Key Economic Concepts and Market Dynamics
Key Economic Concepts
Productivity
Productivity relates the quantity of product obtained to the number of factors used in production. It is often analyzed for different levels of one factor (e.g., labor) while keeping others constant (e.g., capital).
- Total Product: The level of production achieved for a given level of a factor.
- Average Product: The relationship between the quantity of product obtained and the amount of factor used.
- Marginal Product: The change in total production due to an increase in a factor, usually by one unit.
Cost of Production
The cost of production is the sum of the values used to produce a good or service.
- Total Cost: The sum of fixed and variable costs in a given time period.
- Variable Cost: Costs that increase or decrease as the quantity produced changes.
- Fixed Cost: Costs that are independent of production volume.
- Average Unit Cost: Costs calculated by dividing total costs by the number of units produced.
- Marginal Cost: The change in total cost that arises when the quantity produced changes by one unit. It is the increase in total cost from producing one additional unit of a particular good.
- Opportunity Cost: The cost of investing available resources in one economic opportunity at the expense of alternative investments.
Revenue and Profit
- Revenue: The result of multiplying the number of units sold by the selling price.
- Profit: The difference between total revenue and total costs.
- Break-Even Point: The amount of revenue that generates a contribution margin equal to the amount of fixed costs.
Economics: The Science of Scarcity and Choice
Economics is the science that studies how society uses available resources to produce and efficiently distribute goods and services that satisfy human needs.
Characteristics of Economics
- It is a social science, attempting to solve society’s economic problems based on assessments conducted in a social situation and predetermined objectives.
- It is the science of scarcity because while human needs are limitless, the assets that might satisfy them are insufficient.
- It is the science of choice because we have scarce resources while our needs are endless.
- The purpose of economic science is to solve the needs of human beings.
Opportunity Cost: The value of goods and services forgone to acquire others.
Mercantilism
Mercantilism was a school of thought that prevailed in Europe, defending the interests of English merchants. It suggested that the key to a country’s enrichment was international trade.
Economic System
An economic system is a set of principles, institutions, and rules by which people organize themselves economically in a given society to solve its economic problems.
Value Added
Value added is the increased value experienced by raw materials due to the interference of labor and capital goods.
Types of Capital
- Real Capital: The set of man-made elements that contribute to production.
- Financial Capital: The set of money or titles that a company uses to acquire real capital.
- Human Capital: The ability to produce, inherent in the members of a society.
Market Dynamics: Supply and Demand
A market is a set of offers of certain goods or services, accompanied by their corresponding demands.
Demand
The demand for a property is the amount of the asset that a potential buyer (plaintiff) would be willing to buy at a specified price.
Factors Affecting Demand
- Price of the Good: Generally, the higher the price of the good, the lower the quantity demanded.
- Applicant’s Income Level: Usually, there is a direct relationship; a person with greater purchasing power will demand more.
- Price of Other Related Goods: Prices of other goods often influence the demand for a particular good.
- Consumer Preferences: When a significant sector of consumers shifts its preferences towards certain goods, demand increases.
The demand curve is the graphic representation of the relationship between the price of a good and the quantity demanded, assuming that income, tastes, and other prices remain constant.
Supply
Supply is the amount of a good or service that producers or traders are willing to sell at a certain price.
Factors Affecting Supply
- Price of the Good: The higher the price of the good, the higher the quantity supplied.
- Prices of Related Goods: If the prices of related goods grow without increasing the price of the good in question, the supply of that good may fall.
- Prices of Production Factors: When the price of a productive factor increases, the supply of a good in which it is used decreases.
- State of Technology: Technological advancement provides an increased supply of goods and services at all levels.
- Business Objectives: Entrepreneurs, whose main objective is to obtain maximum profit, determine supply.
The supply curve is the graphic representation of the quantities that producers are willing to offer at various prices, assuming all other factors affecting the quantity supplied remain constant.
Equilibrium Price
The equilibrium price is the price at which the quantity supplied equals the quantity demanded.
Elasticity
Elasticity is the percentage change in quantity demanded that occurs in response to a percentage change in price.