Econs

The Nature of the Economic Problem

• Finite Resources and Unlimited Wants

  • Every economy has limited resources, leading to the necessity of making choices about their allocation.

  • The universal economic problem is how to satisfy unlimited wants with scarce resources.

  • Economics focuses on resource allocation to meet the diverse needs of individuals, governments, and firms.

• Economic Agents

  • The three main economic agents are:

    • Individuals (households)

    • Firms (businesses)

    • Government

• Three Basic Economic Questions

  • What to produce?

  • How to produce?

  • For whom to produce?

• Private vs. Public Sector

  • The private sector focuses on profit generation, producing goods/services for consumer demand.

  • The public sector aims to provide services like education and healthcare for societal welfare.

Goods and Services

• Definitions

  • Goods: Physical items that can be produced, bought, and sold (e.g., furniture).

  • Services: Non-physical offerings provided by individuals/firms (e.g., education).

• Needs vs. Wants

  • Needs: Essential goods/services for survival (e.g., food, water, shelter).

  • Wants: Desired goods/services not essential for survival, typically limitless in nature.

Economic Goods vs. Free Goods

• Economic Goods:

  • Limited supply and require effort to acquire (e.g., oil, cars).

• Free Goods:

  • Unlimited supply, no associated opportunity cost (e.g., air, sunlight).

Factors of Production

• Categories

  • Land: Natural resources (e.g., water, forests).

  • Labour: Human resources, including both skilled and unskilled workers.

  • Capital: Manufactured resources (e.g., machinery, tools).

  • Enterprise: Skills needed to combine the other factors of production efficiently.

• Rewards for Factors of Production

  • Land: Rent

  • Labour: Wages

  • Capital: Interest

  • Enterprise: Profit

Opportunity Cost

• Definition: The next best alternative foregone when making decisions.

• Application: Every choice in economics has an associated opportunity cost, emphasizing trade-offs in resource allocation.

Production Possibility Curve (PPC)

• Concept: Illustrates maximum combinations of two goods/services an economy can produce.

• Movements Along the Curve: Indicates trade-offs among different goods/services.

  • Shifts of the PPC: Reflects changes in resource availability or economic conditions affecting production capacity.

Microeconomics vs. Macroeconomics

• Microeconomics: Studies individual firms and market behavior.

• Macroeconomics: Analyzes the economy as a whole, focusing on aggregate factors (e.g., inflation, national output).

The Role of Markets

• Market System: Allocates resources via supply and demand; establishes equilibrium where quantity demanded equals quantity supplied.

  • Effects of Price Mechanism: Influences production decisions based on profit potential.

Market Failure

• Definition: Occurs when market allocation fails to efficiently distribute resources, leading to external costs/benefits.

• Examples of Market Failure:

  • Underprovision of public goods (e.g., street lighting)

  • Overprovision of demerit goods (e.g., alcohol, tobacco)

Key Economic Concepts to Understand

• Private Costs vs. Social Costs: Distinguishes personal financial implications from broader societal impacts.

• Private Benefits vs. Social Benefits: Understanding the disparity between individual gains versus overall societal benefits.

• Merit Goods and Demerit Goods: Recognizing the societal impact of certain goods, classified based on their overall effect on welfare.

• Factor Mobility: Knowledge of labor movement challenges and resource allocation issues within different sectors.

Revision Checklist

• Define key economic terms and concepts thoroughly.

• Discuss the implications of market systems and failures.

• Understand the role of economic agents in decision-making processes.