Introduction to economics

What's economics? Many say that economics is the study of how the forces of demand and supply allocate scarce resources, which is divided into two parts, microeconomics, which examines the behavior of firms, consumers and the role of the government; and macroeconomics, which looks at inflation, unemployment, industrial production and the role of the government. But, in my opinion, economics is about what everyone knows, but in a language that nobody understands.

The basic problem of economics is that there are scarce resources and humans have unlimited wants. This brings about choice and opportunity cost. Where opportunity cost is the next best alternative lost because of a choice made. For example, I once wanted to buy a comic and a computer game, and they cost $15 and $27 respectively and i only had $30. At this point, i was faced with choice because i could not choose both as I did not have enough money to buy both, and I chose to buy the computer game. After choosing the computer game, I have thus experienced opportunity cost, because I have lost the next best alternative, which is the comic, after choosing the computer game. This example also illustrates scarcity, because I only have $30, and as both add up to more than $30, I cannot get both the computer game and the comic.

There are also three questions that producers are always faced with; For whom to produce? What to produce? How to produce? Producers will always ask who they should produce for, it could be the higher upper class of the society or the youngsters in the society. Cars like Ferrari are examples of goods produced, that are targeting the upper class of society, while brands like Bilabong cater to the youngsters in the society. Next, producers ask what to produce, based upon who they intend to produce for, like the example illustrated above. Finally, producers ask how to produce. This question is subjective to which type of economy the producer is in, whether it is a free market or a command economy.

In a free market economy, producers will find the most efficient, cost saving method possible, so as to maximize their profits. This is because in a free market economy, the producers are profit motivated, and because of all the competition they face, they will need to produce goods of superior quality compared to their competitors. An example is the ipod versus creative. When creative came out, ipod had to come out with a new model in order to compete with creative, because a new model would cause an increase in demand for it.

While in a planned economy, the producers are not the ones who set their targets, but the government tells them how much to produce within a year. A good example of this is Russia, where producers produced 3 litre jars of mustard just to meet the requirements set by the government. But, a lot of the mustard went to waste because people could not finish all the mustard and also because the mustard went bad before people could finish eating them.

This also shows the efficiency between the free market and planned economy. While the free market is efficient in allocating resources and in production, because of profit motivation and competition, the planned economy has proved itself to be inefficient because they do not think of methods of production that is efficient and cost saving, but rather, they think of ways to meet their yearly targets.

Therefore, in every economy, whether they are planned or not, they need to answer the three economic questions and they all face the same economic problem of scarcity and choice, but they do not always tackle the problem the same way.

Timothy Tan Wen Bin 5V