Introduction to Economics Concepts

What is Economics?

• Economics is a social science that studies the production, distribution, and consumption of goods and services.
• Economics analyzes the factors that determine these aspects.
• Resources are limited, and we have unlimited wants.
• Economics attempts to resolve this fundamental issue, which directly stems from scarcity.

Nature of the Economic Problem

• The economic problem stems from scarcity, which means we have finite resources and unlimited wants.
• Resources are the inputs needed to produce goods and services.
• Resources are scarce, and this scarcity creates the economic problem.

Economic Goods and Free Goods

• Economic goods are scarce and have an opportunity cost.
• Economic goods are produced with limited resources.
• Free goods are abundant in supply, such as sunlight and air.
• Free goods do not have an opportunity cost.

Needs and Wants

• Needs are necessities for survival: food, water, and shelter.
• Wants are non-essential luxuries.

Factors of Production

• Factors of production are the resources used for producing goods and services.
• There are four factors of production: Land, Labor, Capital, and Enterprise.
• Land refers to all natural resources.
• Land includes the surface of the Earth, including the forests, lakes, rivers, etc.

Factors of Production

• Factors of production are scarce resources used to create goods.

Land

• Land refers to all natural resources used in an economy.
• The reward for land is rent.
• Land has a fixed supply as it cannot be created.
• Land's quality is determined by soil type, fertility, and weather.
• Land's geographical mobility is low; it cannot be moved.
• Land's occupational mobility is high; it can have various uses.

Labor

• Labor is the mental and physical effort of workers.
• Labor is a type of resource.
• The reward for labor is wages and salaries.
• The supply of labor depends on factors like the number of workers, population size, years of schooling, retirement age, age structure, hours worked, holidays, sick leave, and part-time vs. full-time work.
• The quality of labor depends on skills and education.
• Labor has a high degree of occupational mobility as workers can switch jobs based on skills.
• Workers have varying degrees of geographical mobility, depending on factors like family ties, costs, visa requirements, travel regulations, and work laws.

Capital

• Capital refers to man-made resources used in an economy.
• Capital goods are used to make other goods or more capital goods (e.g., machinery).
• The reward for capital is interest.
• The supply of capital depends on the demand for goods.
• The quality of capital depends on the quality of product output and technology.
• Capital's mobility varies depending on its type: geographically mobile examples (tools, equipment, vehicles) and geographically immobile examples (buildings, factories).

Entreprise

• Enterprise is the ability to take risks and start a business venture.
• Entrepreneurs take risks and start businesses.
• Entrepreneurs organize all factors of production.
• The reward for enterprise is profit.
• The supply of enterprise depends on entrepreneurial skills, creativity, risk-taking, education, and taxes.
• The quality of enterprise depends on how well entrepreneurs meet and extend demand with innovation.
• Enterprise is generally highly mobile both geographically and occupationally.

Scarcity and Opportunity Cost

• Scarcity of resources means there are not enough goods and services to satisfy everyone.
• Opportunity cost is the value of the next best alternative forgone.
• Example: The opportunity cost of studying is the sleep that could have been obtained instead.

Production Possibility Curve (PPC)

• PPC diagram shows the maximum combination of two goods producible with available resources.
• Points on the PPC represent different combinations of goods that can be produced.
• Points outside the PPC are unattainable.
• Points inside the PPC are inefficient.
• An outward shift in the PPC indicates economic growth (from factors such as resource discovery, technological advancements, and increased workforce).
• An inward shift indicates economic decline (due to factors like natural disasters, low technology investment, or resource depletion).
• PPC is used to calculate opportunity cost, by analyzing production choices and their trade-offs.