Understanding Economics: Principles and Processes
Item 1: Understanding Basic Economic Concepts
Positive Economy: Describes and studies reality as individual and collective behavior.
Economic Rules: Should be the economy that sets the rules.
The Factors of Production
- Land (or Nature Factor): Provides us with resources. Land is durable and can be exploited.
- Labor: The most productive factor, requiring human intervention. It involves physical and mental effort.
- Capital: Financial. Two types:
- Funds the company has for its employees or investments.
- Capital Goods/Loans: Assets built to produce other goods.
Economic Operators
- Household Economics: People clustered in households. Their main activity is spending power consumption (tax-saving-consumption expenditures).
- Companies: Combine factors of production to produce goods and services for sale.
- Public Sector: What the state controls in consumption and production. Acts as a consumer and public investor.
Goods and Services
- Good: Material elements that directly or indirectly meet human needs.
- Service: Activities intended to meet needs.
Classification by Scarcity
- Free: Abundant and can be obtained for free.
- Economic: Require the operation of factors for their production.
Classification by Nature
- Real Capital: Do not directly satisfy human needs; they are used to produce other goods (e.g., machinery).
- Consumption Goods: Ready for immediate need, consumed upon use.
Classification by Function
- Intermediate Goods: Must be transformed to meet needs (e.g., flour used for bread).
- Final Goods: Have been transformed and are ready for consumption.
Opportunity Cost
- Family: Possible spending options that affect businesses.
- Companies: Possible combinations of cost and production.
- State: Alternatives in election-spending and government revenues, reflecting the state budget (expenditures and revenues).
Production Possibility Frontier (PPF)
The production limit of a country or company.
Main Economic Problems
- What to produce? Which goods or services should be produced and in what quantity? (e.g., land that can be used for livestock or to start a business).
- How to produce? Which resources should be used, and which techniques will be used in obtaining these goods and services?
- For whom to produce? What will be the destination of the goods and services?
Item 2: The Production Process
Elements of the Production Process
- Inputs: All materials and machinery that the company must have to create the product.
- Technology: Allows for further progress in the production system, leading to an improved product or improved productivity.
- Outputs: The end result of the production process. Goods and consumer services can be incorporated into another production process.
Flexible Production Process: Adapting to change and new technologies.
Objectives of a Company
- Profitability: Return on investment.
- Growth: Do not stagnate in the market.
- Proceeds: Established relationship between quantity and cost of the product.
- Financial: Level of indebtedness.
Objectives of the Production System
- Productive Capacity: To have the bare minimum.
- Quality: Level of quality.
- Costs: Minimize costs.
- Flexibility: Adaptability of products and the production environment.
Law of Diminishing Returns
Increasing the use of a variable factor while others remain constant leads to a decrease in the marginal product and average product.
Costs
- Fixed Costs: Do not always remain fixed.
- Variable Costs: Vary or are a function of units produced.
Key Terms:
- Q: Output quantity
- T: Land factor
- L: Labor input
- K: Capital input
- PT: Total production
- PMe: Average product
- PMg: Marginal product
- CF: Fixed costs
- CV: Variable costs
- CT: Total cost
- I: Income
- B: Profits
- PM: Break-even point (Deadlock)