to business.
 Business, of course, will demand resources because they are the means by which firms will produce
goods and services.
 The interaction of demand and supply for the immense variety of human and property resources
establishes the price of each product.
 The payments, which businesses make in obtaining resources, are cost to businesses, but simultaneously
constitute flow of wages, rent interest and profitable income to the households supplying these resources.
 The bottom part of the model is the product market where households spent their incomes or money
sources to buy (demand) a vast of goods and services. Simultaneously, businesses combine the
resources they have obtained to produce and supply goods and services in these same markets. The
expenditure spent by households will become revenue to the firms and use it to buy resources again.
 The net result is a counterclockwise real flow of economics resources and finished goods and services.
The clockwise is a money flow of income and consumption expenditures. These flows are simultaneously
and repetitive.
 To summarise, in a monetary economy, “Households”, as resource owners, sell their resources to
businesses and, as consumers, spend the money income received buying goods and services. “Business”
must buy in order to sell to household to gain revenue.

The circular flow diagram

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