Basic Economic Ideas

In this world of ours we face lots of problems; unemployment, scarcity of water,

labour and many other useful resources but all this comes down to one single

cause. Unlimited wants and limited resources to satisfy them which is also

referred to as scarcity and hence we have to make a choice. And to fulfill each

demand government, society and businesses have to go through three

fundamental questions.

What to produce: Since we can`t produce everything we desire to, we have to

make a decision on what to produce and in what quantities to produce for

example a business can either produce 100 blue boxes or 100 red boxes and not

both due to limited resources.

How to produce: Since resources are scare the economy needs to get the

maximum out of the raw materials and reduce cost through technological

advances, in high tech machinery which are able to produce more with less

wastage and at a faster rate. Another good example is the agricultural industry

where crops are genetically modified to generate high yields along with the use of

fertilizers but ignoring the long term health risks and devastation to the

environment leaving the soils infertile.

For whom to produce: Deciding your target consumer group will be the final task

and has to be done with precision because in any economy there are 3 types of

classes the rich , middle class and poor who leave below the poverty line and to

balance this equation government set different rates of taxes on each good

designed for a different class e.g. there is likely to be a higher tax rate on a luxury

good so as to distribute income evenly and the benefit also goes to the needy

meanwhile a very lower rate of tax is set on education and food because it’s

essential for everybody most likely for the middle and poor.

Limited Resources

Land: Land is referred to as the gift of God given to us to be used for production it

doesn`t only include the bare land but also rivers, lakes and the climate above us

plus the diverse minerals.

Labour: This includes the human population eligible to work and ready to work

i.e. people who choose to work.

Capital: Capital refers to both investment money and fixed machinery, which are

essential for the running of the business. E.g. farmer has a tractor as his capital

and an oil refinery would have its oil refineries and pipe lines as its capital.

Enterprise/ Entrepreneur: They are two meanings, firstly it refers to an enterprise

organizes the other three factors of productions and secondly it involves taking

risks like every other business does meanwhile entrepreneur is the one who

undertakes the responsibility on running the business and the post are more

complex on the type of organization.

Unlimited Wants

Wants are the essential things we need in our daily lives such as food, shelter and

clothes, in short the things one can`t live without or could ignore but there are

also those wants which people have that signify their standard of living like having

a car, going for a holiday, movies or what you would consider as a luxury but a

need to some which is due to scale of preference and is influenced due to certain

circumstances like the way they were brought up, level of addiction to a certain

item, likes of one and experiences. When you compare the wants of one person

to another including the factor that wants are ever changing and expanding as we

grow up you will observe vast differences. And due to the factors enhancing our

wants it comes back to the economic problem and all these goods cost us in terms

of real money due to scarcity of each commodity due to limited resources unlike

free goods which don`t have a cost but quite a few, say wild fruits, air and

sunshine.

Specialization and Exchange

Economies, businesses and individuals want to produce the most of a certain

product at the best quality and this lead to a new revolution of the concept of

specialization where each individual, firm and economy concentrate on producing

a certain service and good which they are best at.

Individuals: looking at this at an individual level is easy conceptual learning like in

a carpenter`s workshop each person specializes on what he`s best at, one cuts the

timber, the other does the nailing and third one does the polishing because each

one does their own job with perfection and pace which leads to efficient work

and reduced wastage though it possesses a very negative drawback in which the

absence of one employee can lead to a halt in production.

Economies and business: Just as we looked at the way individuals prospered

through specialization so did the economies and businesses due to development.

Economies produced what they best did and since they obtained surpluses they

exchanged them for commodities they didn`t produce and the other economies

were having a surplus of. But with the technical improvements in the countries as

they develop are seen dramatically so each individual needs to be flexible and

multi-tasking to move between occupational opportunities and they may be a

time that their experience won`t be of any use and looking at economical level

there can be a sudden change in demand and leading to unemployment.

Division of labour

With huge progress comes effective production and hence new ways are adapted

through which a pin production company was able to increase its production

capacity from mare 12 dozen pins per worker to 5000 pins per worker. Division of

labour is where the production line is broken into parts, each consisting groups of

workers who do a certain work most efficiently e.g. one packs pins faster than the

rest and placed in the packaging lane.

Choice and Opportunity cost

Due to the basic economic problem of unlimited wants and limited resources to

fulfill them we need to decide on what to buy and what to let go. Say Every

month you get a pocket money of 500$ and you`ve got a plan to either throw a

party or buy 3 phones, in case you buy 3 phones then the party is the opportunity

cost and if you throw a party your opportunity cost are the 3 phones. So basically

due to scarce resources (money) one can`t enjoy the benefits of both.

Production possibility curve

The amount of goods an economy is able to produce is determined by the

resources it has and the technical advantages through better equipment and

machineries and these factors determine the production capability. An example is

shown in the table below between military goods and consumer goods.

In economics diagrams make a hell lot of a difference and one can earn more

marks through using them and the diagram that represents the production

possibilities is referred to as Production possibility curve (PPC), production

possibility boundary (PPB) and production possibility frontier (PPF).

This is a diagram illustrating the information given in the table above showing the

amount of each type of good the economy can produce with existing resources. A

show that it can produce 10000 military goods and 0 consumer goods with

existing resources while D shows that 20000 consumer goods could be produced

and 0 existing resources. Y shows a little bit modest illustration where resources

are tried to balance to produce both goods hitting an equilibrium point but that’s

practically impossible. That’s not all but the diagram also illustrate the real cost of

unemployed resources for example point X illustrates that approximately 4000

military goods are produced and 2000 consumer goods and the economy is

capable of increasing production to point B where it is able to produce more

military goods with no change in the production of consumer goods. Point C

illustrates an increase in production of consumer goods and no change in military

goods. Point Y represents the most efficient production of both goods where

resources are utilized the most. As seen above all the transformations of

resources illustrated in form of goods involve a sacrifice of the production of the

other good so resources are allocated (reallocation of resources) hence involving

opportunity cost and such a process consumes a lot of time for example labour

has to be trained again to do a certain task and for reallocation of resources to

take place factors should be mobile.

The table is represented in form of a diaram below.

The basic concept of the diagram and table are to help us understand the cost of

reallocation of resources done for production of the opposite good to take place.

In this case we take point P where 660 agricultural goods are produced and 100

manufactured goods, but when the government takes a step to increase

production of manufactured goods by 100 more, then the cost is 60 units of land

or farmer subsidy and cost to each consumer is 0.6 units of an agricultural good

and again if the government decides to make a change again from R to S that

means that each the cost to each consumer of an agricultural good is 2 when 200

agricultural goods are forgone in favor of manufactured good.

Shifts in production possibility curves.

PPC curves illustrate that all resources in an economy are fixed which is

impractical because there can be an advance in technology and labour as a result

of a flexible and multi-tasking work force. However in some other economies you

may see the existing resources drop in quantity and quality, like water scarcity

caused due to lack of enough rain and soil infertility affecting crop harvest due to

factors causing soil deterioration.

In the above diagram, A shows a growth in the quantity and quality of resources

mainly due to technological advances in the manufacturing sector and new

genetically modified plant seeds which are much better and drought resistant. An

example of change shown in diagram A is likely to be seen in a developing county

where while looking at diagram B you can clearly see that there is an increase in

resources which assist in more production of agricultural goods but due to lack of

technological advances in the manufacturing sectors there is no change in the

quantity and quality of resources. But it could also mean a decrease in the

production of manufactured goods resulted by the actions taken by government

in order to reduce carbon emissions which lead to closure of firms and ultimately

a reduction in manufactured products.

Making use of production possibility curves

PPCs guide an economy on their capabilities and limits of production based on

existing quantities and qualities of resources and it becomes easier to track

progress of a certain product through which the government gets an idea when to

withdraw resources from e.g. military goods and when to deposit.

One of the essential good needed for an economy to develop is a capital good,

but also consumer goods are necessary to feed and provide essential services to

their population and that’s the challenge faced. As you interpret the diagram

below point A shows the number of capital goods wearing out per year and

government has to coup up otherwise the capital stock goes down, production of

other goods such as consumer also decline ultimately causing the curve to shift

left.

Economic structure

Economic structure refers to the different types of sectors that make up an

economy e.g. primary sector, secondary sector and tertiary sector and also used

to measure the size of an economy in terms of quantity and value of output.

Primary sector: This sector basically includes output of goods such as agricultural

products, mined products like gold and timber. It is the principle employer in

under developed or developing countries.

Secondary sector: Firms which process raw materials obtained from the primary

sector and convert them into finished goods later bought by consumers. You’re

more likely to see such a sector in developing or developed countries. Examples

of products include cars, furniture, electronic products and many others.

Tertiary sector: Refers to the service sector like the banks, insurance companies,

transportation and information and technology department. Such sectors are

mostly seen in developed economies. In U.K for instance, 90% of the employed

population was working in the tertiary sector during 2008. As economies develop

the employment of population shifts from primary towards tertiary sectors.

Different types of economies.

Due to the problem of scarcity both rich and poor economies have to make

choices involving cost and resource planning and since different economies have

to make different choices so the concept of economic systems comes up and each

government of an economy selects one based on what is best for them. So far

economists have discovered many but the 3 main ones are; market economy,

mixed economy and planned economy.

Market economy. This is an economy with the least or no government

interference and decisions taken which involve the allocation of resources are

done by the public not government on basis of price mechanism where demand

and supply are involved in taking important decisions. In such an economy you`re

likely to see a wide range of products and is advantageous to consumers in terms

of variety. Since there are many firms operating there will be intense competition

leading to reduction of prices and great efficiency to consumers in terms of

service too. Governments have few roles to play in the economy like providing

defense equipment, printing currency and regulating acts to avoid monopoly.

Though it proves to be really beneficial for some it also has its disadvantages such

as advertisement which mislead consumers and merit goods are neglected e.g.

education and health services, not only that but consumers are also exploited

through charging higher prices since there are is no much government

intervention. Countries running such economies include U.S.A, Germany, France

and many others.

Command/Planned economy. In command economy decision taking on the

allocation of resources is done by the government and the whole point of

economy is centralizing decision taking. All business are state owned but being

practical, one government can`t have control over small business organizations

like small sole trader shops and supermarkets, hair dressing and plumbing

services but instead have a partnership through which they intent to be a part of

the business and also give instruction on what to produce and not to produce.

Government tends to own all resources and allocate them as per their perception

of future well-being of the next generation. As there is only one producer, the

consumers have a limited choice but prices are down due to subsidies which

create rationing of goods and are advantageous to its citizens. Wages are fixed by

the government and normally government jobs are much more secure though

wages are low but a pension is assured after retirement but greedy ones won`t be

satisfied. Advantages include assurance of full employment of resources to

maximize the efficiency and potential growth by maximizing GDP. Consumption of

merit goods such as education and proper health care services are insured and

prioritized at the top and advertisements misleading consumers are banned.

Public goods such as roads and street lights are built and maintained to ensure

proper communication and easy transportation which is essential for rapid

growth. Though many nations have such economies and progress at high rates

e.g. China, some criticize them due to the slow decision making process caused by

the centralized system leading to slow response in demand and supply situations.

Consumers have no variety of products to choose from. Due to subsidies on

commodities, there is an artificial excessive demand created which leads to long

queues as more people are able to afford a certain good. In command economy

the government seems to be worried more of the future generations due to the

fact that they tend to invest more in capital goods than consumer goods like cars,

fridge and consumer durables, this is illustrated in a production possibility curve

below.

You can clearly see how resources are allocated in a planned economy. X

represents the amount of capital goods and consumer goods produced in a

planned economy while Y represents the allocation of resources in a market

economy where most resources are dedicated to consumer goods by private

firms.

Mixed economy: The name is enough to throw light on the definition; it refers to

an economy where resources are allocated by both private firms and government

organization through market mechanism. In the past private firms would work

along the guidance of the government but the trend has changed now, there is

more privatization in economies where private firms buy state owned businesses.

It contains the best possible features of both private and planned economies;

there are varieties of products available in the market which is beneficial to

consumers in terms of low prices due to competition, many products and high

efficiency. The government plays a role by regulating prices and protecting

consumer rights through anti-dumping laws which avoids companies from selling

at lower prices for a short period of time to eliminate competition and later on

exploits consumers. One more feature is that the government encourages the

consumption of merit goods which would be under consumed if left alone to

market forces as they have higher positive externalities than private benefits.

Here government has control over printing currency and authority over

infrastructural planning like building roads, bridges and so on. Government

redistributes income from the rich to poor through taxes such as progressive

taxes which increase along with income so the more you earn, the more you pay

which in return is used to pay government workers, help vulnerable people and

build infrastructure. This type of economy is practically in existence unlike the

other two which are more theoretically applicable.

Money

In a simplistic definition money is a medium of exchange accepted by the other

party in exchange of goods and services, it could either be notes, coins, cheques

and debit cards. Money is used by everyone to fulfill their wants and needs e.g.

purchasing clothes, cars, food, water and so on but where there is hyperinflation

such as in Zimbabwe and people have lost confidence in the currency, people

demand payment for their produce in goods or services, this is the concept of

barter trade where goods are exchanged for goods, though it was practiced in the

past and people seemed satisfied nowadays it`s very hard to find someone in

need of your good and you in need of his/her good. The problem in Zimbabwe

was caused due to the excessive printing of money by the president that lead to a

rise in inflation by almost 1000,000% and the Zimbabwean dollar was valueless, in

a certain way if you see the problem of unlimited wants and limited resources is

good to balance the economies and if resources (money) are over produced

artificially, it would lead to unbearable consequences. Economists have

recognized 4 essential functions of money and they are;

Money as a medium of exchange: what they mean by medium is the acceptance

of money for a certain product by a certain person. For example you go to

supermarket and pay money either physically or electronically in exchange for the

goods and services you desire.

Unit of account: It is also referred to as measure of value. Whenever you go out

to purchase something there is a price tag on each item and that shows the worth

of the money you`re holding and as you go to different countries e.g. USA uses

dollars and in India Rupees are used both with different values and each of them

has their own price tag which you will learn later in exchange rates.

Standard for deferred payment: Sometimes when you desire to buy something

and you don`t have all the money required now, you can pay in installments when

agreed with the seller whereas through barter trade you couldn`t have been able

to do it so that’s one essential function of money.

Store of wealth: All your wealth could be stored in form of money through a bank

where you deposit it as a saving before using it or even in form of assets e.g. land

and investment in stocks. When calculating your wealth all the assets and bank

balance are added up in monetary form.