Basic Economic Concepts
Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.
1. Principles Are Derived At Two Levels:
Macroeconomics: is concerned with the overall performance of the economy. Macro looks at totals or aggregates to examine the "big picture".
Microeconomics: is concerned with the behavior of individual entities such as markets, firms and households. Micro looks at the "trees not the forest".
2. Economic Goals:
Positive economics collects and presents facts. It avoids value judgments. Positive economics concerns WHAT IS — what the economy is really like.
Normative economics involves value judgments about what the economy should be like or which policies are best. Normative economics embodies subjective feelings about WHAT OUGHT TO BE — examining the desirability of certain conditions or aspects of the economy.
Scarcity is the situation that exists when they are not enough resources to meet human wants.
Necessity vs. Wants
Wants multiply over time with new products and income/
Human wants tend to be unlimited, but resources are limited
Resources in economy is anything that can be used to produce a good or service. Four types of resources are:
Land — All natural resources
Gifts of nature
Labor — Human Resources
Capital — form the durable goods of an economy
Tools and equipment
Use of technology
Use of available information
Entrepreneurship — a particular type of human resource
Sees opportunity to make profit
Uses unexploited raw materials
Takes risk with new product or process
Brings together land, labor, capital
Resource Payments — note the special terms used
Land - Rent Labor - wages and salaries Capital - Interest Entrepreneurship – Profit
Economists deal with the problem of scarcity. Scarcity requires that people and companies make choices. To get one thing, we often must give up another. The Opportunity Cost is the value of the good or service forgone.
4. Production Possibility Curve:
PPC is an economic model to demonstrate opportunity costs and tradeoffs. It shows the various combinations of goods that a society can have given its current level of resources, technology, and trade. Table:ABCDE
Each point on the curve represents efficiency. The economic resources are being used to produce the maximum amount of goods and services.
Choice is reflected in the need for society to select among the various attainable combinations lying on the curve.
The concave shape of the curve implies the law of increasing opportunity cost, defined as within production switches from one product to another, increasing amounts of resources are needed to increase the production of the second product. The slope of the PPC curves becomes steeper as we move from A to E. The reason lies in the fact that economic resources are not completely adaptable. A straight line would mean constant opportunity cost.
Points inside the curve may signal unemployment or underemployment of labor and other resources.
Economic growth (and a movement outward of the curve) occurs because of discovering new resources, inventing new technology, or engaging in more trade. For example, new discoveries of raw materials (diamonds in Australia, or oil on the North Slope of Alaska), improving the educational level or training of labor (Job Corps or company-sponsored job training), and new technology (robots in factories or the microchip).
Consumer Goods vs. Capital Goods:
Consumer goods directly satisfy out wants, while capital goods satisfy indirectly since they permit more efficient production of consumer goods.
A current choice favoring more consumer goods will result in only a modest movement to the right in the future.
A current choice to produce a greater portion of capital goods with the available resources can result in a greater rightward movement in the future.