Scarcity and Economic Activity: Understanding Key Concepts
Scarcity and Economic Activity
The economic intent resolves distinct problems:
- To consume or purchase.
- Unemployment.
- Government budgets.
Governments are distinct.
Scarcity
Scarcity is when needs exceed available resources, depending on time, intelligence, etc. Scarcity is relative. For example: a state budget.
Economic Activity
Economic activity targets humans, satisfying needs with scarce resources and maximum use of media. How needs are satisfied by goods is the core of the economy. It implies:
- Production: Obtaining goods.
- Consumption: Using goods.
- Distribution: Bringing goods to the final consumer.
People involved are producers and consumers.
Economics
Economics is the science that studies economic activity, or how to use limited resources to satisfy unlimited needs, assigning possible alternative uses. Therefore, it considers what is produced, how it is produced, technology, resources, who it is for, and if distribution and production are efficient.
Economic Focus
- Microeconomics: Deals with the agents involved in economic activity individually (families, businesses, the state) and the relationships between them.
- Macroeconomics: Studies economic activity as a whole, dealing with topics such as economic growth, unemployment, and inflation.
Choice and Opportunity Cost
We must choose among scarce alternatives:
- Families: How to spend their salaries.
- Companies: How to invest.
- State: How to spend the budget optimally.
Opportunity cost: The value of the best available option chosen, that which we have resigned. Social cost is the repercussion that our decisions have on society.
Classification of Needs
A need is the feeling of a deficiency together with the desire to satisfy it.
Types of Needs
- Individual: Natural or social.
- Collective: Public transport.
- According to their nature:
- Primary
- Secondary
They depend on time and geographic zones.
- According to their function:
- Physiological
- Psychological
- According to their economic value:
- Economic needs
- Non-economic needs
Decision Making
Decision-making is the process by which a choice is made between alternatives or ways to resolve different situations in life. These can be presented in different contexts: at work, family, relationships, etc.
Goods and Income
- Superior goods: Demand increases with higher income.
- Inferior goods: Demand decreases with higher income. They are substituted by another good when the price increases.
- Luxury goods: When income increases, demand increases.
Resource Allocation
To satisfy needs with goods, we perform economic activities. For this, we need productive factors. The intervening resources, persons, or entities are called economic agents.
Production Factors
- Land: Nature. Income is rent.
- Work: Human physical and intellectual activity. Income is salary.
- Capital: Human contribution to favor production, such as machinery. Income is interest.
Economic Agents and Decision Makers
People who perform economic activities are economic agents.
- Families: Buy and offer goods.
- Administration: Buy factors of production, sell goods.
- State: Charges taxes, redistributes income.
Economic Systems
An economic system is a set of elements related to each other with the objective of satisfying human needs as efficiently as possible, employing scarce material resources.
Elements
- Combinations of persons and institutions (economic agents).
- Set of procedures and norms for organizing society.
Functions
They resolve three basic questions:
- What to produce?
- How to produce?
- For whom to produce?
What to produce: The scarcity of resources poses the first function: what and how much to produce. Because we are in a society, we must determine:
- Economic needs to satisfy.
- Preference among them.
How: We are going to realize the production of goods. It depends on:
- Technology.
- Quantity of available resources.
- Economic, political, and social ideologies.
For whom: This is given by the question of what to produce and gives us the distribution of production and, therefore, income distribution.
- Who will consume the goods?
- How is national production distributed?
- Will income differences be equalized?
Economic Progress
Economic progress is the advancement of a society in which individuals have access to greater quantities of goods, which implies greater well-being.
Conditions for Economic Progress
- Population growth, age structure, education, and values.
- Increase in the quality and quantity of available resources and techniques.
- Liberal and organized company.
Economic Systems Must Respond to Progress With Respect to
- Sacrificing current consumption for future well-being.
- Forgoing efficiency for technology that respects the environment.
Types of Economic Systems
- Economic problems are common in humanity.
- Unlike the state, the way to resolve problems differs.
Two Questions to Consider
- Who is responsible for the economic system and its functions?
- How are economic units coordinated?
Throughout History
First stage of primitive economy:
- Production to cover the needs of the product category and the family.
- Custom resolved the three basic questions.
With time:
- Increasing specialization.
- Production multiplied, leading to increased productivity.
This leads to:
- Production goes to the market.
- Economic systems are classified according to intervention in the economy.
Tendencies
- Capitalist system or market economy: The state’s statement is minimal.
- Communist economic system or central direction: Important state intervention.
- Mixed economy system: Intermediate between the two previous ones.
Economic Transitions
An economic transition is a step from one economic system to another because they do not remain stable and change over time. For example, communist countries change their actions towards a mixed system, such as Russia and China.
Market Economy or Capitalism
Characteristics
- What to produce: What produces benefits.
- How to produce: With minimum cost criteria.
- For whom to produce: For those who can afford it.
Advantages
- Flexibility.
- Economic growth.
- Great importance to consumers.
Disadvantages
- Difficult to achieve economic security and objectives.
- Generates serious income differences.
- May violate people’s rights.
Decisions: Taken by the market.
Economic Liberalism
Economic liberalism refers to the economic theories of the mid-17th and early 19th centuries, defended by Adam Smith. It speaks of:
- The invisible hand.
- Specialization in work.
In the 20th century, the theory of neoliberalism defends:
- Free market.
- Capitalism.
Centrally Planned Economy or Communism
Characteristics
- What to produce: What the state decides.
- How to produce: To keep to state plans.
- For whom to produce: In principle, for everyone; in practice, for the state.
Advantages: Full employment of resources is pursued. The population is provided with basic needs.
Disadvantages
- Disregard for real needs.
- High economic inefficiency and waste of resources.
- Lack of technical innovation.
- Consumers are not taken into account.
Decisions: Taken by the state.
Economic Doctrine: Marxism
Marxism is based on the ideas of Karl Marx. In the second half of the 19th century, the idea of capitalism was a class dislocation between:
- Bourgeoisie.
- Proletariat.
Solution: A revolution that establishes a communist society where the state monitors everything and establishes an egalitarian society.
Mixed Economy
Characteristics
- What to produce: Goods decided by the state.
- How to produce: Minimum cost criteria, state intervention in some sectors.
- For whom to produce: For those who can pay, and some services for everyone.
Advantages
Takes advantages of both systems.
Disadvantages
Minimizes disadvantages.
Decisions: State and market.
John Maynard Keynes: Keynesianism
In the first half of the 20th century, Keynes considered that state intervention was necessary, as it would be the source of demand stimulus and increase the standard of living.