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Economics

The document discusses the basic economic problem of scarcity, highlighting the distinction between economic goods and free goods. It outlines the factors of production, including land and labor, and explains different economic systems and their approaches to resource allocation. Additionally, it covers the concepts of demand and supply, their relationship with price, and the conditions that can cause shifts in demand and supply curves.

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5 views

Economics

The document discusses the basic economic problem of scarcity, highlighting the distinction between economic goods and free goods. It outlines the factors of production, including land and labor, and explains different economic systems and their approaches to resource allocation. Additionally, it covers the concepts of demand and supply, their relationship with price, and the conditions that can cause shifts in demand and supply curves.

Uploaded by

kingvv2kar5
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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ECONOMICS

SECTION 1: THE BASIC ECONOMIC PROBLEM


I. The nature of the economic problem
1. The economic problem: unlimited wants exceeding finite resources
=> Scarcity: a situation where there’s not enough resources to satisfy everyone’s wants
2. Economic goods and free goods
+) Economic goods: a product that requires resources to produce and has an opportunity cost
(limited in supply)
+) Free goods: a product that does not require resources to produce and does not have any
opportunity costs (quite unlimited in supply: sunlight, wind…)

II. Factors of production


1. Land: cover any natural resources used in production
+) Mobility of land
> occupationally mobile
> geographically immobile

+) Quantity and quality of land


> quantity: example – soil erosion can decrease the supply of land, while a certain amount of
land reclamation increases the supply of land.
> quality: example – stopping firms from polluting rivers can increase the fish’s health.

2. Labour: the human effort used in the production of goods or services


- Mobility of labour
+)
I. Different economic system
1. The 3 questions: What to produce, How to produce, and Whom to produce for.
=> These are the questions that producers have to answer, in order to allocate the resources, because
of the basic economic problem.

2. Different types of system:


+) Planned: the government, ensures that everyone has a job, for everyone
+) Mixed: demand & supply and the government, in the most efficient way but also focus on welfare
+) Market: demand & supply (price mechanism), most efficiently and profitably as possible

3. Role of the price mechanism: allocation and rationing functions


+) Allocation
> signaling: prices provide information to consumers and producers about where the resources are
wanted and where they’re not
> incentives: when the price of a product rises, it incentivizes producers to reallocate the resources
from a less profitable market to a new market with a higher demand, to maximize their profit. When
prices fall, firms are incentivized to reallocate their resources to a new market.
+) Rationing
> prices scare resources. When resources get scarer, the price increases, and only people who can
afford goods can receive them. And when there’s a surplus, price decreases to make it affordable for
everyone.

4. Market equilibrium and disequilibrium


+) Equilibrium occurs when the quantity supplied is equal to the quantity demanded
> at this price, the price is called the clearing price
+) Disequilibrium occurs when there’s an excess in the quantity demanded and quantity supplied
> surplus: quantity supplied exceeds the quantity demanded
> shortage: quantity demanded exceeds the quantity supplied

II. Demand: the ability and willingness to buy a product


1. Demand and price: inversely related
- This happens because as the price for a product falls, it is expected to increase the quantity
demanded of a product, called an extension. Because, as the price gets lower, more consumers are
willing and able to purchase the product

2. The effect of change in the product’s price: movement along the demand curve
- Prices increase: leads to a contraction in demand (falls in the quantity demanded)
- Prices decrease: leads to an extension in demand (rise in the quantity demanded)

3. Conditions of demand: factors that cause the demand to change irrespective of the price level.
- Changes in these conditions cause the demand curve to shift
+) Conditions
> changes in real income: directly related
> changes in fashion: directly related
> advertising: directly related
> changes in substitute good’s price (direct) & complementary good’s price (inverse)
> population distribution: directly related

III. Supply: the ability and willingness of firms to sell a product.


1. Supply and price: directly related
- This happens because a rise in a product’s price will rises the quantity supplied by firms, called an
extension in supply. Since firms are more willing to supply the product, they are more likely to earn a
higher profit.

2. The effect of change in the product’s price: movement along the supply curve
- Prices increase: leads to an extension in supply (rise in the quantity supplied)
- Prices decrease: leads to a contraction in supply (fall in the quantity supplied)

3. Conditions of supply: the conditions


- Change in the supply conditions causes the supply to shift

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