Resource Utilization Microeconomics PDF

MICROECONOMICS Resource utilization and Economics Review of Basic Economics Economics is a social science that deals with the efficient allocation of scarce resources to satisfy the unlimited human wants and needs. There seems to be an irony in the definition because there seems...

MICROECONOMICS Resource utilization and Economics Review of Basic Economics Economics is a social science that deals with the efficient allocation of scarce resources to satisfy the unlimited human wants and needs. There seems to be an irony in the definition because there seems to be a disparity between scarce or limited resources against unlimited human wants and needs, hence we identified that the central concept of economics is scarcity.  To address this fact, economists and non economists are eventually guided by five basic economic questions, namely: 1. What to produce? 2. How many and how much to produce? 3. How to produce? 4. For whom to produce? 5. At what price to produce?  What to produce is a question of the types of goods society desires. Will a country produce rice, coconuts, bananas? Since resources are scarce, no economy can produce every product desired by members of society? How many or how much to produce refers to the quantity of each good that will have to compose the total output. Example, if rice is decided to be produced, how much should the total output be? How to produce is a question on the technique of production and the manner of combining resources to come up with the desired output. For whom to produce refers to the market to which the producers will sell their products. It refers to how much of the wants of each consumer are to be satisfied.  Answering the final question entails determining how much the consumers are willing pay for a product and if the price is agreeable on the part of the producer. Generally, there are four economic activities that are undertaken in a cycle to address the above mentioned questions. Basic Economic Activities The first activity is known as the Production activity. This directly addresses the basic economic questions of what to produce, how many and how much to produce, and how to produce. When products have been produced, they may be classified into several types as presented by the next slide:  Types of goods Basic goods – primary and necessary items needed for man to survive. Ex. Food, Clothes, Shelter and Education. Luxury goods - items that are desired by man to have a more comfortable way of life, but are not necessary to his survival, often expensive and not easy to acquire. Ex. Mansions, High-End cars, Jewelries. Public goods - goods that are provided by the government for the benefit of its constituents. Ex. Highways, Roads and Bridges, Healthcare Free goods - Goods that are normally abundant and do not need to be paid for. Ex. Air and Water. Economic goods - Goods that are normally produced or are scarce, requiring a certain payment for their consumption. Ex. Processed Foods, Mineral water, Branded clothes,  Production can be classified into two: Labor- intensive production and capital-intensive production. Labor-intensive production requires more of the human skills and capital-intensive requires more of the machineries and other resources to produce goods and services. The second economic activity is known as Distribution. It directly addresses the question, “For whom to produce?”. It focuses on how the products will reach the ultimate consumer. Non-conventional way of transporting such as kalesa, pushcarts and the likes are still the cheapest but slowest way. The conventional way  Exchange is the third economic activity which is designed to facilitate the transfer of goods or service from the producer to the consumer. An exchange only happens when both parties agree, or when the consumer agrees to the price of the producer. The final economic activity is Consumption, where the ultimate consumer now gets to enjoy the goods or services he or she has bought. The satisfaction derived from consumption of a good or service is generally called utility. Normally, the higher the utility of a good, the higher the satisfaction a consumer gets.  Generally, there are at least five basic factors used in any production process, regardless of the types of production facility an enterprise has, This is so-called, “CELLF” of production which stand for Capital, Entrepreneurship, Land ,Labor and Forex. To sum up, below is the table showing the factors of production and their corresponding payments. Factors of Production Corresponding Payment Type of Resource Capital Interests Man-made Resource Entrepreneurship Profits Human Resource Land Rent Natural Resource Labor Salaries and Wages Human Resource Forex Investments Man-made Resource Some Economic Problems Most societies aim to use economic activities as a channel to improve the people’s standard of living within the limits of available resources. Hence, a government can restructure economic system in order to solve its short comings like:  Unemployment of labor or other resources.  Economic instability that causes highs and lows in production and investment levels;  Low levels of growth and development.  Inequality in income distribution resulting in concentration of the nation’s wealth in the hands of few.  Determination of the type of economic system to adopt to fit the country’s peculiar conditions and needs. The Functions of Economic Theory The principal functions of economics fall into two categories: (1) to explain the nature of economic activity and (2) to predict what will happen to the economy as facts change. Positive economics is supposed to be completely objective, limited to the cause-and-effect relationships of economic activity; it is therefore concerned with the way economic relationships are. It is factual and is used to describe occurrence of a phenomenon. Normative economics however, is concerned with what ought to be or what should be. This is more subjective and more judgmental. In contrast, normative economics is more predictive than descriptive in usage. Economic Models  Microeconomics makes extensive use of modelling, comparative statistics and mathematics. Economic models are composed of statements of assumptions or implications.  Among the best known economic model is that of a competitive market, or “supply and demand.” The Law of Supply and demand can be expressed verbally (logical), mathematically and graphically. Comparative Statics vs Dynamic Analysis Comparative statics focuses on the shift in equilibrium positions (statics) for an individual decision unit, a market, or an economic system. Microeconomics extensively uses comparative statics analysis. Equilibrium refers to a state where there is a balance of internal forces and no tendency for the situation to change unless outside forces intervene. To simplify, equilibrium is a state where quantity demand equals quantity supply. A system in such equilibrium may also be termed “static”. Let us say in a competitive market, supply and demand for a commodity reaches equilibrium at the price of Php20 per unit. If demand exceeds supply because of an increase in population and an effective advertising program, it is possible that price would go up to Php22 per unit. Comparative statics is applicable here because there is a shift in equilibrium brought about by an increase or shift in demand. Thus, price would go up from Php20 to Php22. An Overview of the Economy The Circular Flow of Economic Activity Within the economy, the basic activities take place through the interrelationship existing between the basic consuming unit, which is the household and the basic producing unit, which is the firm. A simplified model of this is the circular flow of economic activity. The top loop in the diagram shows the business firm supplying the household with goods and services in exchange for payments representing consumption expenditures. On the other hand, the business firm has to use of economic resources consisting of land, labor, capital and entrepreneur to produce these goods and services. The household provides the firms these resources in exchange for payments in the forms of rent, wages, salaries and profit. Type of Economic System An economic system is a mechanism in a country which deals with the production, distribution, exchange and consumption of goods and services. The economic system is composed of people, institutions, and their relationships. It is designed primarily to address the problems of economies in a country, particularly, the allocation of scarce resources. Economic systems may be classified into three types: Traditional economic system In this economic system, production decisions are made according to customs and traditions. A farmer engaged in the production of rice does exactly what his father did 20 years ago. This system, while simple and easy, does not follow for progress to be introduced in the production techniques. This is usually practiced in underdeveloped regions and in mountains where transportation and communication are practically nonexistent. Command Economies In this economic system, the basic economic problems are dictated by the government through the head of the nation or a group of men designated by the head to make decisions. The former Soviet Union and Cuba are very good examples of this economic system. Market Economic System A market economic system is one which a nation’s economic decisions are result of individual decisions by buyers and sellers in the market. The buyers represent the demand side of the market, while the sellers represent the supply side of the market. Transactions in this market occur when both buyers and sellers agree on the price of a given good or service. Although there is governmental intervention, it usually plays more of a regulatory rather than an intervening role. A market economy gives people the freedom of enterprise or the freedom to pursue business without dictates of the government. United States of America is an example of this economy.  An extreme type of this economy is known as Fascism, which only happened in Italy during the time of Benito Mussolini where people were encourage to accumulate more wealth and consume larger number of product and services apparently to bring about great economic wealth to the country.  Today, modern economies have evolved to encompass several characteristics of these three original economic systems. Isolated tribes, clans and towns even in high developed countries still follow their traditions. Market economies, although giving their constituents a very wide range of economic choices and freedom, are still giving reasonable government intervention, especially in basic goods and services-a characteristic of a Command economy. Command economies, on the other hand, have been known to give their constituents a freedom of enterprise in a limited scale. Most economies today have Mixed Economic System. Economic Systems Characteristics Production Decisions Existence of Freedom Degree of Government Country Example of Enterprise Intervention Pure Capitalism Market decides (buyers Yes Very little Early industrialization and sellers) Experiences Socialism State decides on major Limited, on non-basic Great extent China under Mao Tse and basic products and critical products Tung Communism State decides entirely None Absolute Former Soviet Union, modern day Cuba Fascism Individual and groups Yes Government Italy encourages material accumulation and consumption Mixed Economics Dynamic Interaction Yes, but with Government only Modern-day Countries between the market government imposes regulations. and the government. participation especially for basic goods