Unit 1: Basic Economic Ideas

Economics: Economics means the study of human wants in relation to the available resources. 

Factors of production:

  1. Land
  2. Labor
  3. Capital
  4. Enterprise

Major Economic Activities: 

  1. Production
  2. Consumption
  3. Exchange
  4. Distribution
  5. Public Finance

Production: Generating utility to fulfill the needs of humans through the use of land, labor, capital, enterprise. 

  1. Factors of production:
  • Land: Natural Resources such as land, rivers, plain area, air, water, sunlight.
  • Labor: Human resources (which requires physical and mental ability) with the expectation of incentives (money, facilities).
  • Capital: Required aid to run the production. Capital goods help in production of further other goods. In this process, money is the means to buy capital goods. 
  • Enterprise: Collective group of people with the necessary entrepreneurial skills that help in organizing the production process and run the business. 

Consumption: Use of the finished products/services to fulfill the need. 

Exchange: Transfer of goods and services. Transferring the goods to fulfill the need by providing the resources you have. 

Distribution: Providing incentives to the factors of production for their 

Allocating and dividing the incentives to the factors of production for their fair share contribution in the finished goods during production. The output/incentives from the production can be in the form of rent, wages, interest, and profit. 

Ceteris Paribus Assumption: Only carrying out the effect of one phenomenon with one variable without considering other variables. This process occurs in isolation with only the effect of one variable with the phenomenon.

Observing the effect of one phenomenon with another in isolation. For example, the price of sugar increases with respect to demand without considering government regulation. 

Example:

Dx = F (Px, Y, Py, T, N, E, W, C)

Where, 

D is the demand, f is a function. Other factors are the price of goods that are bought. Y represents income, Py represents price of other similar goods, T represents taste, N represents number of buyers E is expectation of change in price, W represents weather and C represents culture and tradition. 

Scarcity: The fundamental problem with the scarcity of resources is due to the imbalance in human’s needs and available resources (land, labor, capital). 

When there are scarce resources, then one must make choices to choose between which of the resources you need the most.
And when choices are to be made, then you have the opportunity cost for the alternative options. 

For example, I have limited money to go to a trip, so I need to choose between Singapore and Nepal. So, with my scarce in limited resource, I choose Nepal . My opportunity cost for going to Singapore would be the viewpoint of lakeside view and the beaches.

Leave a Comment

Your email address will not be published. Required fields are marked *