Introduction to Economics and Scarcity

Economics and Scarcity

• Economics is the study of how to efficiently allocate scarce resources to satisfy human needs and wants.
• Scarcity refers to the limited availability of resources like land, labor, and capital, which are used to produce goods and services.
• Economics exists because of scarcity.

Factors of Production

• Land represents all natural resources, not manmade.
• Labor refers to any human effort exerted in producing goods and services.
• Capital includes manmade goods used to produce other goods and services.
• Entrepreneurship is the organization, management, and risk-taking involved in turning a new product into a successful business.

Basic Economic Questions

• Every economic system must answer the following questions:
  • What to produce?
  • How to produce?
  • How much to produce?
  • For whom to produce?

The Circular Flow Model

• Shows the flow of resources, goods and services, and money between households (consumers) and firms (producers).

3 Es in Economics

• Efficiency: Productivity and effective allocation of resources.
• Effectiveness: Achieving goals and objectives.
• Equity: Fairness and justice in the distribution of resources.

Types of Economic Systems

• Traditional Economy: A subsistence-based economy where practices are dictated by tradition.
• Command Economy: The government dictates production methods.
• Market Economy (Capitalism): Resources are privately owned, and decisions are made by individuals and firms.
• Socialism: Key enterprises are owned by the state.
• Mixed Economy: A blend of market and command elements.

Important Economic Terms

• Wealth: Anything with functional value that can be traded for goods and services (usually measured in money).
• Consumption: The direct use of available goods and services by buyers (individuals) or consumers (households).

Classical Economics

• Birth of economic theory: Mid-1700s and 1800s.
• Adam Smith, known as the "Father of Economics," wrote "The Wealth of Nations" (1776), which became the "bible of economics" for a century.
• Invisible Hand: Smith's theory that the interaction between consumers and producers (through supply and demand) regulates the market effectively.
• John Stuart Mill developed the basic analysis of political economy, emphasizing the role of the state in national economies.
• Karl Marx focused on the impact of the Industrial Revolution on working classes. He argued that the system was unfair and prone to class struggle.

The Basic Analysis of Demand and Supply

• Demand: The quantity of goods and services that people are willing to buy.
• Supply: The quantity of goods and services that firms are willing to sell.
• Market: Where buyers and sellers meet to exchange goods and services.

Market Equilibrium

• Occurs when the quantity demanded equals the quantity supplied.
• The equilibrium price is the price at which this balance is achieved.

Price Control

• Government-set minimum or maximum prices for goods and services.
• Floor Price: A legal minimum price designed to protect producers.
• Ceiling Price: A legal maximum price designed to protect consumers.

Elasticity

• Measure of the responsiveness of quantity demanded or supplied to changes in price or other factors.

Elasticity of Demand

• Price Elasticity of Demand: Measures how much quantity demanded changes in response to price changes.
• Income Elasticity of Demand: Measures how much quantity demanded changes in response to income changes.
• Cross Price Elasticity of Demand: Measures how much the demand for one good changes in response to price changes of a related good.

Elasticity of Supply

• Measures the responsiveness of supply to changes in price.

Consumer Behavior

• The study of consumers' decision-making processes, including how they choose, use, and dispose of products and services.

Maslow's Hierarchy of Needs

• A psychological theory that proposes a hierarchy of human needs, starting from basic needs to self-actualization:
  • Physiological Needs: Basic needs for survival, such as food, water, and shelter.
  • Safety Needs: The need for security and protection from danger.
  • Social Needs: The need for belonging, love, and acceptance.
  • Esteem Needs: The need for self-esteem, recognition, and status.
  • Self-Actualization Needs: The need for personal growth, fulfillment, and achieving one's potential.