Key Concepts Flashcards
Goods
These are the outputs (such as health care) of a production process that involves the combining of different resources such as labour and equipment. Goods (including services) are valuable in the sense that they provide some utility (see below) to individual consumers. They are termed ‘goods’ as they are desirable, as distinct from ‘bads’.
Marginal Analysis
An examination of the additional benefi ts or costs arising from an extra unit of consumption or production of a ‘good’.
Opportunity cost (economic cost)
As resources are scarce, an individual, in choosing to consume a good, in principle, chooses the good which gives him or her the greatest benefi t, and thus forgoes the consumption of a range of alternative goods of lesser value. The opportunity cost is the value of the benefi t of the next best alternative.
Resources
These represent inputs into the process of producing goods. They can be classifi ed into three main elements: labour, capital and land. Different goods would generally require varying combinations of these elements. Resources are generally valued in monetary terms.
Welfare
The economic criterion on which a policy change or intervention is deemed to affect the well-being of a society. In general, this is assumed to be determined by aggregation of the utilities experienced by every individual in a society.
Economics
Economics is the study of scarcity and the means by which we deal with this problem. Because resources are essentially limited, choices need to be made about how they are to be used. Economics, as a discipline, is concerned largely with how we make these choices in the context of scarcity. One of the key assumptions generally made in economics is that individuals will make these decisions rationally. This means that given good information they will choose to do things, such as utilize health services that will be in their best interests, where ‘best interests’ is defi ned as maximizing their utility given the resources they have at their disposal.
Production
Most resources are not, in themselves, useful to us as individuals but they can be combined to make something that is useful. This process is called production, and goods are the result of combining resources in the production process
Goods
Goods are either consumption goods, which are then used to directly satisfy people’s wants, or else they are intermediate goods, which are goods used to make other goods. In economics the term utility is used to describe the satisfaction provided by the consumption of goods by individuals while welfare is the sum total of utility experienced across all individuals within a society. Goods are either products that you can hold or touch (e.g. a drug) or else they are services that happen to you (e.g. a consultation). There are two essential characteristics that distinguish different goods.
- Physical attributes – an ice cream and a cup of tea are clearly different commodities because they require different manufacturing techniques and because they satisfy different wants.
- Context in which the good is consumed – for example: a. The time in which the good is available – an ice cream that is available on a hot summer’s day is a different good from one available in the cold midwinter. b. The place where the commodity is available – a cup of tea available in a fashionable café is a different good from tea that is sometimes sold at a petrol station.
How can individuals benefit from a good?
There are three ways in which individuals can benefi t from the ownership of a good. Most immediately, it can be consumed (or used) and thus utility directly derived from it. Taking paracetamol is an example of such consumption because it increases utility by relieving the pain of a headache. Likewise, the use of a non-disposable good (i.e. not designed to be thrown away after use) such as a walking stick provides direct utility for an individual in terms of improved mobility. The second benefi t individuals can derive from (some) goods is their investment value. Although goods provide utility when consumed, goods themselves can also be used as inputs into a production process. For instance, apples might be the output from farm production and consumed immediately, or they can also be used as input into the production of apple pies or cider. People invest because they expect the good to be worth more in terms of its contribution to the production of the fi nal product than its immediate utility. Often, an investment entails a risk such that the end return may be smaller than was expected at the time of investment. The third benefi t derived from a good is exchange value. If you do not invest or consume a commodity then you can sell it and potentially purchase other goods. Figure 1.1 illustrates the different ways of using a resource (consumption, investment and exchange). Whichever route is taken, the result will be increased utility for the owner of the resource. The route chosen by the owner should depend on which one yields the largest increase in utility for them
What is a market?
In economics, the term ‘market’ is used to describe any situation where people who demand a good come together with suppliers.
Importantly, a necessary condition for properly functioning markets is a system of property rights to ensure that people can participate in good faith. This means that the transactions made between parties are somehow enforceable and that there are certain understood rules about how people behave in terms of providing information, making payment and delivering goods.
The amount of money that is exchanged for a good is the price. You will fi nd in this book that the price is infl uenced by the number of suppliers in the market and the amount of money they are prepared to accept. The price is also infl uenced by the number of buyers in the market and the amount of money they are prepared to pay. Individual consumers or households are usually thought of as being buyers, while fi rms (or businesses) are associated with supply. However, this is not true in the cases of markets for resources and markets for intermediate goods. For example, in the labour market, households will supply and fi rms will demand labour.
How can government impact the market?
In reality, most markets also have some kind of government intervention. Such intervention in the market might involve levying taxes, f i xing prices, licensing suppliers or regulating quality. Alternatively, the government might decide to take control of demand for a commodity and prohibit private demand, or it might decide to take over supply entirely and prohibit private supply. On the other hand, a government might make laws that are intended to ‘free up’ market forces and make markets more easily accessible. Ultimately, as mentioned earlier, markets are generally also underpinned by some form of state intervention through the legal system to uphold a system of property rights.
In some economies, the government plays such a large role that markets as such scarcely exist at all. Such systems are referred to as command or centrally planned economies. Because of the diffi culties involved with planning a whole economy and the problem of trying to motivate workers and managers, command economies have rapidly diminished in number over the last 50 years or so. Almost every country in the world today has a mixed economy, a system in which market forces and central planning both play a role
Subsistence economy
An economy with an absence of exchange.
Barter economy
A system where exchange takes place without the use of money.
Mixed economy
A market economy with substantial government intervention.
Command economy
An economic system where resource allocation decisions are directed by the state.
