Fundamental Principles of Economic Activity and Theory

Posted on Mar 30, 2025 in Business Administration and Management (BAM)

Fundamental Economic Concepts

Economic Acts and Problems

The economic facts of production, distribution, and consumption occur spontaneously, often without people being fully aware of their actions or the various processes involved. However, when an individual becomes aware of their needs and how to satisfy them, they engage in an economic act.

Economic Act: Conscious actions taken by individuals to satisfy their needs. For example, families consume goods, companies produce them, and governments often play a role in distribution.

Once individuals are aware of their needs, they face an economic problem: how to satisfy them? This leads to fundamental societal questions:

  • What will be produced?
  • How will it be produced? (Using which resources?)
  • How much will be produced?
  • For whom will it be produced?

An economic activity is the sum of many economic acts.

Economic Theory

Economic Theory: Comprises hypotheses that attempt to explain aspects of economic reality. It often views economics as the science dealing with choices made under conditions of scarcity.

Branches of Economics

Microeconomics

Microeconomics studies the economic behavior of individual agents (such as consumers, businesses, workers, and investors) and markets. It focuses on the choices made by these units to achieve specific goals. Key elements include:

  • Individual economic units
  • Firms
  • Households
  • Prices
  • Demand

Macroeconomics

Macroeconomics focuses on the overall economy, studying aggregate variables like total goods and services produced (GDP), total income, employment levels, productive resources, and general price behavior. Key elements include:

  • Large aggregates
  • GDP
  • Aggregate demand
  • Investment
  • Savings
  • Inflation
  • Unemployment

Core Economic Processes

Production

Production: In economics, production means creating value. This involves generating satisfaction through products, economic goods, or services using various production methods.

Consumption

Consumption: The final stage of the economic process where a good or service provides utility to the consumer. Some goods are destroyed upon consumption, while others are transformed into different goods or services during consumption.

Factors of Production

The factors of production are the essential elements involved in the production process:

  • Land: The physical space and natural resources used in production (e.g., location, raw materials). Earns Rent.
  • Capital: Manufactured resources used in production (e.g., machinery, buildings, tools), including the organization required. *Note: Financial assets like money, bonds, and stocks are different from physical capital goods.* Earns Interest.
  • Labour: The human physical and mental effort applied to produce goods and services. Earns Wages.

The Economic Problem Revisited

Economic Problem: The fundamental issue of choosing among alternatives due to scarce resources. For a company, this often relates to the scarcity of raw materials and the need for innovation in production.

Economic Agents and Sectors

Economic Agents

The main economic agents are typically identified as:

  • Households (Families)
  • Firms (Businesses)
  • Public Sector (Government)

Economic Sectors

Economic activities are often grouped into sectors:

  • Primary Sector: Extraction of raw materials (e.g., agriculture, mining, fishing, ranching).
  • Secondary Sector: Transformation of raw materials into finished goods (manufacturing, construction).
  • Tertiary Sector: Provision of services (e.g., retail, finance, education, healthcare).

Price and Value

Price: The monetary expression of a good’s or service’s value; the amount of money exchanged for it.

Value to Price Conversion: This conversion occurs through the exchange process. Historically, a specific commodity emerged as a universal equivalent (money), allowing the value of other commodities to be expressed as a price.

Market Structures

Imperfect Markets

Imperfect Markets: Market structures where conditions for perfect competition are not met. Examples include:

  • Monopoly
  • Oligopoly
  • Monopolistic Competition