SCARCITY refers to the situation where the limited resources available are unabke to satisfy the unlimited human’s wants
Definitions to remember:
- Needs= good or services that are required to survive. This would include the needs for food, clothing, shelther, health care.
- Wants= goods or services that are not necessary for survival, but that we desire or wish for
- Free goods= goods that don’t require any resources to produce and therefore have no opportunity costs
- Economic goods= goods that require FOP to produce and therefore causes opportunity costs
- Capital goods= goods that are used to produce other goods
- Consumer goods= goods used/consumed by individuals
SCARCITY leads to making choices. In order to get what we want, we need to make choices we want to satisfy first. The choice we give up in order to get what we want first is the OPPORTUNITY COST or best alternative forgone.
THREE FUNDAMENTAL QUESTIONS
- What to produce ?= the productions we would like to produce
- How to produce ?= the method we are going to produce the goods, whether by labour-intensive method or capital-intensive method
- Who to produce for ?= our aims, the people we expect to buy our productions
FACTORS OF PRODUCTION= resources available to produce goods and services
Consisting of… - LAND (all the natural physical resources), - LABOUR (the human input into production process), - CAPITAL (investment in capital goods that can be used to produce other than consumer goods and services), - ENTERPRISE (the willingness to take risks).
NORMATIVE STATEMENTS= express an opinion about what ought to be, they are SUBJECTIVE statements rather than objective statements, they carry value judgements
POSITIVE STATEMENTS= are OBJECTIVE statements that can be tested or rejected by referring to the available evidence. Positive economics deals with objective explanation and the resting and rejection of theories.
PRODUCTION POSSIBILITY CURVE (PPC)
è The PPC shows all the possible maximum attainable combinations of goods or services that can be produced in an economy, when all resources are used fully and efficiently, at a given state of technology.
Assumption:
- Only 2 goods or services produced
- Production observed over a specified period of time (yearly basis)
- Quality and quantity of resources remain constant/fixed over the time period
- Resources fully employed and efficiently used
- No change in technology
- Points inside the PPC are attainable but inefficient because resources are either underemployed or unemployed
- All points along the PPC are attainable and efficient because all resources are fully employed
- Points outside the PPC are unattainable because growth is limited by current amount of resources and state of technology (scarcity)
Other names for PPC:
- Production frontier = draws boundary between what can and cannot be achieved
- Product transformation curve = the economy moves along the curve from 1 point to another point then different combination of goods is being chosen
Planned economy
- Which can also be called a certainly planned, command or collective economy
- It is one in which the state makes the decisions about what to produce, how to produce it, and who receives it
- No private enterprise, all productions are undertaken by states.
- The state gives instructions, sometimes called directives, to state-owned enterprises
- The state owns all or at least most of the economic resources
- The state decides the remuneration paid to the workers and controls prices
- No consumer sovereignty
However:
- There is economic equality (as workers are paid the same wage rate)
- The state provides for training and education, resulting in equal opportunity for everyone
- The state provides welfare to the people (basic necessities. E.g= housing and transports)
A PLANNED ECONOMY= an economy where the govt. makes the crucial decisions, land and capigtal are state-owned and resources are allocated by directives.
Market economy
- Also known as a free enterprise, is one in which consumers determined what is produced
- They signal their preference through the price mechanism. If they want more of a product, they will be willing to pay more for it
- In market economy, resources switch from products that are becoming less popular to those becoming more popular
- Government intervention is minimum. Land and capital are privately owned. Private sectors firms decide how to produce the products consumers want to buy
- In making their decision on which FOP to employ, firms will seek to achieve the least cost method of production.
- Capital intensive= firms employ large amounts of capital relative to labour
- Labour intensive= firms use a relatively high numbers of workers in comparison with the amount of capital used
In market economy:
- Those who earn the highest income exercise the maximum influence on what to produce
- Those workers whose skills are in highest demand and the most successful entrepreneur will be able to buy more products than those whose skills are in low demand and unsuccessful entrepreneur.
MARKET ECONOMY= an economy where consumers determine what is produced, resources are allocated by the price mechanism and land & capital are privately owned
Advantages of a Market Economy
- A market economy should be very responsive to changes in consumers demand. In fact, consumers are said to be rulers
There is also choice in Market Economy, consumers can choose which firms to buy from, firms can decide what they want produce and workers can choose who to work for.
The profit motive and competition promote efficiency
- Those firms which produce what consumers want at the lowest possible prices are rewarded with high profits
- But firms which do not change their output quickly to reflect what is in demand and have high costs are likely to go out of business
High income provide an incentive for people to work hard and for entrepreneur to set up and expand firms.
è Competitions to improve oneself and become better emerges amongst people since everybody will try to do their best in order to control economic resources as much as possible.
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