Economics From An Idiot
Created | Updated May 27, 2003
Points that might be of interest to you in this artical:
- The basic Economic Problem
- PPF's
- Market Economy
- Command Economy
- Price mechanism
The Basic Economic Problem
The worlds resources are finite (SCARCE), and humans have infinite wants, therefore there is not enough (ECONOMIC GOODS) to go around and people will exchange economic resources for economic goods (opportunity costs).
PPF's
Where a graph or table shows the combination of goods an economy can produce if all it's resources are efficiently and effectively employed.
It will work when not all the resources in the economy are as productive in one capacity as another.
PPF is concave to the origin
Illustrates diminishing returns to the factors of production as you get closer to the PPF, the more resources does not mean more goods produced. (Opportunity cost is high, more resources means less turns)
This only happens in the short term because the economy would grow.
The economy can grow if there is more land, more immigration or better working conditions.
Price Mechanism
Prices perform an economic function of major significance. So long as they are not artificially controlled, prices provide an economic mechanism by which goods and services are distributed among the large number of people desiring them. They also act as indicators of the strength of demand for different products and enable producers to respond accordingly. This system is known as the price mechanism and is based on the principle that only by allowing prices to move freely will the supply of any given commodity match demand. If supply is excessive, prices will be low and production will be reduced; this will cause prices to rise until there is a balance of demand and supply. In the same way, if supply is inadequate, prices will be high, leading to an increase in production that in turn will lead to a reduction in prices until both supply and demand are in equilibrium.
Market Economy
The three Questions
What
Whom
How
6 FUNDAMENTAL FEATURES
P - Private ownership, (can do what ever you want with your land )
C - competition - lots of retailers lots of products
S - Self interest as the dominate factor
M - Reliance on the Price mechanism
E - Freedom of choice and enterprise
G - Little or no government
Pros and Cons of a Market Economy
+ Choice of products (- only available to those who have consumer votes)
+ Incentive to work had and come up with new ideas.
- Large corporations will be formed and exploit the consumer
- Distribution of wealth and income
-Hard to get onto property ladder
- Rich get richer
- Resources allocated on consumer votes
- Risk insurance, not enough for everybody.
Command Economy
Who - planner
Whom - everyone
How- planners
All working together for the good of everyone.
Public ownership - no one owns anything individually only collectively
Planners allocate resources
Pro's and Cons
+ Greater equality
+ No Risk
- Lack of choice (humans want to be individuals)
-don't get a choice of job
- Lack of incentive to do well no special rewards
- No incentive to produce quality goods
- No incentive to work hard
- No enterprise or innovation
- Environmental issues are likely to be ignored
- less growth
- abuse of Power
Opportunity cost
Forgoing the next best alternative.
You can only use the resource once.
opportunity cost n (1911): the cost of making an investment that is the difference between the return on one investment and the return on an alternative - Websters dictionary
Sacrificing current consumption for increased future consumption.
The slope of a PPF is the opportunity cost.
