Thursday, March 26, 2009

Economics Overview

Economics Overview

Economics is the study of how scarce resources are allocated to satisfy seemingly unlimited needs and wants.

Economic resources are the things used to attempt to satisfy human needs and wants through the production and distribution of produce goods and services.

Economic resources can be divided into three broad categories:
(1) labor (human effort),
(2) capital (things that are man-made that make labor more productive), and
(3) natural resources.

(a) blue-collar workers
(b) white-collar workers

(a) physical capital (machines, tools, …)
(b) human capital (education)
(c) technology (new knowledge and discoveries)
(d) financial capital (money used to buy physical capital, human capital, and technology).
Financial capital does not make labor more productive. Yet it is needed in order to purchase the physical capital, human capital, and technology that increase productivity.

Natural Resources

Economic Systems of Allocation

(1) Tradition (i.e., custom)
(2) Command (i.e., government)
(3) Markets (i.e., trade)

Every economy uses a combination of these three systems.

Systems of allocation are typically based on two criteria:
(1) efficiency (Is society obtaining the most products from its resources?)
(2) equity (Is the distribution of products fair?)

People frequently disagree about what is fair.

Markets are very efficient. Thus many people profess the desirability of “free markets” and “free trade.” (Business leaders, especially favor reducing or eliminating government regulation of markets, because regulation tend to reduce profits. Profit is revenues minus expenses.)

But when markets are allowed to operate freely, they produce some socially undesirable outcomes. (Markets are selfish and mean.)

Markets create too much of some things (pollution, poverty, and market power) and too little of other things [national defense, police and fire protection, education (schools and libraries), public health and disease prevention, roads and highways, etc.]

Consequently, we choose to have the government tax us and use the revenues to provide government services. (Government is not evil.)

Pollution in the St. John´s River in Jacksonville, Florida.
Pollution in the Cuyahoga River in Cleveland, Ohio.

If a society wants to have more goods and services, it needs to acquire more resources or become more efficient in their allocation. Markets tend to be more efficient at the allocation of resources than the government or tradition systems. Yet, markets are not perfect. There are many market failures in which the market does not provide the socially desirable outcome. Free markets create too much Free (i.e., unregulated) markets create too little capital. Consequently, most people agree government is needed to provide things that

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