1. The Economic Problem What is Scarcity? Available in quantities too small to meet demand. We have to exercise choice because of scarce resources. We all have to make choices because humans have unlimited needs. If one of your needs is satisfied one is lost. This what is known as OPPORTUNITY COST. Now lets think of it in terms of business and production. When you produce a product or service what do you need? Land Labour Capital Entrepreneurship These are known as the four factors of production. There are limits to the quantity and variety of goods and services that can be produced. This problem of scarcity is known as The Basic Economic Problem. The resources that we use are scarce and our needs are unlimited, we also have to make decisions in business about how best to use the four factors of production. We need to ask ourselves: What goods and service swill be produced using the factors of production? How will they be produced efficiently? For whom will the goods and services be produced? Every time a choice is made, something is given up or sacrificed. In Economics we call the good that has been sacrificed opportunity cost! 2.Trade and Barter To begin with people provided for themselves and their families only. They were self sufficient. There was no surplus left for trade and barter. This type of economy was known as a subsistence economy. As colonies grew and people became better at farming and providing for themselves they started to produce a surplus and specializing in certain goods and services. This is known as specialization. The surplus of goods and services lead to the beginnings of trade and barter. Trade with out money is known as barter. Problems with Barter You have to want what the other person has got. Time consuming 1
Some goods were too bulky to transport Products need to be divided Standard unit was needed for exchange The more products and services that became available the more people wanted, their needs in creased for specialized products. 3.Money Initially in Trade and Barter: One for one One for two (more valuable) Trade with precious metals Danger of travel with precious metals so they were issued with gold certificates. This was the beginnings of paper money Cheques and cards E-bucks We can clearly see that there were four phases in the development of money 1) Goods 2) Metal 3) Paper 4) Cheques and cards The role and function of money When money is used to make trade easier it is known as a medium of exchange. It is more efficient Reduces time and resources More time to produce goods and services Specialization in goods and services greater productivity greater quantity For money to be an effective medium of exchange, it should have certain characteristics: Scarce Durable Portable Divided Functions of money Medium of exchange Measure of value Bearer of value 2
Make up a mnemonic to help you remember the charcteristics of money and the functions of money. The future of money Can you think of other forms of money that we use today? 4. International Trade (across borders) Imports goods and services brought into the country Exports leave the country International trade can lead to an improvement in the standard of living because it allows for specialization. Specialisation in turn leads to improved quantity and variety. It can however, be a complicated because of different currencies. Activity 1.Give the currencies of America, Japan, France, Ireland, England. 2.Give the exchange rate of all of the above. 3.Try to find a foreign note to display in class. 5. Banks Definition: An organization offering financial services, especially loans and the safe keeping of customers money. The Development of banks Banks came into existence before the development of money as we know it. Originated in ancient Mesopotamia where the royal palaces and temples where used for the safe keeping of grain. They issued receipts which were used to trade and eventually private houses offered banking. 3
The Role of banks What is interest? Interest is paid by the bank to individuals. When you borrow money you get charged interest. When you deposit money the bank uses your money to lend to someone else and they pay interest. Different banks have different interest rates services and charges. As for banking in the business world If you wanted to start a business now what is the main thing that you would need? You would borrow money from the bank and they use these savings of individuals to lend to other people. 6. Inflation Definition: When the average price level increases from one year to the next. It is an increase in the general level of prices. The government take a selection of goods and services that a typical South African household would use, this is called the shopping basket and they calculate the cost of this shopping basket to get the Consumer Price Index or CPI. So in simple terms the CPI is the cost of the shopping basket of goods and services in a typical South African Household. What is deflation? When the general price level decreases and price levels fall. NB: Not just one GENERAL Reasons for inflation 2 main causes Increase in the cost of production 4
Increase in the level of consumer spending 5