Economics Fundamentals

• Microeconomics studies individual economic units like industries, firms, and households, focusing on specific markets, prices, and services.
• Economics uses scarce resources to maximize satisfaction of society's unlimited material wants.
• Economics studies how individuals and societies choose among alternative uses of scarce resources to satisfy wants.
• Two key terms in economics are scarce resources and unlimited wants.

Scarcity

• Scarcity means that at any given time, there is only a limited amount of resources or factors of production.
• Scarcity implies nature does not provide as much of everything as people desire.
• Scarcity is ever-present, because people always want more than is freely available.
• Scarce resources are used to produce economic goods.

Economic Goods

• Economic goods are any scarce good or service.
• It is any tangible (cars, soap, tools, machines) or intangible economic product that directly or indirectly satisfies human wants.
• Desired quantity of an economic good exceeds what's freely available from nature.
• Goods that are abundant, like air and water, known as Free Goods are not considered economic goods.
• Free goods have a zero supply price, leading to overuse and potential environmental issues.

Choice

• Scarcity necessitates choice among available options for individuals, households, firms, and governments.
• Producers address three major questions due to limited resources:
  • What to produce? (decisions about which goods to make and in what quantities)
  • How to produce? (decisions about methods and inputs for production)
  • For whom to produce? (decisions about distribution of goods and income)
• The need to choose implies sacrificing one or more things to obtain another, which brings in opportunity cost.
• Opportunity cost is the next best alternative forgone when making a choice.
• It is the highest-valued alternative that was sacrificed for the chosen option.

Production Possibilities Curve (PPC/PPF)

• Graph showing all possible combinations of two goods a country can produce efficiently during a specific period.
• A graphic representation of opportunity cost.
• Assumptions of the PPF:
  • Efficiency: the economy operates at full employment and achieves productive efficiency.
  • Fixed resources: supplies of factors of production are fixed in quantity and quality.
  • Fixed technology: technology remains constant during the analysis.
  • Two products: goods are classified as consumer goods (directly satisfy wants) and capital goods (indirectly satisfy wants by enabling more efficient production of consumer goods).

Graphic Representation of the PPF

• All resources are devoted to consumer and capital goods in the graph.
• Devoting resources to consumer goods lead to 10 units of consumer goods and zero capital goods.
• Devoting to capital goods produces 9 units of capital goods and zero consumer goods.
• Producing 8 units of consumer goods and 6 units of capital goods is at point A.
• Producing 4 units of consumer goods and 8 units of capital goods is at point B. Points within PPF (like C & E) are inefficient uses of resources which resources can further utilize by producing on the curve.
• Points outside the PPF (like F & D) are unattainable at moment with fixed technology but are achievable in the long term
• The curve is concave from its origin with a downward slope. It shows that in order to produce more of one good, less of the other must be produced.
• Example of producing more capital goods leading to producing less consumer goods
• The opportunity cost of producing more capital goods is the consumer goods given up.
• As the country increases the consumption of one good, then the opportunity cost increases.

Law of Increasing Relative Costs

• As society allocates more resources to produce a specific item, opportunity cost for each additional unit increases.
• In the long run, the PPF can shift to the right, which means that the economy is going through positive growth.

Growth and the PPF

• Expanding resource supplies which comes from population growth, increases in labor, and entrepreneurial ability increases the country's capability to produce both goods which shifts the PPF to the right.

• Technological advancement and new and better goods also shifts the PPF to the right.

• Increase in productivity, where productivity refers to the amount of output per unit leads to an increase of country output, therefore shifting the PPF otwards

• Growth in population

• The PPF can also shift inside due to depletion of natural resources, decline population, natural disaster or reduction in productivity.

• PPC shifts outward only if resources devoted to both goods increase.

Pivoting of the PPF

• If there is an increase in one of the goods, than the PPC pivots outwards
• If resources devoted to capital goods increase while consumer goods remain constant, more capital goods are produced.

Efficiency

• Defined as the absence of waste.
• An efficient economy wastes no available resources, maximizes output with its technology.
• Full production implies two kinds of efficiency:
• Allocative Efficiency: Resources devoted to the combination of goods and services most wanted by society, and maximizes output. Productive Efficiency: Desired goods produced in the least costly ways, where production at lowest cost will lead to more products.
• This concept was introduced by Vilfredo Pareto, and states that an economy will be efficient is no change is made to help some people without harming others.
• Scientific generalisations about economic behaviour.
• For example, a reduced tax increase leads to increased spending.
• Normative economics is someone's value judgements about what the economy should look like.
• It's the study about what "Ought to be".
• Inductive and Deductive Reasoning helps analyze aspects of the economy to come to a conclusion
• It is a accumulation of facts that help permit the derivation of a generalisation. Induction moves from facts to theory, from the particular to the general.
• Deductive is more hypothetical, with casual observation to frame a untested principle called hypothesis.
• The economist may draw upon decisions based on experiences as rational.
• Private Costs- These are the costs (explicit and implicit) incurred by firms for the use of factor inputs in producing their outputs.
• External Costs -- These are costs imposed without compensation on third parties by production or consumption of others.
• Social Costs -- These are the costs borne by society resulting from the actions of firms.

Market

• A market is a place to exchange, buy or sell products.
• It is the process by which buys and sellers with interact for the purpose of exchange.
• The interaction will help determine the price of the quantities that are traded.
• Market failure if the market isn't able to meet the needs and wants of society, which maximizes the wants and satisfaction.

Alternative Methods of Allocation Economic Systems

• Due to the problem of scarcity and choices, means for resources to be allocated are known as economic systems.
• The institutional means help use resources to satisfy needs
• Economic systems consists of:
  • Market Economy (Capitalism, Free) - Decisions on allocating resources are taken usually by households and firms which determine the price in the market.
  • Free enterprise and free choice is how individuals is allowed to obtain resources or choose what they want.
  • Competition allows rivalry among sellers trying to attract customers to desired goods.
  • Prices signal value to individual resources, and can either increase or decrease rate of return.
  • Government protects individual's rights and private property.
  • Manufacturers is able to produce what consumers require and the customers are free to spend.
  • The system isn't controlled, thus there is greater participation on what to be produced. There is little government intervention
• Businesses want to make profits, which means that their profits increase.
• Consumers can be exploited due to increase of essential goods.
• Market economy may encourage inequalities of wealth.
• Command Economy (rationing)
  • Major decisions on levels, distribution, organizations is determined by central planning board, and must follow state directives.
  • Production targets are determined by the planning boards for each enterprise.
• The decentralised making process gets replaced by collective preference Coordination is needed in quantities, outputs, or organization for resource allocation
• Forces are set by central planners rather than prices, and gives to given expressions to wage rates. -The allocation is set, production targets, allocation targets and planning is performed by central government.

Advantages of the Command Economy

• Reduction of wasted sources because decision making is planned.
• Profits may lead to goods that would cause private enterprise to be unwilling, such as welfare and hospitals.
• Since prices are determined, than no group can force prices up.
• Income distributions will distributed.
• Private monopoly is unable to develop.

Disadvantages of the Command Economy

• Free enterprise is disencouraged, and are a waste of manpower
• It may not be what people want, and does not respond to changing needs.
• Creativness isn't encourage,
• Incentives may lead to initiatives.
• Mixed Economy This system involves both private and public sectors for resource allocation.
• Planning by private and public enterprises, businesses interract through market mechanisms. Businesses are now being privatized.
• They take responsibility of expenditures, operations and supplies of manufacturig The state can intervene passing laws or protect against trading practices
• Some states may have industries operating inefficiently, therefore government will intervene setting a mmaximum price.

Price Controls

• Governments will specify a prices.
• The price may be fixed at a level below the market equilibrium price or above it, depending on the objective in mind.
• Two forms of prices is price ceilings and price floors.
• A price ceiling is the maximum legal price a seller can charge for a a product
• A price is legal if it is at or below the ceiling but illegal above not.
• Enable customers to obtain services that they could not afford at the normal price.
• This leads to a persistent shortage of goods
• illegal markets arise to supply the commodity, charging prices higher.
• Investments may dry up as prices are too controlled.
• Price floors will guarantees suppliers receuve receive a specified about ofr product, which will set prices for the government
• This is invoked to protect producers, helping wages.
• The is an excess supply due to quantity increase, which can lead to the product desposals

Explore fundamental economic principles. Learn about income distribution, opportunity cost, and the Production Possibilities Frontier (PPF). Understand how these concepts impact resource allocation and economic growth.