Some background information for Survey Economics

 

Economics can be defined in several different ways. Here we will provide four (4) definitions of economics as follows:

 

Definition#1: Economics is a social science that studies the efficient or optimal allocation of scarce resources among competing ends in human societies.

 

PS. Please pay special attention to the meanings of the phrases that are underlined in definition#1 above.

 

Definition#2: Economics is the science that studies or investigates the choices that households, business firms, governments, savers and other economic agents make in their use of scarce resources.

 

Definition#3: Economics is a social science that studies the optimal management of scarce resources among their competing ends in all political economies in the world.

 

Definition#4: Economics is the social science that studies the main phases of economic activities from the start to the end namely: Production , distribution, exchange and consumption and the usage of scarce resources at each phase of the cycle.

 

Economics is a social science because it studies people or human behavior as it relates to changes in their economic environment ie changes in wage rates, prices, interest rates, investment rates among others. It is a science because it uses the scientific method to conduct research and investigation into economic phenomena such as inflation, production, investment among others.

 

As indicated earlier economics derives its social character from its study of human behavior as it relates to changes in the economic environment (prices for goods/services, wage rates etc).

 

As earlier indicated economics is a science because like all other social sciences such as Sociology, Political Science, Psychology etc and all physical sciences such as Chemistry, Mathematics, Physics and Biology it uses the Scientific Method in its study of the economy.

 

The Scientific Method is an approach to research or scientific investigation that is used by all scientists (social and physical/natural) to improve their understanding, explanation and prediction or forecast of the social or physical phenomena or processes that are of interest to them. For example economists use the scientific method to improve their ability to understand, explain and predict changes that take place in an economy. Some of the phenomena that economists (micro/macroeconomists) study are inflation, economic growth, the effect of technological changes on growth, investment, household demand for goods and services, a firm’s supply of goods and services, international trade among others.

 

Social and physical scientists including economists use the following tools of the scientific method to improve their ability to understand, explain and forecast changes in the social and physical phenomena of interest to them. These tools of the scientific method are as follows:

 

(1)Observation

 

(2)Assumptions Ex. Ceteris Paribus (A Latin phrase that means“ All other things remain equal, the same or constant”)

 

(3)Hypothesis

 

(4)Models-Models can be represented in three (3) ways: Verbal, Graphical and mathematical

 

(5)Theory

 

(6)Laws

 

(7)Testing (Statistical and otherwise)

 

(8)Experiments

 

(9)Conclusion(s)

 

All of the above tools are interrelated and complement each other and as such constitute critical elements of the tool kit that are used by all scientists to improve their knowledge about the phenomena of interest to them.

 

The Central Economic Problem or CEP is the conflict that exists between the limited availability of resources and the unlimited wants and needs of people that exist for these resources to provide foods, housing, education, roads, health care, transportation, parks, office space, day care centers and a myriad of other goods and services that exist in all societies. In a word the CEP in any society: rich or poor, capitalist or socialist, slave or feudal, modern or antique is the existence of the scarcity of resources and the limitless wants and needs of human populations imposed on these resources to satisfy the wants and needs of people.

 

Scarcity is the limited availability of resources that are required to provide the unending list of goods and services that mankind want and need for their material existence in human societies. Alternatively expressed scarcity means that resources are not limitless or infinite but on the contrary they are limited, fixed or finite but are required to satisfy the unlimited or infinite wants and needs of people.

 

Scarce resources are all the lands, machineries, tools, equipment and other capital goods, all types of labor, entrepreneurial skills and talents and all goods and services (autos, bikes, airline tickets, medical services, clothing, housing, shoes, foods etc) used by people.

 

Scarce resources are subdivided into two (2) broad categories viz: Economic resources and Non-Economic resources.

 

Economic resources are all those goods, services, land, capital goods such as machines and plants, labor services of pilots, engineers, teachers, cooks, janitors, policemen, professional athletes, movie stars, entrepreneurs that are characteristically limited in supply and that are rationed by prices ie all economic resources have price tags.

 

Non-Economic resources are all those resources that are generally limitless in supply and are not rationed by prices ie (they have no price tags) they are not characteristically traded in markets. For the latter reason these resources are commonly referred to as “free resources” and include critical resources such as the air we breathe, sunlight, moonlight, carbon dioxide etc.

 

Scarce resources are further subdivided into three (3) main types that are different but interconnected. These three (3) types of resources are: (a) Human resources (b) Capital resources and (c) Natural resources.

 

Human resources are the collective of labor skills, talents, experiences, training (on/off job) in a human society. Thus the totality of skills, talents, experiences and training of all categories of workers in a society.

 

Capital resources are the totality of physical and monetary capital in a society. In other words capital resources refer to the sum total of capital  goods ie tools, equipment, plants, machineries and financial assets bonds, stocks, loans, T-bills etc in a society.

 

Natural resources are those resources that are so-called God given resources in a society such as land, forests, animals, air, lakes, metals, petroleum, diamond among others. These resources are not man-made.

 

Efficiency is the maximization of economic benefits such as output, consumption, employment etc and the minimization of their economic costs in a firm, industry, household or economy. In other words efficiency seeks to expand the economic pie in households, firms, industries and whole economies with the usage of minimum ingredients to make the cake. Technically efficiency and optimality are terms that are used interchangeability to describe an economizing or least-cost scenario in a household, firm, industry or economy. The rationale for this is that an optimal economic result or outcome is impossible without an efficient usage of scarce resources. Thus an efficient or optimal outcome whether at the micro or macro level of economic operation is theoretically represented on the Production Possibility Frontier or PPF of a household, firm, farm, industry or economy. (TASK#-Study the concept\diagram of the PPF)

 

First, it should be pointed out that equity does not mean the same thing as equality. Second equity unlike efficiency refers to the fairness with which resources are distributed to the members of a society or community. Alternatively expressed equity is concerned with the way in which the economic pie is shared or distributed among the members of a community/society whereas efficiency is concerned with the expansion of the economic pie.

 

The short answer is that economic efficiency in market economies does not guarantee in the least equity in the allocation of scarce resources in a society. Why not? The answer to this query resides in the logic of capitalist market economies.

 

The short answer is that the existence of equity in centrally planned or socialist economies does not guarantee in any way economic efficiency in the allocation of scarce resources in a society. Why not? The answer to this query resides in the logic of socialist economies.

 

Yes, there is a trade-off between efficiency and equity in an economy. Why? and Is this trade-off inevitable? The answer is no but I would like to extend the rationale for this answer as a challenge or task to you to discover the reason for this.

 

Yes there is a strong relationship between the CEP in any society and at any level of an economy (micro or micro) and the level of efficiency in the use of resources in that society and at any level (micro or macro). In other words the existence of limited resources and unlimited wants and needs of people as discussed earlier constitute the CEP. As such in order for every society and its economic entities: households, firms, industries and economy as a whole to satisfy the increasing wants and needs of its population for goods and services it is imperative that they produce, distribute, exchange and consume them efficiently. Why? Because only by maximizing benefits and minimizing costs ie expanding the economic cake which is the meaning of efficiency (see discussion above) will the scarce resources that exist in all societies produce more goods and services to meet the unlimited wants and needs of people. Thus in this way the existence of the CEP imposes the requirement on all economies to operate on their PPF ie operate efficiently or optimally in using their resources.

 

Competing ends in an economy ie a society refers to the alternative uses to which the resources of a society can be put to produce goods and services. For example a firm that manufactures car brakes may also manufacture gas pedals for cars. However if such a firm uses more of its resources to produce more car brakes it will necessarily have to use less of its resources to produce less gas pedals and vice versa. In other words “competing ends” refers to the trade-offs and choices (or opportunity costs) that are the inevitable outcomes in all societies because of the existence of the scarcity of resources.

 

Demand in economic theory means that people (consumers, investors, governments etc) are willing and able to support their wants and needs for goods and services (resources) with money power ie their ability to pay for the goods and services they desire in markets. Thus whenever a consumer goes to a car dealership and pays for a Toyota Corolla car in cash, check or credit he/she is exhibiting a demand for that car.

 

Wants are the subjective desires of people for goods and services that are not backed up or supported by their ability to pay for goods and services in markets. So a consumer Mariza may express a want for a dress ($65) or a tube of toothpaste ($1.85) but if she does not have the money to pay the prevailing prices of $65 and $1.85 then Mariza does not exhibit a demand for these goods but merely wants for them.

 

Needs on the other hand refer to necessary goods and services that are essential to sustain the lives of people such as foods, medicines, housing, clothing among others that are not backed by the money power of these individuals. For example hunger children in Argentina or India need foods but the parents of these children may not have the money to pay for these foods hence the parents of these hungry children would have no demand for foods. Similarly a South African or American citizen dying from Aids would need the AZT drug and other medicines to prolong life but if these citizens do not have the money to purchase these drugs-they do not have demand for the drugs.

 

The conclusion is therefore that demand for goods and services is not identical to their wants and needs.

 

Markets are social institutions that facilitate economic transactions or trade between people as buyers and sellers or between consumers and producers and sellers. Markets provide information to buyers and sellers through prices that in turn determine the level of demand and supply for the goods and services (resources) in a market. There are several media that bring buyers and sellers together to effect trade between themselves. Some examples of these media or institutions that facilitate buying and selling between traders are Billboards that are used for advertising, Catalogs that are provided by a wide range of retail outlets, the Internet that increasingly is a multi-billion $ medium of trade in a range of goods and services, Newspapers, Magazines and TV that are used as media for advertising goods and services among others.

 

 

The main characteristics of markets in all social systems (capitalist market economies, socialist economies and mixed economies are as follows:

 

 

 

 

 

Marketplaces are also markets but unlike markets that are forged by the internet or catalogs marketplaces are physical geographical locations where buyers and sellers interact with each other in a person to person way. Examples of marketplaces abound in the real world and include your visit to your neighborhood doctor’s office, your local supermarket, local department stores, service stations, cosmetology store, barber shop, newspaper stand among others.

 

Marketplaces like markets in general have all the characteristics of markets described above since they too are markets.

 

The essential difference between markets in general and marketplaces as a specific type of markets is that the latter are physical locations where people (traders) buy foods, dental care, clothing, carwash, health care, education, gasoline, transport services and other goods and services in a face to face way. However with the internet, catalogs, classified ads and other types of markets buyers and sellers may not even interact with each other in executing a transaction or trade.

 

The quick answer is absolutely not. Why is this so? The existence of markets is a reality in all social systems, capitalism and socialism, but not all markets are free markets. Free markets are necessarily competitive markets in which the market forces of supply and demand interact to determine market prices in the following ways:

 

 

 

 

How can we use basic algebra to calculate market prices including equilibrium prices and quantities?

 

To illustrate the relevance of algebra\mathematics to economics let us use a simple example of a specific market.

 

Let’s say that there is a market for natural peanut drink in a hypothetical city. Let’s further assume that the demand for natural peanut drink is represented by P=20-Q and that the supply for natural peanut drink is P=1/4Q.

 

How would we use these equations for the demand and supply of a commodity like natural peanut drink to calculate the market equilibrium price and market equilibrium quantity of peanut drink?

 

To do this we must solve these two equations simultaneously. This means that we must equate these equations and solve them at the same time for the price and quantity demanded and supplied in equilibrium.

 

To do this the method is as follows:

 

First rewrites either the demand or supply equation as a function of price (in their present form price is expressed as a function of quantity)

 

Second if we choose to rewrite the supply equation as a function of price we get:

 

P=1/4QŽ4P=Q

 

Therefore by substituting 4P=Q into the original demand equation we would solve for market equilibrium price:

 

Thus P=20-4P yields

 

ŽP=20-4PŽ5P=20

P=$4              

 

Substituting the equilibrium price into the transformed or rewritten supply equation 4P=Q, therefore by substitution Q=4(4)ŽQ=16

 

Notice that now that we know the market equilibrium price ($4) per bottle of natural peanut drink and market equilibrium quantity (16) bottles of natural peanut drink we can use these results (numbers) to verify the validity of the original demand and supply equations given in the problem.

 

For example if we take the original demand equation for natural peanut drink P=20-Q yields by substitution 4=20-16 and by taking the original supply equation for natural peanut drink:

P=1/4 QŽP=1/4 (16) =$4