Ministry of Higher Education and Scientific Research

University of Algiers 3

Faculty of Economic Sciences, Commercial Sciences

and Management Sciences
Department of Commercial Sciences

Financial and Commercial Sciences

“Specialized Foreign Language 01”

Dr. Ouahiba Chehat

Dr. Fatiha Gueraria
 Chapter 1
Economic concepts
1.1 What is Economics all about?
Consider the following quote from The Reserve Bank of Australia’s Jacqui Dwyer:

“Economics is about how individuals and societies choose to allocate their limited
resources to meet their needs and wants. It’s about how we respond to incentives,
make trade-offs, weigh up costs and benefits – and how we decide what is efficient
and [sometimes] what is fair.”

This speech was focused on the declining number of people

who are choosing to study Economics. This might be seen
as an unfortunate development, as the study of Economics Study tip
will assist in the development of your analytical skills and an
understanding of the theories that can be used to explain
many of the challenges facing the modern world. The recent
increase in the fees that students will now have to pay to In economics, we often use the expression
‘economic agents’ to refer to any entity (such as
study Economics at university may further exacerbate this a person, household, government or business)
that makes economic decisions.
potential shortfall. But as we progress through the next two
chapters, you may start to appreciate some of the
consequences of the decision, one of which could be higher
salaries for economists.

Economics is, as you will soon discover, all around us. Whether we understand it or not, we
influence, and are affected by, economic events and the decisions that economic agents make.
Each person makes what seem to be small and insignificant economic decisions, but when
aggregated, these decisions can have consequences that the original decision maker may not have
considered. Economics therefore tries to explain the motivation for certain decisions and analyses
the short-run and long-run consequences of these decisions. Given the complex nature of the
human mind and the infinite number of interactions that could take place, it is not surprising that
economists often make mistakes with their predictions. One would hope that your on-going
economic education will give you a better understanding of both the costs and benefits associated
with your own decision making, as well as more insight into the different perspectives that can be
held on what might first appear to be a one-sided issue.

Economics is essentially a social science. Social sciences

focus on human behaviour and social interactions. Like other
social sciences, Economics tries to explain aspects of the
way societies function, both the causes and consequences of
human behaviour. Economics has evolved over time as
continued research and inter-disciplinary investigation has
resulted in a deeper understanding of the ways humans
behave. Theories about how the economy operates that were
once well regarded in the past have subsequently been tested
using empirical research, resulting in a dismissal of some of
these theories and the development of new ones.
The focus for this book will be to provide you with an insight into some of the key economic issues
that are faced by economic agents (households, businesses, governments and other key
stakeholders), how these groups respond to incentives, factors that affect the performance of the
Australian economy and ultimately how each of these economic decisions and events affect living
standards.

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 Over time, economists have branched out into many areas of knowledge. Here is a sample of some
of the questions and issues that economists have considered:

• How do people choose which goods and services that they consume?
• How do producers decide what they will produce and how they will produce it?
• How are these choices influenced by new discoveries and technological change?
• Why are some people paid significantly more than others?
• What factors influence the level of income earned?
• Why do some people become unemployed?
• Why do prices change for goods and services?
• Why do governments intervene in markets and how are living
standards affected by such intervention?
• What factors influence world trade and how does
interaction with the rest of the world influence
Australia’s living standards?
• Why does poverty occur and why are some countries richer than others?

Economics as a discipline often faces much criticism. The models developed by economists are
often based on a number of simplifying assumptions and these lead to conclusions and decision-
making that may, in some cases, not lead to the best outcomes for the majority of society.

Many economics courses are divided into the study of microeconomics and macroeconomics.
Microeconomics is the study of the economic behaviour of individual consumers as well as
businesses. Microeconomics focus of study the role of markets and the price mechanism is
discussed as well as the factors that influence buying and selling decisions.

Macroeconomic analysis builds on this foundational knowledge developed in microeconomics

and attempts to explain economy-wide phenomena. Our study will look at the government’s
aggregate economic goals such as the rate of growth in the volume of production, the percentage of
those who are considered unemployed and how quickly the general level of prices is rising.

Activity 1a: Macro or micro?

Complete the table to indicate whether the issue is predominantly a microeconomic or macroeconomic one:
Concepts/factors/events Micro Macro
The factors involved in the price charged for an Apple computer compared to a
Surface-Pro
The decision by the government to double the unemployment benefits for a short
period of time
A decline in the rate at which the average price level is rising
The increasing number of workers who are working part-time
The decision by the government to increase taxes on cigarettes by 12.5% per annum
A decision by the Chinese government to place an 80% tariff on Australian Barley
A decrease in the total volume of production due to the Covid-19 pandemic
The reduction in the company tax rate
A decrease in university fees for teaching and nursing degrees
A decrease in carbon pollution
The closing of Australian borders due to Covid-19

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1.2 Relative Scarcity: needs and wants
Scarcity is the fundamental economic problem

If you ask someone who may have studied Economics what it is about, they may initially struggle to provide
you with a concise explanation. As we have seen in Section 1.1, there are a vast array of issues that could
be considered in an economics course. Economics is often described as a subject about incentives, choices,
and consequences. It is essentially focused on the management of a society’s scarce resources to maximise
a society’s wellbeing. Most economics courses therefore start from the premise of relative scarcity.
Something is seen as scarce when it is desired but access to it is limited. We start by making the (perhaps
challengeable) assumption that our collective needs and wants can never be fully satisfied (they are
therefore considered infinite). In contrast, the resources needed to meet all of our needs and wants have
physical limits (they are therefore finite). If humans could attain all of their desires, would the concept of
scarcity exist?

All economies face the problem of relative scarcity, no matter how wealthy or resource-rich they are.
Therefore, Economics studies how different economic systems attempt to allocate scarce resources to
meet the needs and wants of their people. In fact, one could argue that the problem of scarcity is likely to get
worse over time as more and more of the world’s finite resources are consumed and the size of the human
population increases.

Economists often distinguish between needs and wants when they discuss relative scarcity.
A need is seen as good or service that is deemed to be necessary for one’s survival. As societies evolve
over time, what is considered a need by some individuals (in rich industrialised nations like Australia)
may be seen by others as a want (those who may be living in a less developed nation like Zimbabwe). A want
is therefore a good or service that is not necessary for one’s survival, but consumption of which adds to the
quality of one’s life. Most would accept that food, water, clothing and shelter are needed for survival, but
what about telecommunications services, electricity and healthcare? Are these needs or wants? Like many
areas of Economics, there is no definitive answer and each person will express a different opinion on how
they perceive each of these ’products‘. The economic models that are discussed throughout this book are
based on another key economic assumption; households seek to maximise their needs and wants through
their interactions in the economy and that for most people, these needs and wants cannot be fully satisfied.
In other words, as one need or want is satisfied, another will emerge in its place. For example, you might be
about to each lunch, but you will need to access more resources tomorrow and the next day, etc.

Economics as a discipline tries to improve the experience of humanity by seeking (constantly) to overcome
the problems created by relative scarcity. Scarcity makes it necessary for economic decision making to
allocate resources to best meet the needs and wants of society. Economic agents cannot have everything
they want and usually have a limited income they can use to meet their desires. They also cannot work 24
hours per day and therefore need to allocate their scarce labour resource to that area of production that a)
is within their skills set and b) will maximise their wellbeing (which may include, but is not totally limited to,
the ability to purchase the goods and services that are available). Economics continually seeks to
understand why humans make the choices they make and then tries to analyse the consequences of these
choices for the economy as a whole and for a number of key stakeholders.

Relative scarcity
Wants/needs > Resources

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 1.3 Resources and the key economic questions
An economy is a place where scarce resources are allocated among competing uses. Economists
distinguish between three main types of resources that can be used to produce goods and services to meet
the needs and wants of the people on the planet. For this reason, they are also referred to as factors of
production, where the quantity and quality of these factors of production has a big impact on national living
standards or welfare. The three factors of production are as follows:

• Land or natural resources refers to all those Study tip

resources that occur in nature. These can be
utilised in the production process to generate more A note about language. In Economics, you will come
elaborate products or consumed in their raw form. across a lot of new terms. One term you will see often
is ‘utilise’. Some students assume this is just a fancy
Examples of such resources include water, forests, way of saying ‘use’. Technically, in Economics, we talk
minerals, land, animals, fruit and vegetables. It may about ‘utilising’ our resources or ‘capacity utilisation’
to signify that we mean they are being used for some
seem obvious, but all production ultimately benefit or being used effectively.
depends on natural resources.

• Labour refers to the mental and physical effort by humans in the production process. For example,
your teacher is currently exerting effort to provide you with an education and your doctor has to think
deeply when presented with the challenges associated with diagnosing a patient. A construction
worker may be involved in more physical effort than some other professions. In some cases, people
will become unemployed or leave the labour force (covered in Chapter 5) and may therefore be
unable (or unwilling) to contribute their labour resource to the production process.

• Capital refers to those resources that have been made by combining labour and natural resources
to create a more sophisticated input in the production process. Capital goods are made with the
intention of making more goods and services in the future, and generally these will increase the
efficiency with which natural resources can be converted into end-use products for consumption.
Examples of physical capital include machinery, tools, factories, infrastructure and artificial
intelligence.

In some texts you will see reference to a fourth type of resource (or factor of production) referred to as
entrepreneurship or enterprise. This refers to the skills of those individuals who combine resources to
produce goods and services. They take financial risks to establish enterprises and are extremely
important to wealth creation for every nation. They not
only include high profile entrepreneurs like Jeff Bezos,
Gina Rinehart or Mark Zuckerberg, but include the
owners of every small or medium-sized business in
existence. This type of scarce resource typically forms
part of ‘labour resources,’ given that entrepreneurs are
providing their expertise or skills to the business sector
of the economy.

As you will recall, because we have limited resources

and unlimited demands on those resources, all
economic agents and all economies need to make
choices. These choices can be guided by answering
three key basic questions. Each economy around the
world attempts to answer the three basic economic
questions:

1. What goods and services will be produced and in what quantities?

All economies must decide on the different goods and services that should be produced. For example,
the Australian economy produces more education services than it does television sets. Economic
theories have been developed to explain why this occurs. In a predominantly market-based economy
(such as Australia), the question of what and how much to produce is assumed to be answered through
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the interaction of demand and supply of independent self-interested consumers and producers. What
to produce will also be affected by government decision making. For example, during the Covid-19
pandemic, the Australian Government purchased millions of faces masks to protect medical
professionals, but also prevented many live venues from opening.

2. How will the goods and services be produced?

This key economic question looks at the methods of production that are employed to meet the needs and
wants of society. Should the production method be more labour intensive or rely upon the use of simple or
sophisticated technology? Over time, technological advances and knowledge about production methods
leads to changes in the way goods and services are produced. Robots and artificial intelligence may
undertake more and more tasks that have been traditionally performed by humans if the cost associated
with doing so is relatively favorable. Some countries may also have an abundance of labour and lower
wages which might encourage their manufacturers to employ more people in the production process.
These decisions will be made by businesses to maximise their profits (another key assumption). How to
produce will therefore be heavily influenced by the costs and benefits associated with different production
methods. In some cases, the government will influence how goods and services are produced. For
example, governments often require that firms alter their production processes to meet occupational
health and safety standards. Alternatively, governments will typically legislate for minimum wages to apply
across the country. These types of interventions will tend to increase the cost of labour relative to capital,
and influence how firms produce goods and services.

3. For whom will these goods and services be produced?

The final key question that all economies must consider is associated with the distribution of the benefits
derived from production. Once the goods and services have been produced and made available for
consumers, how might an economy decide who gets to enjoy them? Should the decision be based on the
ability to pay or should need, or social standing be a relevant determinant? The approach taken
by economies when answering this question is the cause of much debate, and like many areas of
economics there is not a definitive solution that will satisfy all relevant economic agents. In Australia, this
question is largely answered based on who can afford to buy what is produced (which is affected by the
value of their economic contribution to the production process). It is therefore heavily linked to markets. In
most countries (and in varying degrees), the government will redistribute incomes (via taxes and transfers)
to alter the access to goods and services as well as provide some essential items at reduced or zero prices.

Figure 1.1 highlights the core economic problem faced by all economies, characterised by an imbalance
between our unlimited needs and wants and limited resources which results in scarcity and the need to make
key economic decisions about how resources will be allocated. Box 1.1 refers to general options available
to countries when deciding which economic system will deliver the best outcome.
Figure 1.1
Relative scarcity and choices

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 Box 1.1 Different systems used to allocate resources
Market capitalism
A market is any place that allows buyers and sellers to interact and exchange goods and
services. This interaction and exchange may or may not take place in a physical space. A
market system is therefore one that allocates resources based on the buying and selling
decisions of consumers and producers. Prices give signals, which influence the behaviour of
these buyers and sellers. Capitalism refers to an economic system where the majority of
productive resources are owned by private individuals and firms. Capitalists will therefore
use their assets to generate revenue which motivates them to provide the goods and
services that are demanded.
Planned Socialism
A completely different type of economic system is one in which the government is primarily responsible for resource allocation.
Governments may make long-term and short-term plans about what to produce, how to produce it and who receives the
production after it is produced. This is referred to as a planned economy. Socialism indicates that the majority of productive
assets are state owned (owned by the people of the country collectively) and therefore no one can benefit excessively from
producing goods and services.
Planned Capitalism
An unusual economic system may evolve whereby the government directs the private owners of productive assets to produce
certain goods and services. Therefore the output of the country is planned. This has been used by countries during war time
when the owners of factors of production are directed to the production of goods and services that are needed for defence. In
this system, the ownership of factors of production remains with private individuals, and so it continues to be called a form of
capitalism.
Market Socialism
Under this system the government owns most of the resources (socialism) but markets determine what goods and services are
ultimately produced (market system). For example, the businesses may be owned by the government, but their operations would
be left to independently appointed management who would try to maximise profits based on what consumers wanted most.

Review Questions 1.1

1. Explain why Economics is often referred to as a social science and describe the key elements of social sciences.
2. Outline why there exists disagreement between economists.
3. Outline why the predictions made by economists will often be different to the predictions made by other
social scientists.
4. Define the term relative scarcity. Explain why this is such an important concept when studying Economics.
5. Discuss the concept of relative scarcity with respect to the time you have available to undertake all of the
activities you want to complete today.
6. Distinguish microeconomics from macroeconomics.
7. Provide examples and explain the importance of each of the ‘factors of production’.
8. Identify the three essential economic questions that each economy seeks to answer. Using Australia as an
example, explain how the economy might answer each of these questions.