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What is Economics About? - Activity

This is a question that is more often asked at induction evenings for prospective AS/A2 students than any other. This Activity is designed to help you to understand at least something about what you will be studying over the coming months and to be able to identify some of the key economic issues and problems that make up the subject.

What happens when oil eventually runs out?
Why can't we just pay doctors and nurses more money?
Why can't I just get a grant to go to university?
The unemployed should get off their backsides and get a job!
Why do people always get so excited about interest rate changes?
Inflation - no idea what it is; it doesn't affect me!
It's obvious that fining polluters would stop them from doing it!
We should just wipe out the debt that third world countries owe us.
I never seem to have enough to get what I want, I wish I could win the lottery - not millions just enough to get by!
That CD I bought was a real bargain at £10 - I would have paid anything up to £30 to get it, it is sooo cool!
It's crazy, fishermen are catching decent fish and have to throw half of them overboard - even though they are dead!
It's not fair, they are the only firm I can buy from and they are so expensive; I don't have any choice!
It's so annoying, the price of my train journey is twice as expensive before 9 o'clock!
Not another threatened strike, why don't they just go back to work?

The above questions and comments are all issues that you might be faced with during the course - many of them will be familiar and there are bound to be many, many more.

Task 1

  • Write down five questions or statements that you think have something to do with economics.
  • Now share your ideas with the rest of the class. Given the range of comments and issues collected by the group could you now write down a definition of what economics is?

Economics is essentially a subject that looks at choices - how individuals, governments and businesses make them and what the consequences of making those decisions are. There is a strong likelihood that every issue raised in the class involves some form of decision or choice - for example, if fines were the answer to pollution - the choice being to pollute and get fined or not pollute and avoid the fine - the question may then be how much of a fine is necessary before those who choose to pollute feel the cost of doing so is too great?

The economy therefore is faced with three key questions that have to be answered - irrelevant of the complexity of the economic system involved.

  1. What goods and services should be produced? Should the economy focus on being self-sufficient or concentrate on what it is good at? Should it devote resources to health and education or defence and policing? Should we devote more resources to housing? Should an economy use resources producing goods that are essentially useless - like 'free' toys in cereal packets, football sticker cards and so on?
  2. How should goods and services be produced? Should the economy use a system that is labour intensive, thereby ensuring everyone who wants a job has one, or should we use more efficient methods of production that involve the use of machines, even if this means more pollution and fewer jobs? Should we devote more land to production and thus solve some problems of feeding the population at the expense of encroaching into areas of natural beauty?
  3. Who should get the resources that the economy has produced? Should an economy be geared to providing goods and services to every person as equally as possible or should those who work hard get more? How do we distribute our resources?

Task 2

  • Make a list of answers to these questions - think of the answers in general terms rather than specifics, e.g. food, health, etc.
    1. What should be produced?
    2. How should these goods and services be produced?
    3. Who should get what is produced?
  • Having identified these key questions, now take them a stage further - take one item from the list you have in question 1 and break it down further - for example, in health, should the resources allocated to this area be spent on fertility treatment, heart disease, cancer treatment or research into AIDs, etc?
  • Having considered these factors now start to think about which of these resources you feel should actually be provided and to whom!

You are now in a position where you have had to make decisions. In doing so there will inevitably be some sacrifice to be made. The sacrifice is, for example, in deciding that cancer treatment is more important than fertility treatment. You are making judgements; these judgements cannot always be quantified to any great degree.

Economists call these sacrifices Opportunity Cost. Opportunity Cost is central to any understanding of economics; if you understand and can apply this concept you are on the way to thinking like an economist - this will be very important as you go through the course!

Economists illustrate the concept through the use of Production Possibility Frontiers (PPFs) or Production Possibility Curves (PPCs). Look at the diagram below.

Production Possibility Frontiers (PPFs)

The diagram shows the possibilities for a hospital in the provision of two treatments - one for cancer treatment and one for fertility treatment. The maximum amount of respective treatment that can be given with existing resources is shown by the points where the PPF intersects with the horizontal and vertical axes. If all resources were devoted to fertility treatment then Fo patients could be treated but the consequences of this would be that there would be no funds available for cancer patients. Conversely, if all resources were devoted to cancer treatment, Co patients would get treated but, as in the first case, there would now be no funds available for patients seeking fertility treatment.

Task 3

Analyse the impact of the decision making process on patient care in these two areas of different resource allocations, for example:

  • Think about the implications of being on different points on the PPF
  • What are the implications of being at some point within the PPF
  • What would be the implications of moving from one point to another, either within or on the PPF?
  • How would hospital managers be able to extend the PPF outwards?
  • What might be the cause of an inward shift of the PPF?

Applying your Knowledge and Understanding:

The Health Service

A surgeon carrying out an operation

Image: Should NHS money be spent on funding more operations, or should it go on training and employing more GPs? Copyright: Zarko Kecman

A recurring theme of manifesto commitments made by the Labour Government in both 2001 and 2005 was the improvement of the health service. The problems facing the National Health Service (NHS) have been huge: under-investment, poor pay, inability to recruit and retain the right staff, endless competing demands on resources, the developments in technology and treatment and numerous crises have all contributed to the problem. Solving it is not going to be quick or easy but does highlight the central issue in economics - that of resource allocation and choice.

The Chancellor has raised taxes (primarily through raising National Insurance) to pay for massive investment in the NHS. The NHS budget for 2005-6 is £76.38 billion, which accounts for 18% of total government spending, and 6.95% of total GDP. Despite these massive funds, problems still exist: waiting times for operations are stubbornly refusing to fall to the level the government would like; recruitment of new staff - especially doctors and specialist nursing staff - takes time and is not necessarily going to hit targets set; arguments continue over where NHS funds would be most appropriately spent - on preventative medicine, on more primary healthcare (GPs) on major health problems such as cancer and heart trouble - or on more mundane, but nevertheless debilitating conditions, such as hip replacement operations.

The government therefore has to convince voters that this extra spending will eventually lead to an improvement in the service. Many in the UK would be willing to pay higher taxes if it could be proved that the extra spending would lead to a better service. However, the evidence is not so clear-cut. Suggestions therefore have been made about alternative methods of funding the NHS.

One such system is a social insurance fund. With this system, employers and employees would have to pay a contribution from their salary into one of a number of competing schemes. Such schemes would be dedicated to providing the best possible use of funds for health care. The problem with such schemes is that it would increase business costs - possibly reducing employment!

Another system could involve greater use of private health policies. Responsibility for this would be in the hands of the individual to ensure they had enough insurance cover to pay for any medical bills and treatment. This type of system is more common in the USA but there are many who criticise such a system. It invariably means some people who need the treatment cannot afford to pay health insurance; others may gamble about not needing it only to find themselves landed with huge debts if they do need treatment!

The problem in the UK, however, is quite different to that in a country such as Tanzania in Africa. Tanzania is a poor country: it has a population of 35 million and has a national income of around £5.5 billion per year! The poor healthcare facilities have a significant impact on its ability to create wealth to improve its situation. Lack of preventative medicine means more people get sick from diseases such as malaria, typhoid and so on. This means they are unable to work, which means they do not earn enough money and so the government has a lack of funds through taxes to invest in the health service, which means... you get the picture! In Tanzania, significant effects can be observed through very simple treatments - rehydration salts, anti-malaria netting and so on - which could, if the government of Tanzania had the funds, make a huge difference to the lives of the people and to the general health and wealth creation capacities of the population.

The text above is typical of the sort of article available in newspapers and magazines such as 'The Economist', 'Newsweek' and so on. You will gain a great deal from reading all manner of relevant articles in your studies - but the secret is to read it like an economist!!

Task 4

When reading the text, try to identify the following and where they occur:

  • How does the text relate to the three key questions that are at the heart of the 'economic problem'?
  • What are the opportunity costs involved in deciding on appropriate levels of health care?
  • What parts of the text are positive statements and which are normative? Explain your answer.
  • How does the text suggest that there may be alternative answers to the issue of the provision of health in the UK?