What is Economics?
Economics is the study of how people make choices to satisfy their wants.
Economics is the study of how societies use scarce resources to produce valuable goods and services and distribute them among different individuals.
Shaping the wants into demand
• Want- Everything we don’t have (Our desires)
• Need- Our wants, have ability but not interested to buy.
• Demand- Interested to buy that we need.
Scarcity and Efficiency
Scarcity:
It means that there is a limited quantity of resources to meet-up the unlimited needs and wants. Economics guides how to ensure the best utilization of the limited resources to meet-up the unlimited wants and needs. Economics teaches us to decide or to make choice, which needs or wants should be meet-up first. Actually we can never satisfy our all desires or wants or needs
Scarcity is not shortage. Shortage is a situation where a particular thing (goods or service) is temporarily unavailable.
Efficiency:
Efficiency denotes the most effective use of a society’s resources in satisfying people’s wants and needs. We should keep in mind that we have only limited resources but our wants or needs have no limit.
Economic efficiency requires that an economy produces the best combination of quantity and quality of goods and services by using its available technology and scarce resources.
Branches of Economics
Microeconomics: It is the branch of economics which today is concerned with the behavior of individual entities such as markets, firms, and households. Microeconomics is the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of governments.
Macroeconomics: It is concerned with the overall performance of the economy. Today, macroeconomics examines a wide variety of areas, such as how total investment and consumption are determined, how central banks manage money and interest rates, what causes international financial crises, and why some nations grow rapidly while others stagnate. Macroeconomics is the study of the performance of the national economy and the global economy.
Positive Economics versus Normative Economics
Positive economics describes the facts of an economy. Why do doctors earn more than janitors? Did the North American Free Trade Agreement (NAFTA) raise or lower the incomes of most Americans? Will the high interest rate slowdown the economy and lower the inflation?
They can all be resolved by reference to analysis and empirical evidence.
While normative economics involves value judgments. It involves ethical precepts and norms of fairness. Should the United States negotiate further agreements to lower tariffs on imports? Has the distribution of income in the United States become too unequal? There are no right or wrong answers to these questions because they involve ethics and values rather than facts
The Three Problems of Economic Organization
Three fundamental questions of economic organization— what, how, and for whom
What commodities are produced and in what quantities? A society must determine how much of each of the many possible goods and services it will make and when they will be produced. Will we produce pizzas or shirts today?
How are goods produced? A society must determine who will do the production, with what resources, and what production techniques they will use.
For whom are goods produced? Who gets to eat the fruit of economic activity? Is the distribution of income and wealth fair and equitable? How is the national product divided among different households? Are many people poor and a few rich?
MARKET, COMMAND, AND MIXED ECONOMIES
A market economy is one in which individuals and private firms make the major decisions about production and consumption. A system of prices, of markets, of profits and losses, of incentives and rewards determines what, how, and for whom. Firms produce the commodities that yield the highest profits (the what) by the techniques of production that are least costly (the how).
Command economy is one in which the government makes all important decisions about production and distribution. In a command economy, the government answers the major economic questions through its ownership of resources and its power to enforce decisions.
Mixed economy: Combination of market and command economies.
INPUTS AND OUTPUTS
To answer the three questions of economics- What, How & for Whom, every society must make choices about the economy’s inputs and outputs.
Inputs are commodities or services that are used to produce goods and services. An economy uses its existing technology to combine inputs to produce outputs.
Outputs are the various useful goods or services that result from the production process and are either consumed or employed in further production.
Factors of Production
Factors of Production: Resources that are used to make all goods and services.
1. Land (natural)- All natural resources that are used to produce goods and services.
2. Labor (human)- Any effort a person devotes to a task for which that person is paid.
3. Capital- Any human-made resource that is used to create other goods and services.
a. Physical Capital- all the tools, machines, and other equipment a business needs
b. Human Capital- the skills and knowledge of a company’s workers 4. Entrepreneur: A person who takes the initiatives
THE PRODUCTION-POSSIBILITY FRONTIER
The quantities of goods and services that we can produce are limited both by our available resources and by technology. And if we want to increase our production of one good, we must decrease our production of something else—we face a tradeoff.
Example: By using all available resources an economy can produce only two types of goods. IT product (100 units) or Foods (2000units).
Opportunity costs
The opportunity cost of an action is the highest- valued alternative forgone. It is the cost of the next best alternative when we choose one over another. The PPF makes this idea precise and enables us to calculate opportunity cost.
