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**Economic principle** Scarcity is **the gap between limited resources and greater demand**. It's the underpinning of economic theory and several related principles, including opportunity cost, resource allocation, price elasticity and risk. Prices and perceived value rise when resources are scarce...

**Economic principle** Scarcity is **the gap between limited resources and greater demand**. It's the underpinning of economic theory and several related principles, including opportunity cost, resource allocation, price elasticity and risk. Prices and perceived value rise when resources are scarce and fall when they are abundant. **Absolute scarcity** describes resources that are **fixed in supply and cannot be increased or decreased,** **regardless of demand**. Their supply is hard-capped due to intrinsic limitations. There is no ability to generate more of an absolutely scarce resource, and there are no true substitutes. Examples include: - Time, because once it's past, it's gone. - Fine art, as in there can only be one Mona Lisa. - Land, because we're not making any more of it. - Bitcoin, which has been described as a currency with absolute scarcity since it is intrinsically capped by its own mining protocol. In contrast, a resource with **relative scarcity** is one that has a **limited supply but only in relation to demand.** Most discussions of scarcity in a business setting are examples of relative scarcity. The key difference between absolute scarcity and relative scarcity is the [relationship between supply and demand](https://www.netsuite.com/portal/resource/articles/erp/law-of-supply-demand.shtml). **Resources that are relatively scarce may exist in large quantities, but the supply just can't keep up with** **demand**. Relative scarcity requires consumers to make choices, evaluate substitutes and allocate resources. The three causes of scarcity --- excess demand, insufficient supply and structural access --- describe situations of relative scarcity. **Opportunity cost** [**Opportunity cost**](https://www.economicshelp.org/blog/2177/economics/opportunity-cost-definition/) **is the next best alternative foregone**. When land is devoted exclusively to the cultivation of rice, we give up an output of bananas or mangoes that we could have planted on that land area. A producer who decides to transform all his leather into shoes, gives up the chance to produce bags with that leather. A schoolteacher who could have worked in a bank, **gives up the salary that she would have earned as a bank employee**. A manager who quits his job in order to take up a master's degree, gives up his salary as a manager. That salary is his opportunity cost. Without scarcity, a person does not need to make choices since he/she can have everything he/she wants. **Microeconomics** **examines the behavior of individual entities such as the consumer, the producer, and the resource owner or firms within the market**. It is more concerned with how goods flow from the business firm to the consumer and how the resources move from the resource owner to the business firm. It is also concerned with the process of setting prices of goods that are also known as Price Theory. Microeconomics examines individual economic activity, industries, and their interaction. It has the following characteristics: - **Elasticity:** It determines the **ratio of change in the proportion of one variable to another variable.** For example- the income elasticity of demand, the price elasticity of demand, the price elasticity of supply, etc. - **Theory of Production:** It involves an **efficient conversion of input into an output**. For example- packaging, shipping, storing, and manufacturing. - **Cost of Production:** With the help of this theory, the **object price is evaluated by the price of resources.** - **Monopoly:** Under this theory, the **dominance of a single entity is studied** in a particular field. - **Oligopoly:** It corresponds to the **dominance of small entities in a market.** **Macroeconomics** **analyzes the entire economy and the issues affecting it**. Primary focus areas are unemployment, inflation, economic growth, and monetary and fiscal policy. Macroeconomics is about the nature of economic growth, the expansion of productive capacity, and the growth of national income. It is the study of an economy as a whole. It explains broad aggregates and their interactions "top down." Macroeconomics has the following characteristics: - **Growth:** **It studies the factors which explain economic growth** such as the **increase in output per capita** of a country over a long period of time. - **Business Cycle:** **It advocates the involvement of the central bank and the government to formulate monetary and fiscal policies** to monitor the output over the business cycle. - **Unemployment:** It is measured by the unemployment rate. **It is caused by various factors like rising in wages, a shortfall in vacancies, and more.** - **Inflation and Deflation:** **Inflation corresponds to an increase in the price of a commodity, while deflation corresponds to a decrease in the price of a commodity.** These indicators are valuable to evaluate the status of the economy of a country. **Economic systems** The economic system is the **means through which society determines the answers to the basic economic problems mentioned**. Economic systems regulate the factors of production, including land, capital, labor, and physical resources. An economic system encompasses many institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community 1. **Traditional economy.** **Decisions are based on traditions and practices upheld over the years and passed on from generation to generation.** Methods are **stagnant** and therefore not progressive. Traditional societies exist in primitive and backward civilizations. Societies with traditional economies depend on agriculture, fishing, hunting, gathering, or some combination of them. They use barter instead of money. Most traditional economies operate in emerging markets and developing countries. They are often in Africa, Asia, Latin America, and the Middle East. 2. **Command economy.** **This is the authoritative system wherein decision-making is centralized in the government or a planning committee**. Decisions are imposed on the people who do not have a say in what goods are to be produced. This economy holds true in dictatorial, socialist, and communist nations. The command economy is a key feature of any communist society. Cuba, North Korea, and the former Soviet Union are examples of countries that have command economies, while China maintained a command economy for decades before transitioning to a mixed economy that features both communistic and capitalistic elements 3. **Market economy.** This is the **most democratic form of economic system**. Based on the workings of demand and supply, **decisions are made on what goods and services to produce. People's preferences are reflected** in the prices they are willing to pay in the **market** and are therefore the **basis of the producers' decisions on what goods to produce.** 4. **Mixed Economy.** A mixed economy is a system that c**ombines characteristics of** [**market,**](https://www.thebalance.com/market-economy-characteristics-examples-pros-cons-3305586) [**command**](https://www.thebalance.com/command-economy-characteristics-pros-cons-and-examples-3305585) **and** [**traditional**](https://www.thebalance.com/traditional-economy-definition-examples-pros-cons-3305587) **economies**. It benefits from the advantages of all three while suffering from few of the disadvantages. A mixed economy has three of the following characteristics of a market economy. First, **it protects private property**. **Second**, **it allows the free market and the laws of supply and demand to determine prices**. Third, **it is driven by the motivation of the self-interest of individuals.** **Applied economics vs social economics** **Applied Economics -** is the **study of economics in world situations as opposed to the theory of economics.** It is the **application of economic principles and theories to real situations** and trying to predict the outcomes. Put simply; applied economics is the study of observing how theories work in practice. The discipline may be practiced at macroeconomic or microeconomic levels. Economics is a social science because it **studies human behavior just like psychology and sociology**. Social science is, broadly speaking, the study of society and how people behave and influence the world around them. As a social science, **economics studies how individuals make choices in allocating scarce resources to satisfy their unlimited wants.** **Demand and Supply** **Demand** is the **willingness of a consumer to buy a commodity** at a given price **THE LAW OF DEMAND** when price goes up demand goes down when price goes down demand goes up **NON-PRICE DETERMINANTS OF DEMAND** 1. Income 2. Taste and Preferences 3. Consumer's Expectations 4. Prices of Related Goods 5. Number of Consumers **Supply** is the amount of a **product that is offered for sale at all possible prices in the market.** In other words, supply is the amount of goods and services available for sale at a given price in a given period. **Supply implies the ability and willingness of sellers to sell.** **FACTORS OF SUPPLY** 1. Technology 2. Cost of Production 3. Number of Sellers 4. Taxes and Subsidies **GDP and GNP** [**Gross National Product (GNP)**] is the market **value** of final products, **both sold and unsold, produced by the resources of the economy in a given period.** **FORMULA FOR GNP: Y = C + I + G + (X - M)** - **C** -- Consumption Expenditure - **I** -- Investment - **G** -- Government Expenditure - **M**-- Imports (Value of imports minus value of exports) - **Z** -- Net Income (Net income inflow from abroad minus net income outflow to foreign countries) **Exports -- Imports \\** **Gross domestic product (GDP)** is the **value** of the finished **domestic goods and services produced within a nation\'s borders. ** **Market equilibrium** When the **quantity that consumers are willing and able to buy equals the quantity that producers are willing and able to sell,** that market reaches **market equilibrium**. In equilibrium, the independent plans of buyers and sellers exactly match, and there is no incentive for change. Therefore, market forces exert no further pressure to change price or quantity. - **shortage and surplus** **Market exchange** Buyers prefer a lower price, and **sellers prefer a higher price**. Thus, buyers and sellers have different views about the price of a particular good. Markets help sort out those differences. **Markets answer the questions what to produce, how to produce it, and for whom to produce it.** **Adam smith's invisible hand** **Market prices guide resources** to their most productive uses and **channel goods to those consumers who value them the most.** Market prices transmit information about relative scarcity and provide incentives to producers and consumers. Markets also distribute earnings among resource owners. The coordination that occurs through markets takes place because of what Adam Smith called the "invisible hand" or market competition. No individual or small group coordinates market activities. Rather, it is the voluntary choices of many buyers and sellers responding only to their individual incentives. Although each individual pursues his or her own self-interest, the "invisible hand" of competition promotes the general welfare. **Role of prices** **Market prices serve as a signal to buyers and sellers about the relative scarcity of the good. A higher price encourages consumers to find substitutes** for good or even go without it. A higher price also encourages producers to allocate more resources to the production of this good and fewer resources to the production of other goods. In short, **prices help people recognize market opportunities to make better choices as consumers as producer**s. The beneficial effects of market exchange include trade between people or organizations in different parts of the country, and among people and organizations in different countries. **Market Structure** ### **Perfect Competition** #### **Monopoly** #### **Monopolistic Competition and Oligopoly** #### **Monopolistic Competition** #### **Monopolistic Competition vs. Perfect Competition** #### **What is an Oligopolistic Market or Oligopoly?**