WHAT IS ECONOMICS? WHAT DO ECONOMISTS STUDY?

Many people think that economics is about money. Well, to some extent this is true. Economics has a lot to do with money: with how much money people are paid, how much they spend. But money is only important to us because through it we can satisfy our wants and needs. Therefore it is a tool and economics is much more than just the study of money. It is concerned with the following:

• Production of goods and services: how much the economy produces, both in total and of individual items; how much each firm or person produces and what techniques of production are used.

• Consumption of goods and services: how much the population as a whole spends (and saves), how much people buy of particular items and what particular individuals choose to buy, how people’s consumption is affected by prices, advertising and other factors.

Thus we can define:

Production - Production is the organised activity of transforming resources into finished products in the form of goods and services; the objective of production is to satisfy the demand for such transformed resources. It is the act of creating output, through input.

Consumption - Consumption is the utilization of goods and services in order to satisfy needs. This often involves purchasing the products and the services.

But in order to produce output we use various goods and services named resources.

Resources - Resources are productive factors required to accomplish an activity or a desired outcome.

One important property of the resources is their scarcity.

The economic problem - scarcity of resources

The biggest economic problem of our society is that resources are limited but our wants are unlimited. This problem may exist to a greater of lesser extent for people around the world, but the truth is that it exists and we all face it.

Thus we can define economics:

Economics studies the allocation of scarce resources among people - examining how various goods and services end up in the hand of which people.

In the next post we will talk more about resources have a closer look at the types of resources present in today's society.

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EQUILIBRIUM

We have previously described what supply and demand are and how the price fluctuates in order that the quantity demanded and the quantity supplied level out. Thus when these two are equal we reach a desired outcome which economists call equilibrium. At this point the allocation of goods/resources is at its most efficient because at the given price producers are selling all the goods that they have produced and buyers are getting all the goods they have demanded. In this state the market benefits as a whole because when an equilibrium is reached the number of transactions being made is the highest possible. Picture the case of a shop that sells TVs. As you can see in the table below, the higher the price the lower the quantity demanded but the higher the quantity supplied and vice versa. In each case the amount of transactions being made can be expressed by the formula: Number of Transactions = min(Quantity Demanded, Quantity Supplied) This is obviously happening be...

TYPES OF RESOURCES

There are many representations of the resources throughout the world of science and technology. An economist will tell you that they are goods and services used to produce valuable products that meet human needs and wants. A biologist will define them as substances that are required by living organisms for normal growth, maintenance and reproduction. Even a computer scientist will tell you that resources are any physical or virtual components of limited availability within a computer, used for creating a system. Of course, each interpretation is closely tied to its respective field of study, covering only what is relevant to that particular field. But all these definitions have something in common, which is the fact that resources are the means through which a desired product, state or outcome is achieved. In economics the resources are human-centered and they are used in order to create output ( goods and services ) through which we can satisfy our needs and wants. Because ...

OPPORTUNITY COST

Our lives are filled with everyday economic decisions. Whether you choose to spend one hour watching a TV show instead of studying or whether you choose to buy a book over music album you are essentially taking into account the opportunity cost of each. The time you spend watching TV can't be used to study and the money you spend on the book can't be used to buy the album. The opportunity cost is essentially the benefits you forgo when taking a certain set of actions. Thus we can define: Opportunity cost - When utilizing a certain resource, the opportunity cost represents the benefits of the next-highest-valued alternative use of that resource. It is important to understand that when we talk about the opportunity cost we only take into account the benefits of the next highest valued resource instead of adding up all of the other alternatives. The opportunity cost is often expressed as the difference between the expected return value of the two options: Oppor...

Introduction to Economics

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