Introduction to Economics: Concepts and Circular Flow

Economics Basics

• Economics studies how society manages resources, involving costs and benefits in economic decisions.
• There are two types of economics: positive and normative.
• Economics studies how resources are managed to meet the needs and desires of people.
• It seeks to understand how decisions affect production and well-being.

Examples

• Creating a budget for the market.
• Saving to buy things needed.

Circular Flow Diagram

• The circular flow diagram visually represents how the market relates in different areas, considering the economics of the place.

Economic Concepts

Economics

• The study of the production, distribution, and consumption of goods and services.

Goods

• Tangible products that satisfy needs.

Services

• Intangible activities that satisfy needs.

Supply

• The quantity of goods and services available in the market.

Demand

• The quantity of goods and services that consumers want to buy.

More Concepts

• Inflation: The general and sustained increase in prices in the economy.
• Gross Domestic Product: The total value of goods and services produced in a country in a year.
• Market: A physical or virtual place where goods and services are exchanged.
• Opportunity Cost: What is given up when making an economic decision.
• Taxes: Mandatory payments to the state to finance public spending.

Investigative Workshop

• Microeconomics: The study and analysis of individual economic agents.
• Macroeconomics: Focuses on aspects such as economic growth, inflation, and unemployment.
• Economic Sectors in Colombia: Explained as primary, secondary, tertiary.
• Factors of Production: The elements that intervene in production (explained).
• National Economy: Explanation of how the economy works in one's country. Impact of resource scarcity on production.

Microeconomics Explained

• Microeconomics studies the behavior of individual economic agents, such as families, companies, and industries.
• Aims to understand how these agents make decisions and how they manage their resources to satisfy their needs and achieve well-being.

Macroeconomics Explained

• Macroeconomics analyzes the overall functioning of the economic system, considering aspects such as economic growth, inflation, and unemployment.
• Unlike microeconomics, macroeconomics examines economic factors on a large scale and aims to understand how the economy behaves as a whole, as well as its corresponding economic policies.

Economic Sectors of Colombia

• The division is made according to the production processes, the service they provide, or the products they commercialize.
• Includes primary, secondary, tertiary, and quaternary sectors.

Primary Sector

• Includes activities related to the extraction and collection of natural resources directly from the earth, sea, or air.
• Important in Colombia due to the country's natural wealth.
• Includes agriculture, livestock, fishing, mining, and forestry.

Secondary Sector

• Transforms raw materials obtained from the primary sector into manufactured or elaborated products.
• Important for the industrial development of the country.
• Includes manufacturing industry, construction, energy, and crafts.

Tertiary Sector

• Focuses on the provision of services and not on the production of goods.
• Important for the economy as it generates employment.
• Includes commerce, tourism, transportation, education, health, banking, finance, and communications.

Quaternary Sector

• An evolution of the tertiary sector.
• Focuses on activities related to knowledge, innovation, and technology.
• Important for the modernization and competitiveness of the economy.
• Includes research and development, information technology, consulting, higher education, and professional services.

Other Definitions

• Production: The process of transforming resources into goods and services.
• These goods and services meet the needs and desires of people.
• It involves combining factors of production, such as labor, capital, land, and technology.
• Intervention: Utilized human resources in production, both physically and intellectually.
• Land: Natural resources used in production, such as arable land, minerals, and water.

Factors of Production

• Goods or services used to produce other goods and services.
• Four types as labor, capital, land, and technology transform raw materials.
• Factors are essential for production when technology is available.

Divisions

• Divided into four categories.

Land

• Includes all natural resources that can be used in the production process.
• Example: Arable land, land for building, mineral resources, and energy sources.

Labor

• The number of hours people dedicate to production.
• Example: Farmer hours, factory worker hours, teacher hours, researcher hours.

Capital

• Durable goods used to manufacture other goods or services.
• Example: Agricultural machinery, highways, computers, etc.

Technology

• Combination of knowledge and techniques logically and orderly enables people to solve problems, modify the environment, and adapt to the environment.

Production Function

• Relationship between the maximum quantity that can be produced and each combination of inputs.
• In economics, the production function is generally represented mathematically. FCJ defines the relationship between variables: Q = Production. T = Land. K = Capital. L = Labor. A = Technology.

Examples of Production Factors

• In lettuce production:

Land

• Cultivable land and the lettuce seeds themselves.

Labor

• Hours of work of farmers and other workers.

Capital

• Agricultural tractor and other machinery.

Technology

• Creation of seeds resistant to adverse climates, new forms of production, and design of more efficient machinery.

Diminishing Returns

• Some producers might think that to increase production, they should increase the quantity of factors.
• Generally, this isn't true.
• Additional factor production initially increases production, but as we continue to add quantities of a factor of production (land, labor, or capital), the additional production generated by each factor becomes smaller and smaller, and then declines.
• Law of diminishing returns indicates factors are combined.
• Even if other factors increase, the production increase may not be proportional.

Cobb-Douglas Production Function

• Production function frequently used in the neoclassical approach to estimate the function of a country and its expected economic growth.
• Later technology (A) is incorporated, also called total productivity of the factors.

$Y=AK^{\alpha}L^{\beta}$

Human Capital

• In studies by Uzawa (1965) and Lucas (1988), human capital was introduced as the main variable of the Cobb-Douglas function, replacing the work factor (L) with the human capital factor and maintaining technology (A) and the financial capital factor (C).

$Y=AK^{\alpha}H^{\beta}$

Economic Measurement

• Indicators are used to understand economic problems.

• Measurement allows understanding economic conditions.

• Economic indicators are used in a country.

• Examples are:

  • GDP
  • Unemployment Rate
  • Trade Balance
  • ABC and IDH indicators

• GDP (Gross Domestic Product) is the total value of goods and services.

• Comparisons are temporal in nature.

• Using Market Value to calculate currency.

• Phases:

$C+I+G+(X-M)->Exportation-Importation$.

• Consumption
• Investment
• Government spending 500+200+300+(100-150)=1000+50
• Indicator calculates everything a country produces.
• Limitations to Human growth/Develoment

GDP per capita

• The relationship between goods and services, Market Values, and total Population. Indicators:
  • Human USA Development
  • USA, Switzerland

Exchange Rate

• There is a fixed rate in each country.
• TRM changes daily.
• Fixed and Flexible Rate depends on supply and demand values.
• Mixed Rate: Range of change
• Affects external debt and healthy inflation.
• Debt over time and affects tourism and the dollar.
• Inflation, lots of demand and problems with structure. Increases in an uncontrolled manner.
• Stagflation when prices drop and a large increase in prices in the long term
• Economic Indicators and complementary indicators
• Inflation and unemployment

Relation between Economic Indices and Indicators

• Reflects different aspects of the economy.
• GDP and unemployment
• Inflation and wages
• Fiscal Petition
• Balance of Trade + Export

Economic Crisis

• Depression (1929-1939)

• Oil and Debt Crisis (1973-1980)

• Financial Crisis (2008-2009)

• Covid-19 (2020-2021) - unemployment.