Economics Basics: Resources, Goods, and Market Dynamics
Topics in Economic Sciences
Economy (Classical Definition)
Economics is the science that studies the optimal allocation of scarce resources among alternative uses in the production of goods and services to meet unlimited human needs.
Goods and Services
Goods
Goods are the tangible result of a production process, created to satisfy materialized human needs.
Services
Services are the intangible result of a production process, created to satisfy non-materialized human needs.
Types of Goods
Free Goods
Free goods exist in abundance, are not privately owned, and have no market price (e.g., air, sunlight).
Economic Goods (Non-Free Goods)
Economic goods are scarce, privately owned, and have a market price (e.g., clocks, cars, houses).
Non-Durable Goods
Non-durable goods disappear upon consumption (e.g., food).
Durable Goods
Durable goods do not disappear upon consumption (e.g., clocks, refrigerators).
Manufactured Goods
Manufactured goods are used in the production process and incorporated into the final product (e.g., raw materials).
Capital Goods
Capital goods are used in the production process but not incorporated into the final product (e.g., machinery, equipment, tools).
Substitute Goods
Substitute goods can be traded for one another while maintaining a level of satisfaction (e.g., pen for pencil, sandals for boots, butter for margarine).
Complementary Goods
Complementary goods are consumed together while maintaining a level of satisfaction (e.g., cake and juice).
Divisions of Economics
Positive Economics
Positive economics studies economic phenomena as they are, without making value judgments.
Normative Economics
Normative economics studies economic phenomena as they should be, using value judgments.
Descriptive Economics
Descriptive economics, a part of positive economics, describes economic phenomena without value judgments.
Economic Theory
Economic theory, a part of positive economics, uses descriptive information to formulate laws, principles, theories, and economic models.
Microeconomics
Microeconomics studies individual economic agents (consumers, producers, resource owners).
Macroeconomics
Macroeconomics studies the economy as a whole (e.g., national consumption).
Economic Policy
Economic policy, a part of normative economics, uses economic theory to promote socio-economic development and growth.
The Economic Triad
Limited resources and unlimited human needs influence the economic triad:
- What to produce
- How to produce
- For whom to produce
The first question addresses the choice of scarce commodities and their quantities. The second question concerns the technology used to minimize resource waste. The third question deals with the target audience and their needs.
Economic growth is measured by the interaction of these three elements.
Real and Monetary Flows
Real Flow (Goods and Services)
Real flow represents the movement of goods and services between households and production units.
Monetary Flow
Monetary flow represents the movement of funds between production units.
Household Units
Household units are individuals who directly or indirectly participate in the productive sector by providing scarce resources.
Production Units
Production units are companies, firms, factories, or industries that use scarce resources to offer goods and services.
Economic Theory: Microeconomics and Consumer Behavior
Consumers
Consumers are individuals who demand goods and services to satisfy their unlimited needs, aiming to maximize utility (satisfaction).
Determinants of Demand
Qd = f (P, R, G, Pbs, Pbc…etc.)
Where:
- Qd: Quantity demanded
- P: Price level of goods
- R: Consumer income level
- G: Consumer preferences
- Pbs: Price level of substitute goods
- Pbc: Price level of complementary goods
Law of Demand
Price (P) and quantity demanded (Qd) are inversely proportional. When price is the only variable (ceteris paribus), a shift in the demand curve occurs.