Core Economic Principles: Resources, Costs, and Growth
Understanding Economics
Economics studies how individuals and societies act to allocate scarce resources to meet individual and collective needs. It deals with managing resources to produce goods and services and distribute them for consumption. Economics also addresses issues related to satisfying the needs of individuals and society.
Microeconomics
Microeconomics studies how families (consumers), businesses, and the public sector make decisions and how they interact.
Macroeconomics
Macroeconomics deals with phenomena affecting the entire economy.
Resources
Resources are the basic elements used in the production of goods and services, also known as factors of production. There are three broad categories:
The Land Factor
This includes not only urban and arable land but all natural resources like minerals and fisheries.
Labor Input
This refers to the physical and intellectual faculties of humans involved in the production process. Workers use raw materials and machinery to transform them into goods.
Capital
This includes factories, machinery, equipment, and inventories used in production. This is called physical capital. In economics, unless otherwise specified, ‘capital’ means physical capital, not financial capital. Human capital refers to education and vocational training that increase work efficiency.
Opportunity Cost
Economics teaches that nothing is free; every decision has a cost called opportunity cost. This is what is given up when something is chosen. The opportunity cost of a decision is what we must give up to get something. More specifically, the opportunity cost of a good or service is the amount of other goods or services we must give up to obtain it.
Production Possibilities Frontier (PPF)
The PPF shows the maximum amount of goods and services an economy can produce with available resources and technology, given the quantities of other goods and services also produced. Three key concepts:
Scarcity of Resources
The quantities that can be produced in a given time period with existing technology and resources are limited.
Opportunity Cost
We can only obtain additional quantities of any good by reducing the production of another. Individuals face alternatives. The PPF shows the alternatives that society faces.
The Production Potential
This is the maximum output an economy can obtain with given resources and technology.
Economic Growth
Economic growth represents the increase in the productive capacity of the economy and can be shown graphically by a rightward shift of the PPF.