Understanding Economics: Scarcity, Resources, and Market Dynamics

Posted on Jan 8, 2025 in Economy

What is Economics About?

Economics is the study of how people use relatively scarce resources to satisfy their unlimited wants. As a social science, economics deals with people’s behavior.

The Fundamental Economic Problem: Scarcity

We don’t have enough resources to produce all the things people would like to have. This leads to scarcity.

  • Unlimited wants -> Scarcity <- Limited resources
  • Scarcity -> How to produce, what to produce, and for whom to produce

Three Basic Economic Questions

For whom, what to produce, and how to produce.

Factors of Production

  • Natural Resources (Land): “Gifts of nature,” resources not created by humans, such as mineral deposits, forests, livestock, and sunshine.
  • Capital Resources (Capital): Tools, equipment, machinery, and factories used in production, such as bulldozers, computers, and factories.
  • Human Resources (Labor): People with all their efforts, abilities, and skills, such as doctors, drivers, builders, and cashiers.
  • Entrepreneurial Resources (Entrepreneurs): Risk-takers in search of profit who combine existing resources to produce more goods and services, such as CEOs, directors, and managers.

Macroeconomics and Microeconomics

Macroeconomics is a branch of economics dealing with the performance, structure, and decision-making of an economy. Macroeconomics includes national, regional, and global economies as a whole (Fischer, Dornbusch, and John Maynard).

Microeconomics is a branch of economics dealing with the behavior of households and firms for individuals (Andrew Neel and Margaret A. Neal).

Key elements of the study of economics include description, explanation, analysis, and prediction.

Basic Economic Concepts

Economics, like any other science, has its own vocabulary.

  • Scarcity: The condition that results from society not having enough resources to produce all the things people would like to have.
  • GDP: The dollar value of all final goods, services, and structures produced within a country’s borders in a 12-month period.

Economic Terms

  • Economy = Noun
  • Economics = Subject
  • Economic = Adjective (Connected with the trade, industry, and development of wealth of a country)
  • Economical = Adjective (It would be more economical to buy)
  • Economically = Adverb
  • Economist = Noun
  • Economize = Verb

A) Scarcity is the basic economic problem all societies face.

B) We have to economize on water.

Goods, Services, and Consumers

  • Economic Product: Goods and services that are useful, relatively scarce, and transferable to others.
  • Scarce in the economic sense means not enough to satisfy all our unlimited wants (e.g., a bottle of water).
  • NOT scarce (e.g., air/oxygen, solar energy, coffee).
  • Scarce (e.g., water and petroleum).
  • Types of Economic Products:
    • Goods:
      • Consumer Goods: For final consumption (e.g., clothes, shoes, food, and cars).
      • Capital Goods: Used to produce other goods and services (e.g., cash registers, machines, laptops, and cars). All tangible items that are useful, relatively scarce, and transferable to others.
    • Services: Work that is performed for someone (e.g., security, doctors, and waitresses). Services are useful, scarce, and transferable.
  • Durable goods last three years or more.
  • Non-durable goods last less than three years when used on a regular basis.
  • Capital goods include cash registers, machines, computers, cars, printers, and phones.

Value, Utility, and Wealth

  • Value: Worth that can be expressed in dollars and cents.
  • Utility: The capacity to be useful and provide satisfaction; it is not fixed or measurable.
  • Wealth: The accumulation of products that are tangible, scarce, useful, and transferable from one person to another.

Paradox of Value:

  • Explanation: For something to have value, it must be scarce and useful.
  • Description: The situation where some necessities, such as water, have little monetary value, whereas some non-necessities, such as diamonds, have much higher value.

The Circular Flow of Economic Activity

  • Businesses: Main interest is profit.
  • Individuals: They get satisfied.
  • Product Market: Location for businesses where individuals buy and businesses sell.
  • Factor Market: Location where businesses are buyers and individuals sell.

Monetary flow goes one way, while factors of production flow the other way.

  • Market: Location or other mechanism that allows buyers and sellers to exchange a certain economic product.
  • Goods and services are limited.
  • Invisible Hand: Businesses earn a profit, and they sell goods and services to individuals, who are then satisfied. They have self-interested behavior. Individuals are satisfied with the goods and services, and businesses benefit from the profit they earn.