Intro to econs

Many websites and books often define economics as a social science that studies the production, distribution, and consumption of goods and services although I feel there is no universally accepted definition. The following blog posting will cover some of the key concepts in an introduction to the subject of economics, some of these concepts are scarcity, choice, opportunity cost and the distinguishing features between a planned economy and a free market economy.

The first concept is scarcity. The problem of scarcity is that people have an infinite want or desire for resources which are limited on this planet. There are only a limited amount of workers, machines, factories, land area and reserves of oil on the planet earth, but people are always looking for better food, housing, transport and health services. There is a limited amount of money available to various governments and they have to prioritize as to how they can spend their money. For example governments cannot raise taxes too much to fund health and education without affecting other areas of the economy. If something is scarce, it will have an existing value. If the market supply of a good is low, the price will rise providing there is demand for it. Goods that are not scarce will have a lower market value.

The concept of choice is related to scarcity. Everyone has a limited income, and therefore they have to make choices when buying a particular good or service. They have to decide how to properly spend on their financial resources, they now have to choose proper alternatives, and this is linked to opportunity cost. Opportunity cost is defined as the next best alternative given up. Opportunity cost is the basic relationship between scarcity and choice. For example, if a city decides to build a stadium on a piece of vacant land that it owns, the opportunity cost would be the value of benefits that could have been attained by creating something else such as a hospital or the city could have sold the land to reduce the city’s debt. Opportunity cost does have it’s exceptions, air for example is not limited in terms of supply, therefore it does not have an opportunity cost when it is used. These are “free goods” and cannot be scarce and will not have a price.

A planned economy is an economic system in which the government completely manages the economy. It is an economic system in which the central government makes all decisions on the production and consumption of goods and services. A free market economy on the other hand is seen as capitalism, prices will be used instead to ration goods and services. Production is left in private enterprises and demand and supply are used to set the incomes and prices in that particular economy

In free market economies, the industries will find the most efficient method of production so as to maximize their benefits in terms of profits. These industries completely concentrate on making profits. Therefore it is an economy where demand and supply is controlled by the producers and consumers of the economy. it is also where the price mechanism corrects itself (invisible hand)

In planned economies on the other hand, the government will set the production targets. However these targets are not always met as workers lack the incentive and motivation to do their job efficiently. Because of human nature it is difficult for an individual to put the needs of an entire country before himself. One example of this was in the USSR, the workers were offered attractive incentives if they managed to reach their production targets. Therefore planned economy is when the goods and services that are produced are determined solely by the government.

Nathanael Tan

5Z