LU 1 The Economic problem Flashcards
What is the basic Economic problem
Tension that exists between all the needs and wants we have as a society versus the resources we have available to satisfy these wants and needs
Economics may be described as:
The science of choice
Definition of Economics
We seek answers to the three basic questions:
What? How? and for Whom should it be produced?
In Economics we study:
How people use their limited resources to gain the greatest possible satisfaction of their unlimited needs
Three types of resources:
- Natural resources
- Human Resources
- Manufactured Resources
Natural resources
Mineral Wealth, Fertile soil and fishing resources
Human resources
Brain Power, Muscle Power (labour resources)
Manufactured resources
Machines, equipment and tools
Four factors of production:
- Labour
- Capital
- Land
- The entrepreneur
Factor of production : Labour
Intellectual, physical or other human productive effort
Factor of production: Capital
Means of production
Factor of production: Land
Gifts of nature that include factors such as climate, mineral resource and the quality of soil
Factor of production: The Entrepreneur
Person or entity that has the vision or idea or expertise to combine the factors of production.
Opportunity cost
The value of the best forgone opportunity
Three most important decision makes in an economy
- Households
- Firms
- Governments
Households
Individuals, groups or families also known as consumers.
Firms
Organisations responsible for the production and distribution of economic goods also known as producers
Governments
Responsible for legislation, regulation and the provision of public goods
Functions the governments perform
- Make laws
- Tax households and firms to provide essential services
- Make payments to households or firms to finance their expenditure
Production problem
Scarcity of resources make it impossible to produce all the goods people want
Distribution problem
How the total production of goods and services is going to be distributed among the members in the community
Economic systems
- Traditional economy
- Command economy
- Market economy
- Mixed economy
Traditional economy
Customs and beliefs determined decisions regarding production and distribution
Command economy
All decisions about what, how and for whom goods and services are produced are taken by a central authority or ruling body.
Market economy
Decisions about the what, how and for whom goods and services are produced are determined by markets and prices
Mixed economy
Mixture of other economies
Markets
Consists of thousands of buyers and sellers, thousands of households and firms
Prices
Represent the value of products in monetary terms
Market equilibrium
When there is a balance between the demand for and the supply of a specific product
Aggregation
Process of combining smaller parts into a bigger whole
Total production of the economy (P)
Add together the prices of all goods and services that flow through the market for consumer goods in one year =Total value of all goods and services produced
Total expenditure of the economy (E)
Add the value of the money stream going through the market for consumer goods in one year.
Total income earned in the economy (I)
Add the value of the money stream going through the market for production factors (Sum of all wages, interest, rent and profit)
