Scarcity & Economics Principles

Scarcity & Economics

• Scarcity means there are limited resources available leading to an inability to fulfill every need and want.
• Economics studies how society manages its scarce resources, it isn’t about an authoritarian figure making decisions, it’s about the collective choices made by individuals and businesses.
• Economists use statistics and data to understand production, distribution of goods and services, and how people make their decisions.

What Does An Economist Do?

• They study how people make choices: how much they work, what they spend their money on, how they save, and how they invest.
• They analyze individual and group interactions like how buyers and sellers interact to determine the price and quantity of a product.
• Overall economic trends like average income growth, unemployment rates, and inflation are also examined.

Ten Principles of Economics - How People Make Decisions

• Principle 1: People Face Trade-offs
  • Getting something we want often means sacrificing something else we like, decision making always involves trade-offs.
• Principle 2: The Cost of Something Is What You Give Up to Get It
  • Opportunity cost is the value of the next best alternative that’s forgone during a decision.
• Principle 3: Rational People Think at the Margin
  • Individuals make choices considering the additional benefits and costs of a particular action.
• Principle 7: Governments Can Sometimes Improve Market Outcomes
  • Government often steps in to protect property rights (ownership of resources) which is crucial for a functioning economy.
  • Market failure happens when a market left alone doesn’t allocate resources efficiently.
  • Examples of market failures include externalities (effects on third parties not involved in the transaction) and market power (one player influencing prices).

Introduction to Supply and Demand

• Supply and demand concepts are the bedrock of how prices and quantities are determined in a free market.
• The interaction of these forces sets the market price and volume of goods and services.
• When supply and demand balance, the market is in equilibrium.
• Imbalances can lead to price changes and affect both consumer behavior and production decisions.

The Law of Demand

• This law states that the amount of a product consumers want to buy and are able to buy decreases as the price increases.

Demand

• This is the quantity of a product that consumers are willing and able to buy at various price points.

Factors Affecting Demand

• Economic Conditions: During economic downturns, demand for luxury items lowers while demand for necessities increases, Conversely, booming economies lead to higher demand for goods and services.
• Advertising and Marketing: Successful advertising and marketing campaigns can increase consumer awareness and preference for a product, directly impacting demand.
• Government Policies and Regulations: Taxes, subsidies, and regulations directly affect demand; for example, subsidies often lower the effective price of a good, boosting demand, while taxes would have the opposite effect.

The Law of Supply

• This law states that producers increase the quantity of a good they supply as the price increases and will supply less at lower prices.

Supply

• This refers to the quantity of a product that producers are willing and able to sell at various prices.

Factors Affecting Supply

• Production Costs: Changes in the costs of inputs (e.g. labor, raw materials) influence supply; reduced production costs can boost supply, while higher costs reduce it.
• Technology: Technological advancements can enable more efficient production processes and increase supply.
• Number of Producers: Increased competition (more suppliers) generally brings more total supply.
• Government Policies: Taxes, subsidies, and regulations can affect supply; for example, subsidies can incentivize higher output, while taxes generally act as a deterrent.
• Expectations: Producers may manipulate current supply based on their expectations about future prices; if prices are expected to rise, producers may hold back supply now to sell more later at higher prices.
• Natural Conditions: For agricultural and natural resource industries, weather and environmental factors can significantly impact supply.

Market Equilibrium & Efficiency

• These concepts are at the heart of how markets function and how resources are allocated.
• Market equilibrium exists when the quantity consumers want to buy equals the quantity producers want to sell at a given price.
• At this point, the price and quantity remain stable unless some external factor influences the market.

Types of Cross Elasticity of Demand (XED)

• Substitute Goods (XED > 0)
  • Products used in place of each other. Increased price of one good leads to higher demand for its substitute since consumers switch to the cheaper alternative. For example, butter and margarine.
• Complementary Goods (XED < 0)
  • Goods used together. Increased price of one good leads to a decrease in demand for its complement since they are typically consumed together. For example, coffee and sugar.
• Unrelated Goods (XED = 0)
  • Products with no significant connection. Price changes in one good have a negligible impact on the demand for the other. For example, shoes and apples.

Consumers Behavior

• This refers to the decision-making process individuals use when selecting, purchasing, and using goods and services.

Assumptions of Consumers Behavior

• Rationality: Consumers seek to maximize their satisfaction (utility) based on their income levels.
• Utility: This is the satisfaction or pleasure derived from consuming a good or service.
• Preferences: Consumers have ranked preferences for goods and services.

Types of Utility

• Total Utility (TU) – Overall satisfaction derived from consuming a specific quantity of goods or services.
• Marginal Utility (MU) – Additional satisfaction gained by consuming one more unit of a good or service.
• Average Utility – Total utility divided by the number of units consumed, reflecting average satisfaction per unit.
• Cardinal Utility – Utility can be measured quantitatively (e.g., in "utils") and compared with other goods and services. This approach assumes utility can be measured precisely, which is not always practical.
• Ordinal Utility – Consumers can rank preferences but cannot assign numerical values to them. It is based on the idea that individuals can say they favor one good over another without attributing specific numerical values.

Theory of Production

• Refers to the process of transforming inputs into outputs.

Main Concepts

• The Law of Diminishing Returns: Increasing the quantity of one input while keeping other inputs fixed will eventually result in progressively smaller increases in output.
• Factors of Production: Key inputs used in the production process, including:
  • Land: Natural resources used in production (e.g., oil, minerals, forests).
  • Labor: Human effort and skills involved in the production process.
  • Capital: Man-made resources used in the production process (e.g., machinery, buildings).
  • Entrepreneurship: The ability and willingness to combine resources and take risks in an effort to produce goods and services.