Economics Basics: Understanding Markets and Production

Posted on Nov 13, 2024 in Economy

Item 1: Introduction to Economics

The Economy

The economy involves utilizing scarce resources and leveraging scientific knowledge to satisfy human needs. It’s closely related to scarcity, which arises from the limited availability of resources compared to unlimited human needs.

Characteristics of Economic Scarcity

  1. Affects everyone
  2. Is relative: Scarcity exists when available resources are insufficient to meet existing needs.

Opportunity Cost

The value of what’s forgone when making a decision. For example, if a person with €10 can choose between coffee or a movie, the opportunity cost of choosing the movie is the coffee.

Needs

A desire to satisfy something.

  1. Primary needs: Essential for survival (food, shelter).
  2. Secondary needs: Determined by factors like income level (entertainment, travel).

Goods and Services

Satisfy material or immaterial needs.

Classification of Goods

  1. Degree of scarcity:
    1. Free goods: Unlimited and available in sufficient quantity.
    2. Economic goods: Scarce and priced.
  2. By function:
    1. Consumable goods: Cars, food.
    2. Productive goods: Used to produce other goods, like machinery.
  3. According to their degree of transformation:
    1. Intermediate goods: Transformed to produce other goods (wheat into flour).
    2. Final goods: Ready for consumption.
  4. Basis for its ownership:
    1. Private goods: Owned by individuals.
    2. Public goods: Roads, parks.

Economic Activity

All activities that satisfy needs, involving decision-making and opportunity cost.

  • Consumption: Families decide how to allocate income based on their needs and preferences.
  • Production: Companies decide what to produce and how to utilize resources efficiently to maximize profit.
  • Distribution: Channels used to get products to consumers (direct or indirect).

Factors of Production

Basic elements used in production and distribution.

  1. Resources: Natural resources like oil.
  2. Labor: Physical or intellectual effort involved in production (engineers, workers).
  3. Capital:
    • Financial: Money.
    • Physical: Machinery, buildings.
    • Intangible: Patents, trademarks.

Economic Agents

  1. Families: Determine their needs and consume goods and services.
  2. Businesses: Produce and distribute goods and services in exchange for profit.
  3. Public Sector: Government entities aiming to achieve social welfare.

Branches of Economics

  • Microeconomics: Studies individual economic agents and their interactions.
  • Macroeconomics: Studies the economy as a whole.

Item 2: The Production Possibilities Frontier (PPF)

A country’s production capacity depends on available resources, technology, worker training, and organization.

Technology

How to combine factors of production to obtain goods and services.

Production Possibility Frontier (PPF)

The maximum amount of goods and services a society can produce with given resources and technology.

Economic Efficiency

Optimal utilization of resources and technology to minimize costs.

Economic Growth

Increase in the value of goods and services produced over time.

Ways to Achieve Economic Growth

  1. Increase in production factors: More resources or improved productivity.
  2. Improved productivity: Producing more output with the same inputs.

Relationship with Other Sciences

Economics is related to philosophy, history, law, technology, geography, sociology, psychology, statistics, and mathematics.

Divisions of Economics

  1. Purpose of economic knowledge:
    1. Positive economics: Analyzes causes and consequences of economic phenomena.
    2. Normative economics: Makes recommendations for economic policy.
  2. Object of study:
    1. Public finance: Studies government finances.
    2. Business economics: Studies the economics of firms.
    3. International economics: Studies economic relations between countries.
    4. National economy: Studies the economy of a single country.
  3. Modality of knowledge:
    1. Economic theory.
    2. Economic history.
    3. Economic structure.

Economic Systems

How a society organizes itself to meet its needs with scarce resources.

Key Questions of Economic Systems

  1. What to produce and in what quantity?
  2. How to produce and distribute goods and services?
  3. For whom to produce?

Types of Economic Systems

  1. Capitalist system:
    • Advantages: Consumer sovereignty, efficient resource allocation.
    • Disadvantages: Cyclical instability, potential for market failures, income inequality.
  2. Planned system:
    • Advantages: Meeting basic needs, potential for full employment.
    • Disadvantages: Planning errors, lack of incentives, bureaucracy.
  3. Mixed economy:
    • Advantages: Combines market efficiency with government intervention to address market failures and social welfare.
    • Disadvantages: Potential for government inefficiency, challenges in balancing market and government roles.

Item 3: Economic Operators

Economic Operators

  1. Families: Consumers who decide what goods and services to consume.
  2. Businesses: Make decisions about production and distribution.
  3. Public Sector: Government entities aiming to maximize social welfare.

Utility

The benefit or satisfaction derived from consuming a good or service.

The Consumer or Family

Make rational consumption decisions based on:

  1. Choice: Selecting among alternatives to best meet their needs.
  2. Income level: Purchasing power constrained by budget.

Sources of Income

  • Wages
  • Rent
  • Interest
  • Profits

Types of Families

  • Entrepreneurs: Involved in production and consumption.
  • Workers: Employed for wages.
  • Rentiers: Receive income from capital.
  • Strict consumers: Only consume, do not participate in production (students, retirees).

Businesses

Make rational decisions about production and distribution, aiming to:

  1. Maximize profit: Increase revenue and reduce costs.
  2. Stabilize and grow: Build customer loyalty and expand market share.
  3. Create jobs and wealth: Hire workers and support local businesses.
  4. Respect the environment: Minimize negative environmental impact.

The Public Sector

Includes government entities at various levels, aiming to maximize social welfare through:

  • Taxes: Fund public expenditure.
  • Expenditure: Provide goods and services like education, healthcare, and infrastructure.
  • Institutional and legal framework: Establish rules and regulations for the market.

Item 4: Production and Distribution

Production

The process of creating goods and services by combining factors of production.

Perspectives on Production

  1. Economic perspective: Meeting needs by creating goods and services.
  2. Functionality-utility perspective: Adding value to things by making them more useful.
  3. Technical perspective: Combining resources and technology to create output.

Production Efficiency

  1. Technical efficiency: Using the fewest possible inputs to produce the maximum output.
  2. Economic efficiency: Choosing the most cost-effective technology.

Distribution

Ensuring that goods and services reach consumers at the right place and time.

Distribution Channels

  1. Direct channel: Producer sells directly to consumers.
  2. Indirect channel: Intermediaries (wholesalers, retailers) are involved.

Other Forms of Distribution

  1. Franchising
  2. Teleshopping
  3. Online sales

Types of Businesses

Classified by:

  1. Activity:
    1. Primary sector: Natural resource extraction (agriculture, mining).
    2. Secondary sector: Manufacturing and construction.
    3. Tertiary sector: Services (trade, finance, education).
  2. Ownership:
    1. Private enterprises
    2. Public enterprises
    3. Joint ventures
  3. Legal structure:
    1. Sole proprietorships
    2. Partnerships
    3. Corporations

Elements of a Company

  1. Human resources: Employees
  2. Capital goods:
    1. Fixed assets: Long-lasting assets (buildings, machinery)
    2. Current assets: Short-term assets (inventory, cash)
  3. Organization: Structure and coordination of activities
  4. Environment: External factors that influence the company (economic conditions, competition)

Item 5: Market and Demand

Market

A set of activities where buyers and sellers interact to exchange goods and services.

Demand

The quantity of a good that consumers are willing and able to buy at a given price.

Factors that Determine Demand

  1. Price of the good: Inverse relationship between price and quantity demanded.
  2. Price of related goods:
    • Complementary goods: Consumed together (cars and gasoline)
    • Substitute goods: Can replace each other (coffee and tea)
  3. Disposable income: Purchasing power affects demand.
  4. Consumer preferences and tastes: Influence demand regardless of price or income.

Supply

The quantity of a good that producers are willing and able to sell at a given price.

Factors that Determine Supply

  1. Price of the good: Direct relationship between price and quantity supplied.
  2. Costs of production: Higher costs reduce supply.
  3. Business goals: Profit maximization and market share influence supply decisions.

Market Equilibrium

The point where the quantity demanded equals the quantity supplied.

Changes in Market Conditions

: 1-increasing demand: an increase in the number of lawsuits causes displacement of the demand curve to right. / substitute goods rise / fall in complementary goods / increase in disposable income / change in preferences consumidores.2. Decline in demand: a decrease in the quantity demanded implies a shift to izquierda. / down proxy assets / raise the price of complementary goods / shift in consumer preferences, / decrease in disposable income. Elasticity because of the application: measuring the sensitivity of quantity demanded to the change in the price of the goods and the elasticity is represented by the so-called dende sector and the percentage amount called the percentage change in price.