Fundamental Economic Concepts and Principles
What is Economics?
Economics is the study of the best allocation of a company’s scarce resources to achieve a set of objectives, whether individual or collective societal needs.
Understanding Economic Scarcity
Scarcity is a relative concept, meaning there is a desire to acquire a quantity of goods and services greater than what is available. Scarcity can be mitigated but not eliminated, as goods and services are limited due to insufficient resources to produce all that individuals wish to consume.
Opportunity Cost Explained
The opportunity cost of a good or service is the quantity of other goods or services that must be given up to obtain it.
Branches of Economics
- Microeconomics: Separately studies the behavior and decisions of individual consumers and producers to explain their conduct in the market. It usually refers to a specific sector or industry.
- Macroeconomics: Studies the basic forces and trends affecting the economy as a whole. It works with aggregate data, for example: tables of unemployment and/or occupation across all sectors, CPI growth rates, inflation, etc., always referring to the entire economy regardless of the sector.
Economic Policy and Minimum Wage
Economic policy proposals suggest that the minimum wage be maintained or increased to ensure people have a decent wage for survival and to meet their needs within the economy. This is based on personal values and subjective facts.
Three Basic Economic Questions
- What to produce? What is chosen to ensure a greater good.
- How to produce? With what technology.
- For whom to produce? For society.
Understanding Trade-offs
A trade-off can be defined as an exchange. This decision can be made when there is an excess of any product, which is then exchanged for what you need or to satisfy a need.
Economic System Operators
These are the protagonists of the economic system’s operation. They are economic decision-makers who drive economic activity.
- Families (Consumption – Saving): Firstly, they are the owners of production factors: land, labor, capital, and associated knowledge. Moreover, they are the basic consumption units.
- Companies (Capital – Labor – Raw Materials, Supply of Goods and Services): Companies use the productive factors from families to produce the goods and services that these families demand.
- Government: Controls system operation through laws.
- Foreign Agents: Consumers, businesses, and governments in other countries (exports – imports).
Production Possibilities Frontier (PPF)
The Production Possibilities Frontier (PPF) shows the maximum combinations of products that an economy can produce using all available resources. It expresses the dilemma that producing a larger quantity of one commodity necessitates a decrease in another.
Economic Growth and the PPF
Economic growth is understood as the outward movement of the Production Possibilities Frontier (PPF). This occurs due to events such as:
- Technology improves: Improved methods for producing goods and/or services.
- Increase in the amount of capital: More capital available.
- Increase of the labor force: More workers, physical labor.
- Discovery of new natural resources: Access to new resources.
Marginal Changes
Marginal changes are small changes that can alter a decision.
Why People Respond to Incentives
People respond to incentives because they feel some degree of satisfaction knowing they will receive something in return for performing a task or making a sacrifice.
Types of Goods: Economic, Free, and Capital
- Economic Good: Examples include sewer services, electricity.
- Free Good: Examples include sunlight.
- Capital Good: Examples include machinery, working tools.
Government Intervention in Equity Failure
The government intervenes to create a plan that addresses the equitable, rational, and real needs of society. Examples include scholarships, grants, subsidies, and minimum wage policies.
Understanding Economic Transfers
Transfers are payments where recipients do not provide any goods or services in return. They are often funded by contributions and tax charges.
Negative Externalities
A negative externality occurs when an agent’s actions reduce the welfare of other agents in the economy.
Impact of Lack of Competition
A lack of competition damages society because it eliminates market choices for goods or services. Society is then obligated to purchase goods or services without preference or certainty that they are acquiring what is truly needed.
Capitalism and Ecology
This concept explores the tension between industrial progress and environmental preservation within a capitalist system.
The Accumulation Problem
The accumulation problem refers to the challenge of producing goods in the present to meet future needs.