Fundamental Economic Concepts: Scarcity, Money, and Systems

Posted on Feb 26, 2026 in Economy

What is Economics?

Economics is fundamentally about choices. We face unlimited wants but possess limited resources (such as money, time, and materials). Economics studies how people utilize what they have to obtain what they need or desire.

Needs Versus Wants

  • Needs: Essential for survival (e.g., food, water, clothing).
  • Wants: Desirable but not necessary for survival (e.g., an iPhone, a car, a vacation).

Scarcity and the Economic Problem

Scarcity means there are not enough resources for everyone. Because resources like gold, water, oil, and money are limited, societies must choose:

  • What to produce.
  • What to buy.
  • What to sacrifice (opportunity cost).

Scarcity creates the basic economic problem: How to use limited resources to satisfy unlimited wants?

Goods and Services

  • Goods: Physical items you can touch (e.g., shoes, bread, a laptop).
  • Services: Actions performed for you (e.g., a doctor, a teacher, a hairdresser).

Both goods and services satisfy needs and wants.

Economic Resources (Factors of Production)

These are the inputs used to produce goods and services:

  1. Land: Natural resources (water, oil, land itself).
  2. Labour: Human effort (teachers, builders).
  3. Capital: Tools, machinery, and factories.
  4. Enterprise: Business ideas and the willingness to take risks (entrepreneurs).

Payments for these factors are: Land $\rightarrow$ Rent; Labour $\rightarrow$ Wages; Capital $\rightarrow$ Interest. Enterprise receives Profit (though not explicitly listed in the original factors, it is the reward).

The Role and Forms of Money

Why Do We Use Money?

Before Money: The Barter System

People traded goods directly for other goods. This system had significant problems:

  • Difficulty finding a double coincidence of wants.
  • Difficulty trading large items (like cows).
  • Goods were often indivisible (you cannot easily split a horse).
  • No common measure of value.

Money emerged to solve these issues and facilitate trade. Money is considered passive; it aids trade but does not produce goods itself.

Qualities of Good Money

Money should be:

  • Durable: It does not break or rot.
  • Portable: Easy to carry.
  • Divisible: Can be split into smaller units (coins).
  • Recognizable: Value is easily identified.
  • Stable: Value does not fluctuate rapidly.
  • Scarce: Limited supply to maintain value.
  • Hard to fake: Difficult to counterfeit.

Functions (Roles) of Money

Money serves three primary roles:

  1. Medium of Exchange: Used to buy and sell goods and services.
  2. Unit of Account: Provides a standard measure of value (prices).
  3. Store of Value: Allows wealth to be saved for the future.

Forms of Money Today

  • Cash (Coins & Notes): The most liquid form, easy for daily use.
  • Current Account: Used for daily payments via bank cards.
  • Savings / Time Deposit: Better for saving, often earns interest.
  • Bonds & Funds: Investments, generally less liquid.
  • Electronic/Digital Money: Online payments and card transactions.

Credit vs. Debit Cards

  • Credit Card: Uses borrowed money from the bank.
  • Debit Card: Uses your own money directly from your account.

Banking Structure

  • Current Account: A bank account for everyday transactions, withdrawals, and transfers.
  • Central Bank vs. Commercial Banks: The Central Bank manages the money supply, interest rates, and inflation, and supervises commercial banks. Commercial banks serve the public with deposits, loans, and accounts.
  • Central Bank Functions: Issues currency, controls inflation, manages interest rates, and supervises commercial banks.

Economic Systems and Organization

Economic Systems

Societies organize production and distribution in different ways:

1. Market Economy (Capitalism)

  • Ownership: Production is owned by private individuals and firms.
  • Decision Making: People choose what to buy and sell; prices are set by supply and demand.
  • Example: USA, Japan.
  • Pros: Freedom, innovation.
  • Cons: Inequality between rich and poor.

2. Planned Economy (Command)

  • Ownership: The government owns everything.
  • Decision Making: The government dictates what is produced and sets prices.
  • Example: Cuba, former USSR.
  • Pros: Greater equality.
  • Cons: Lack of motivation, frequent shortages.

3. Mixed Economy

  • Description: Combines market freedom with government control.
  • Role of Government: Provides essential services (schools, hospitals) and regulates markets.
  • Example: UK, France, Slovakia (most modern countries).

Business Organization

  • Private Company: Owned by individuals or families.
  • Public Company: Owned by the government or shareholders (listed publicly).
  • Firm: A business organization (e.g., Coca-Cola).
  • Plant: A physical production site (a factory).
  • Industry: A group of similar firms producing the same type of goods (e.g., the car industry).

The Role of Taxes

The purpose of taxes is to fund public services (roads, schools, hospitals) and to redistribute wealth within the economy.

Three Sectors of the Economy

Economic activity is divided into three main sectors:

  • Primary: Extraction of raw materials (agriculture, mining).
  • Secondary: Manufacturing and production (factories).
  • Tertiary: Services (transport, education, healthcare).