Understanding Basic Economic Concepts and Systems
Key Concepts in Economics
Economic Scarcity:
- Scarcity is the sensation of a lack of resources in relation to the needs of individuals.
Economics Definition:
- Economics is the science that studies how to allocate scarce resources to satisfy human needs.
Opportunity Cost:
- Opportunity cost is the value (whether measured in money or not) of what you renounce when making a decision.
Capital Goods:
- Capital goods are those used to produce other goods.
Economic Activities:
- Economic activities include consumption, production, and distribution.
Factors of Production:
- Factors of production are the basic elements used in the production and distribution of goods and services.
Microeconomics and Macroeconomics:
- Microeconomics is the part of economics that looks at individual agents and the relationships between them. Macroeconomics deals with the economy as a whole.
Economic Models:
- An economic model is a simplified graphical representation that illustrates or predicts the behavior of a much more complex reality.
Technology:
- Technology is how the various factors of production are combined to obtain a good or service.
Production Possibilities Frontier (PPF):
- The PPF reflects the maximum quantities of goods and services a society can produce in a given period, using its factors of production and technological knowledge.
Economic Growth:
- Economic growth is the increase in the value of the production of goods and services in a society over a specific period.
Productivity:
- Productivity is the relationship between the number of goods and services produced and the factors employed in their production.
Economic Organization and Systems
Economic Organization:
- Economic organization determines how to answer any economic question:
- What to produce and in what quantity?
- How to produce and distribute such goods and services?
- For whom to produce?
Economic System:
- An economic system is the way a society organizes itself to satisfy its needs with scarce resources, while establishing formulas for distribution among the population.
Main Economic Systems:
- The main economic systems are the market economy, the centrally planned economy, and the mixed economy.
Rent:
- Rent represents the value or price paid for the use of a productive resource over a specific period.
Business Objectives:
- Business objectives include maximizing profit, stabilizing and growing, generating employment and wealth in the area of influence, and respecting the environment.
Workers:
- Workers are the human element under the direction of the employer. They participate in the production process, providing work in exchange for a price called a salary.
Economic Rationality:
- Economic rationality consists of choosing, among the available possibilities, the one that seeks the most profit or well-being.
Taxes:
- Taxes are amounts paid by individuals and companies to contribute to the support of public spending.
The Circular Flow of Income
Circular Flow of Income:
- The circular flow of income is the set of relationships of economic agents characterized by:
- Payments of rents by companies to families in exchange for work and other productive factors.
- Payments of prices by families to companies in exchange for goods and services produced by them.
The Great Virtue of Exchange:
- The great virtue of exchange is that it allows for the division of labor, thus, the specialization of individuals in more concrete tasks, and this translates into greater efficiency.
Research and Development (R&D):
- Research and Development (R&D) is the true engine of the evolution of technologies, which results in the use of new production processes and the creation of new products.
Economic Efficiency:
- Economic efficiency consists of selecting the cheapest of the technically efficient technologies or, in any case, of the available ones.
Functional-Utilitarian Perspective:
- From a practical perspective, a production process adds value to things, making them more useful than they were before being subjected to said process.
Technically Efficient Technology:
- Technology A is technically more efficient than technology B when it uses a smaller number of factors of production to obtain the highest possible production.