Basic Economic Ideas

Nota:

• A condition that exists because there is an insufficient quantity of resources available to produce all goods and services desired by individuals. 

1. Choices

   Nota:

   • Due to conflict between scarce resources and infinite wants all consumers, business, firms and governments must make choices and compromises on a daily basis.
2. Opportunity Costs

   Nota:

   • The benefit we lose from not consuming the next best alternative.
   1. Production Possibility Curves

      Nota:

      • The curve/frontier represents the maximum level of output an economy can achieve when it fully exploits all of its existing resources and can also represent the various combinations of two goods that can be produced at one time with the available resources.
      1. Factors

         Nota:

         • 1) Quantity and quality of resources available  2) State of technical knowledge
         1. Shifts

            Nota:

            • Indicate:  1) Economic growth - where changes have improved an economy's ability to produce goods 2) Economic decline - where there is a decline in resources such as falling working population 
3. 4 Factors of Production

   Nota:

   • Resources available to produce different goods and services. 1) Land - all natural physical resources from on or under land and sea 2) Labour - human resource, input & effort whether its mental or physical into the production process  3) Capital - investment in capital goods that can be used to produce goods and services in the future 4) Enterprise - an individual who has an idea and combines the other 3 factors of production which involves taking the risk of production to gain a profit Payment:  1) Rent 2) Wages  3) Interest  4) Profits 

Nota:

• 1) What to produce from the available resources?  2) How to best produce them from the available resources?  3) For whom to produce? 

1. Market System

   Nota:

   • An economy where the allocation of resources and decisions are left to the market forces.
   1. Characteristics

      Nota:

      • 1) Existence of consumer sovereignty  2) Private ownership  3) Price mechanism operates freely - Has 3 main functions:     1.  Rationing    2. Incentive    3. Signalling  4) Free Enterprise  5) Competition 
      1. Advantages

         Nota:

         • 1) Efficient and flexible allocation of resources  2) Wider range of choices 3) Decentralized decision making
      2. Disadvantages

         Nota:

         • 1) Unequal distribution of income 2) Demerit goods 3) Underproduction of merit goods 4) Lack of public goods 5) Competition may be wasteful
2. Centrally Planned

   Nota:

   • An economy in which the allocation of resources and decisions are left to the government
   1. Characteristics

      Nota:

      • 1) The state produces all goods and services desired by society  2) No consumer sovereignty 3) No freedom of enterprise  4) Equality of income and wealth  5) A high and stable level of employment 6) Public ownership 
      1. Advantages

         Nota:

         • 1) Attainable full employment 2) Social Justice 3) Economic Stability 4) Public good available  5) Demerit goods less consumed
      2. Disadvantages

         Nota:

         • 1) Misallocation of resources 2) Lack of choice 3) Time lag in implementation of plans 4) Lack of incentive
3. Mixed

   Nota:

   • An economy in which some decisions are made by the government and some by market forces.
   1. Characteristics

      Nota:

      • 1) Both public and private sectors work hand in hand to ensure economic growth of a country 2) Government reduces income equality by imposing a progressive tax system where higher income earners are taxed more than lower income earners  3) Government controls existence of monopolies and regulates their power 4) Competition is mixed where there is competition within the private sector where choices are determined by the price mechanism but there is little competition within the public sector where the government plans and allocates accordingly
      1. Advantages

         Nota:

         • 1) Public goods are provided for  2) Economic stability  3) Attainable full employment 
      2. Disadvantages

         Nota:

         • 1) Costly Administration 2) Loss of consumer sovereignty
4. Transition Economies

   Nota:

   • An economy that is changing from central planning to free markets. 
   1. Problems

      Nota:

      • 1) Rising unemployment - as newly privatised firms try to become more efficient by cutting back labour costs to improve efficiency 2) Rising Inflation - due to the removal of price controls imposed by the government 3) Lack of entrepreneurship skills - making it difficult to reform their economies and promote market capitalism  4) Corruption - as a result of poorly made products which were sold in unregulated and illegal markets  5) Lack of infrastructure - due to lack of real capital required to produce efficiently due to limited development of financial markets 6) Inequality  7) Lack of sophisticated legal system  8) Time is needed to develop markets