Basic Economic Principles
Chapter One
Basic Economic Principles
KEY IDEAS YOU NEED TO KNOW:
Voluntary exchange
Markets
Production and distribution of goods and services
Scarcity
Opportunity costs
Productive resources
Trade-offs
Marginal costs
Basic economic choices
Economics: Is a science that studies the production, distribution, and consumption of goods and services.
Most of you learned about economics when you were very young, although perfecting this knowledge has not taken place and will not occur for most people until you get much older. An example: At a very early age you learned that there were many things you wanted, but you could not get them all. There was a gap between what you wanted and what you could have.
In economics three basic ideas that have to be understood are:
1. Wants - Simply the desires of citizens. Wants are different from needs as we will see below. Wants are a means of expressing a perceived need. Wants are broader than needs.
2. Needs - These are basic requirements for survival like food and water and shelter. In recent years we have seen a perceived shift of certain items from wants to needs. Telephone service, to many, is a need. I would argue, however, that they are wrong.
3. Scarcity - the fundamental economic problem facing ALL societies. Essentially it is how to satisfy unlimited wants with limited resources. This is the issue that plagues all government and peoples. How do we conquer the issue of scarcity? Many people have thought they had the answer but the issue of scarcity still exists.
Scarcity can result from several conditions:
· Poor distribution of resources.
· Personnel perspective
· Rapid increase in demand
A society can deal with the problem of unlimited wants and limited resources in four ways:
People can do without the things they want.
People can create more resources.
People can produce more by making better use of the resources they already have.
People can redistribute goods and services so that everyone has enough-that is, no one has too much and no one has too little.
Factors of Production/Resources - these are those elements that a nations has at its disposal to deal with the issue of scarcity. How efficiently these are used determines the measure of success a nation has. They are
· Natural Resources - land, water, etc.
· Capital - investment monies.
· Human - the work force (labor); size, education, quality, work ethic.
· Management - those who have the basic understanding to run businesses.
· Entrepreneurs - inventive and risk taking spirit. This is a rather new addition to a traditional list.
The "Three Basic Economic Questions" - these are the questions all nations must ask when dealing with scarcity and efficiently allocating their resources. Our economy results from our economic decisions. In fact Economy is defined as the system that results from choices we make as consumers, workers, business owners or managers, and government officials. Below are how the questions are categorized:
· What to produce?
· How to produce?
· For whom to produce?
Opportunity Cost - the cost of an economic decision. The classic example is "guns or butter." What should a nation produce; butter, a need, or guns, a want? What is the cost of either decision? If we choose the guns the cost is the butter. If we choose butter, the cost is the guns. Nations must always deal with the questions faced by opportunity cost. It is a matter of choices. Resources are limited thus we cannot meet every need or want.
Free Products: Air, sunshine are and other items so plentiful no one could own them.
Economists are interested in "economic products" - goods and services that are useful, relatively scarce and transferable.
Good: tangible commodity. These are bought, sold, traded and produced.
Consumer Goods: Goods that are intended for final use by the consumer.
Capital Goods: Items used in the creation of other goods. factory machinery, trucks, etc.
Durable Goods: Any good that lasts more than three years when used on a regular basis.
Non Durable Goods: Any item that lasts less than 3 years when used on a regular basis.
Services: Work that is performed for someone. Service cannot be touched or felt.
Consumers: people who use these goods and services.
Conspicuous Consumption: Use of a good or service to impress others.
Value: An assignment of worth. The assignment is usually based upon the utility (usefulness) or scarcity of the item (supply and demand).
Utility: capacity to be useful.
Paradox of value: assignment of the highest value to those things we need the least, like water and the highest things we often don't need at all like diamonds. Why do we do this? Good question. I do not have an answer.
Wealth: the sum collection of those economic products that are tangible, scarce and useful.
Productivity - the ability to produce vast amounts of goods (economic products) in an efficient manner. The American caplets economy is productive because:
· We use our resource efficiently.
· We specialize to increase efficiency and productivity.
· We invest in Human Capital (our labor pool)
Consumer and producers meet each other, either directly or indirectly, in a market. A market is whenever and wherever people voluntarily make exchanges with one another. Today the telephone is becoming one of the most widely used markets in the world. We in the US live in what is called a market economy, although in reality a true market economy does not exist. Instead we live in a mixed economy. This is because we use markets (voluntary exchange) as a primary means of organizing and coordinating production. In the US we rely on markets to make the basic what, how, and who choices. Thus our economic system is often called a market or free enterprise economy.
When people make a choice between two possible uses of their resources, they are making a trade-off between them. Every choice involves benefits and costs, but economists focus on marginal benefits and marginal costs. Marginal simply means the extra or additional costs or benefits of a decision. Supermarkets are faced with this problem constantly. They can stock as much or as little as they want. When does stocking too many kinds of soup take place? Fast food restaurants as well combat this situation. How many different types of pizzas? Thick, thin, regular, of stuff crust varieties? 10, 15, or20 different toppings? Soft drinks? How many different varieties?