122 L2 - Economic Concepts

What is Economics?

Definition: Economics is the study of how societies allocate scarce resources to meet the needs and wants of individuals. It encompasses the production, distribution, and consumption of goods and services, examining both individual and collective behaviour.

Knowledge Objectives:

• Wealth Investigation: Economics investigates the wealth of nations by analysing factors that influence economic growth, income distribution, and wealth management. It aims to understand why some nations prosper while others languish.

• Cost-Benefit Analysis: This involves assessing and comparing the expected benefits of a decision or policy against its associated costs, particularly in forecasting and making financial predictions, and is essential in speculative economic activities.

• Scarcity Study: Focuses on the principles of scarcity, exploring how societies prioritise the allocation of limited resources against their unlimited human desires. This study includes the implications of scarcity on decision-making processes and the trade-offs involved.

Subjects of Economics

Core Areas of Study:

• Production, Distribution, and Consumption of Goods and Services: Analyzing how products are created, exchanged, and utilized in the marketplace. It covers the entire lifecycle from raw materials to consumer use.

• Behavior of Individuals and Aggregate Units: Examines how economic agents (e.g., households, firms) make decisions and interact in various markets, affected by preferences, incentives, and constraints.

• Influential Forces on the Economy: Investigates external factors such as government policies, regulations, cultural norms, and global economic conditions that shape market dynamics and outcomes.

• Analytical Tools: Utilizes mathematical equations, theories, formulas, and economic models to analyze quantitative data, helping economists predict trends and assess impacts.

Scarcity and Resource Allocation

Fundamental Concept: Due to the limited availability of resources, societies must develop strategies for allocation to achieve maximum economic benefit and efficiency, addressing the fundamental economic problem.

Key Resources:

• Factors of Production: Include land, labor, and capital, which are crucial for producing goods and services. Each of these factors has unique properties and roles in the production process.

Capitalist Economy

Components:

• Entrepreneur: The individual who initiates businesses, innovates, and assumes risks to drive economic progress.

• Land: Natural resources such as minerals, forests, and water utilized for production.

• Capital: Human-made resources, including machinery, tools, and buildings that assist in production.

• Labor: Represents the physical and intellectual contributions of workers in the economy.

Rewards:

• Labor: Earn wages as compensation for work.

• Land: Generates rent from its use.

• Capital: Earns interest as it is utilized in production.

• Entrepreneurship: Acknowledged for profit, which incentivizes innovation and risk-taking.

Urban Land Economics

Definition: This field focuses on the optimal allocation of limited urban resources to enhance economic efficiency and equity within cities, addressing issues like land use, zoning, and urban development.

Principles of Economics

Key Questions:

1. What goods should be produced? Determines the prioritization of resource allocation based on demand.

2. What resources are used in production, and how? Involves evaluating the methods and means of production to ensure efficiency and sustainability.

3. For whom should goods be produced? Concentrates on distributional equity and meeting the needs of marginalized populations.

Political Economy

Historical Context:

• Adam Smith: Recognized as the 'father' of political economy, emphasized the benefits of free markets and competition.

• The evolution of political economy in the late 19th century gave rise to modern economics, increasingly utilizing mathematical forms to analyze economic phenomena.

The Political Economy of Space

Key Figures:

• Henry Lefebvre: Explored how space is socially produced and the implications of spatial justice.

• David Harvey: Studied the urbanization of capital and its impact on socio-economic structures in metropolitan areas.

Market Principles

• Trade-Offs: Economic decisions involve trade-offs, where choosing one option often means sacrificing another.

• Opportunity Cost: The true cost of making a choice is represented by the value of the next best alternative that is foregone.

• Marginal Analysis: Decision-making is based on comparing the additional benefits and costs of a choice rather than total costs and benefits.

Government and Market Interventions

• Market Failures: Occur when the allocation of resources fails to achieve efficiency, prompting the need for government intervention to rectify inequities and enhance overall welfare.

• Market failure may be caused by

  • an externality, which is the impact of one person or firm’s actions on the

  well-being of a bystander. (the classic example of an external cost is

  pollution)

  • market power, which is the ability of a single person/small group or firm – interest group – to unduly influence market prices. (such as monopoly that control water supply)

• An inefficient production and allocation of a good occurs

  1. Undersupply

  2. Oversupply

  • Society has little choice or political power to change the amount supplied or demanded

Market Characteristics

Perfect Market Conditions:

• Presence of many buyers and sellers.

• Availability of identical goods for trade.

• Freedom of entry and exit from the market.

• Perfect information for all participants with no transaction costs.

Standard of Living Measurement

Indicators:

• Includes personal and household income levels as well as the overall market value of production (GNP, GDP).

• Productivity Assessment: Evaluated by measuring output per hour of labor, indicating the efficiency of economic performance.