Basic concepts of Economics • A need is something you have to have, something you can't do without. A good example is food. If you don't eat, you won't survive for long. • A want is something you would like to have. It is not absolutely necessary, but it would be a good thing to have. A good example is a car, cell phone etc. • To have a Demand, have to fill up following three conditions1. desire to get the thing 2. ability to purchase 3. wish to expense for this thing Basic concepts… Wealth: Total of all assets of an economic unit that generate current income or have the potential to generate future income. It includes natural resources and human capital but generally excludes money and securities because there present only claims to wealth. Two common types of economic wealth are 1.Monetary wealth: anything that can be bought and sold, for which there is market and hence a price. The market price, however, reflects only the commodity price and not necessarily its value. For example, water is essential for human existence but is usually very cheap. 2.Non-monetary wealth: things which depend on scarce resources, and for which there is demand, but are not bought and sold in a market and hence have no price. Examples are education, health, and defense. Basic concepts… Goods: A consumable item that is useful to people but scarce in relation to its demand, so that human effort is required to obtain it. 1.Free goods are goods that exist in quantities that are more than sufficient to meet demand at a zero price. In other words, for a free good, at a zero price, the quantity supplied is larger than the quantity demanded. The opportunity cost of producing a free good is zero. Examples of free goods are desert sand and sea water. 2.Economic goods are goods that exist in quantities that are less than sufficient to meet demand at a zero price. Thus, economic goods have a positive price. The opportunity cost of producing an economic good is positive. Examples of economic goods are shoes and computers. Basic concepts… Price and Value: price is determined by what (1) a buyer is willing to pay, (2) a seller is willing to accept, and (3) the competition is allowing to be charged. On the other hands the value of good determined the worth and benefits arising from that goods. Example: The price & value of water and diamond in this case is the best example. In terms of price, a bottle of water is very cheep relative to a very small piece of a diamond. But in terms of value….??? Basic concepts… Utility: The benefit or satisfaction arise from the consumption of a good or service. Total utility is the aggregate sum of satisfaction or benefit that an individual gain from consuming a given amount of goods or services in an economy. Marginal utility is the additional satisfaction, or amount of utility, gained from each extra unit of consumption. Utility of last unit added. Basic concepts… Production: By production, generally, we mean to create something. But man can create nothing. In Economics, production is the processes and methods used to transform tangible inputs (raw materials, semi-finished goods) and intangible inputs (ideas, information, knowledge) into goods or services. Budget: A budget is a description of a financial plan or a periodic list of income and expenditure. Balanced budget: Income equal to expenditure Surplus budget: Income greater than expenditure Deficit budget: Income less than expenditure Basic concepts… Resources: The resources of a society consist not only of the free gifts of nature such as land, forests and minerals, but also human capacity, both mental and physical, and of all sorts of man-made aids to further production, such as tools, machinery, and buildings. Resources are divided into three main groups: 1) all those free gifts of nature, such as land, forests and minerals etc. commonly called natural resources and known to economist as land. (2) All human resources, mental and physical, both inherited and acquired, which economist call labor. (3) all those man-made aids to further production, such as tools, machinery, and factories, which are used up in the process of making other goods and services rather than being consumed for their own shake, which economist call capital. Often a fourth resource is distinguished. This is entrepreneur ship from the French word entrepreneur meaning who undertakes task. Basic concepts… Investment: Economists mean the production of goods that will be used to produce other goods 1.Fixed income investment such as bonds, fixed deposits, share etc. 2.Variable income investment such as business ownership (equities), or property ownership. Consumption: The act of using these goods and service to satisfy wants is called consumption. This will normally involve purchasing the goods and services. Economic Efficiency Economic efficiency is when all goods and factors of production in an economy are distributed or allocated to their most valuable uses and waste is eliminated or minimized. Key Takeaways: Economic efficiency is when every scarce resource in an economy is used and distributed among producers and consumers in a way that produces the most economic output and benefit to consumers. Economic efficiency can involve efficient production decisions within firms and industries, efficient consumption decisions by individual consumers, and efficient distribution of consumer and producer goods across individual consumers and firms. Pareto efficiency is when every economic good is optimally allocated across production and consumption so that no change to the arrangement can be made to make anyone better off without making someone else worse off. Opportunity Cost Opportunity cost is the value of something when a particular course of action is chosen. Simply put, the opportunity cost is what you must forgo in order to get something. The benefit or value that was given up can refer to decisions in your personal life, in a company, in the economy, in the environment, or on a governmental level. Simply, opportunity cost is the cost of best alternatives or it is the cost of second best choices. An easy example of opportunity cost For example, instead of attending classes you had many opportunities to do. Suppose, you could – 1. Sleep 2. Watching movie 3. Travelling 4. Praying 5. Playing etc. Among all of these alternatives, suppose you could get more pleasure from sleeping. That is sleeping is the best alternative of attending class. So we can say that, the opportunity cost of attending class is sleeping. Some examples of Opportunity Cost • The opportunity cost of taking a vacation instead of spending the money on a new car is not getting a new car • If you decide not to go to work, the opportunity cost leisure is the lost wages. • When the government spends $15 billion on interest for the national debt, the opportunity cost is the programs the money might have been spent on, like education or healthcare. • For a farmer choosing to plant corn, the opportunity cost would be any other crop he may have planted, like wheat or sorghum. • Tony buys a pizza and with that same amount of money he could have bought a drink and a hot dog. The opportunity cost is the drink and hot dog. • Mario has a side business in addition to his regular job. If he decides to spend more time on his side business, the opportunity cost is the wages he lost from his regular job. Economic Growth Economic growth is an increase in the the production of economic goods and services, compared from one period of time to another. It can be measured in nominal or real (adjusted for inflation) terms. Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used. Note that• Economic growth is an increase in the production of goods and services in an economy. • Increases in capital goods, labor force, technology, and human capital can all contribute to economic growth. • Economic growth is commonly measured in terms of the increase in aggregated market value of additional goods and services produced, using estimates such as GDP.
