Skip to content
TexNx
GitHubThreads

2. Basic Terms & Concepts

Scarcity

  • Scarcity is the basic core problem of every economic activity.
  • Scarcity indicates that the resources are limited, but the wants are unlimited.

Resources

  • Resources are the inputs used to produce goods and services.
  • Three types:
    1. Natural
    2. Capital
    3. Human

Four Factors of Production

Four necessary factors required for production are:

1. Land

  • Land is the physical space on which production takes place.
  • Land is the natural resources used in production.
  • For example: Land, water, air, minerals, etc.

2. Labor

  • Indicates ability to work.
  • Labor is the human resources used in production.

3. Capital

  • Tools or equipments used in production.
  • Mechineries
  • Vehicles
  • Information or R&D (knowledge)
  • Liquid cash
    • Spendable cash is liquid cash. Cash that can not be spent is non-liquid cash. Fixed deposits are the example of non-liquid cash.

4. Entrepreneurship

  • Gathers other resources.
  • Manages the production process.
  • Carry the output in the market.

Economy activities

  1. Production
  2. Distribution
  3. Consumption

Production

  • Process of combining the material and immaterial input in order to make something for consumption.
  • The act of creating output.
  • Economic well-being of a country depends on the production of goods and services.

Output:

Output has value and contributes to the utility of individuals. It can be two types: 1. Goods and 2. Services

Value indicates level of satisfaction.

For example, making a paper plane is not an output. It might give a level of satisfaction to the maker, so might have value, but has no contribution to the utility of individuals. So it is not an output.

But say we make a video on making the same paper plane and post it on YouTube for monetization. Now it has value and contributes to the utility of individuals. So it is an output.

Utility:

Utility is the level of satisfaction. It is the state of being useful or beneficial

3 Fundamental Problems of the Economy

  1. What to produce?
  2. How to produce?
  3. For whom to produce?

Need, want & demand

Need: The state of deprivation is called need.

Want: Needs shaped by preference is called want.

Demand: It is 1. Having the desire for a product or service, 2. Having the ability to pay for it, and 3. Being willing to pay. We can say that the willingness to pay is the demand, as desire and ability comes before the willingness to pay.

Market

  • The structure which facilitates buyers and sellers to exchange any type of good or service.
  • Not necessarily a physical place.
  • It is important to understand that, in economy, market consists of buyer with demand and sellers with supply of one particular product or service. For example, rice market, gold market etc.

Market Forces

  • Demand
  • Supply

Influence of Market Forces

  1. Quantity of each good supply.
  2. Quantity of purchase.
  3. The price at which it is sold.

Example of markets

  • Market for products/services
  • Market for shares and securities
  • Market for foreign exchange
  • Market for loanable funds

Acknowledgement

  • Reference: Class Lecture