Economics Definitions and Concepts

Economics Definitions

• Economics is a social science, focusing on the efficient allocation of scarce resources to maximize human needs.
• Economists have different perspectives. Adam Smith defined economics as the study of wealth, while Alfred Marshall focused on material welfare.
• Robbins defined economics as the study of human conduct relating to the use of scarce resources with alternative uses.

Scarcity

• Scarcity is the imbalance between unlimited wants and limited resources.
• All economic resources (land, labor, capital, entrepreneurship) are finite.
• Free resources are abundant; their quantities exceed demand at zero price (e.g., sunlight).
• Scarce resources have limited availability compared to demand at zero price (e.g., fertile land, skilled labor).

Types of Resources

• Economic resources are categorized as:
  • Labor (physical and mental human efforts in production and distribution)
  • Land (natural resources)
  • Capital (manufactured inputs for production)
  • Entrepreneurship (organizing other factors to produce goods/services, taking risks)

Economic Systems

• Capitalism: Private ownership, production driven by entrepreneurs, minimal government intervention.
  • Features: Private property rights, consumer choice, profit motive, competition.
  • Advantages: Flexibility, economic growth, decentralized power, new goods development.
  • Disadvantages: Income inequality, unbalanced economic activity, exploitation.
• Command Economy: State-controlled ownership and allocation of resources.
  • Features: Collective ownership, central economic planning, control over all economic activities.
  • Advantages: Balanced economic growth, elimination of private monopolies/inequality.
  • Disadvantages: Absence of automatic price determination, lack of incentives for efficiency, restricted economic freedom.
• Mixed Economy: Combines private and public sectors.
  • Features: Coexistence of public and private sectors, government control over certain sectors.
  • Advantages: combines the strengths of capitalist and command economies, efficient allocation, opportunities for growth, social welfare.
  • Disadvantages: Inefficiency in some sectors, possible inefficiencies or conflict between the two sectors.

Basic Economic Questions

• What to produce? Allocation of resources to decided quantities and types of products.
• How to produce? Selecting techniques of production to optimize the resources used for producing the selected types and quantities of products.
• For whom to produce? Distribution of produced products to the members of society, to maximize the welfare and equality across consumers.

Production Possibility Curve (PPC)

• A curve depicting the possible combinations of goods/services that can be produced given the resources and technology available.
• Points on the PPC are attainable and efficient.
• Movement along the curve reflects scarcity and opportunity cost.
• The slope of the PPC represents the opportunity cost of producing one good in terms of forgone production of another.

Economic Growth and the PPF

• Economic growth is an expansion of the total output or production capacity .
• It occurs due to increased resources (quantity/quality) and technological advancements.
• These improvements shift the PPC outward, allowing for more production.

Circular Flow Model

• A visual representation of the flow of money, resources, goods, and services in an economy.
• Involves households, firms, and the government interacting in product and factor markets.
• Shows how income generated in one sector is used in another for different economic activities.

Positive vs Normative Economics

• Positive economics describes the way the economy works (objective and factual statements).
• Normative economics describes how the economy should function (subjective value judgments).