Economics: Basic Concepts

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Economics Basic Concepts
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Economics Broad Definition

• How people organize
• to meet their material needs

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Economics Narrower Definition

• How society
• allocates resources and
• distributes goods and services

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An economic system

• turns resources into goods and services
• for people to use.

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Goods and services

• useful things.
• Goods tangible
• usually physical objects
• Services intangible
• what a person does for you

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Resources

• Things that can be used to make other things.
• Resources can be
• tangible, like a lump of coal, or
• intangible,
• like an hour of your labor
• or some knowledge you have

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Resource types

• Labor
• human time and effort
• Natural resources
• things found in nature in raw form
• Capital
• things people make to help make other things

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Capital

• Capital is anything that people produce that is
  then used to make other things.
• This is different from the business usage, where
  capital refers to money.

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Capital

• In economics, capital can be
• equipment,
• machines,
• buildings,
• intermediate goods, like steel beams used later
  to build a building,
• knowledge.

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The relationship between the economics and the
business usages of "capital"

• To start an enterprise, you first need to have
  equipment, buildings, etc., before you can sell
  anything and bring money in.
• You need to have "capital" (business usage) up
  front topay for your capital (economics usage).

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Investment

• Economics usage Investment Adding to capital.
  
• Compare business spending money in return for
  claim on future income.
• Generally, investment in the economics sense
  requires investment in the business sense.

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Investment examples

• Building a building
• Installing a machine
• You are investing in our educational capital by
  enrolling in this course.

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Natural resources and capital -- the same?

• Since natural resources have to be worked on to
  be useful
• (e.g. oil has to be found and then pumped out of
  the ground),
• some economists just use two categories of
  resources, capital and labor.

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Classical economists had three categories

• Economists in the early 1800s had separate
  categories for
• Labor
• Capital
• Land
• My natural resources is a generalization of
  Land.

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The Economic Problem

• Resources are scarce, relative to human wants for
  goods and services.
• Therefore, decisions must be made on how to
• allocate resources and
• distribute finished goods and services.

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The Economic Problem in two words

• Scarcity
• Choice

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Allocation and Distribution

• Allocation
• decide which resources are used
• in what ways
• to produce which goods and services.

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Allocation and Distribution

• Distribution
• decide which goods and services go to which people

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Economics helps us make allocation and
distribution decisions better.

• Individual decisions -- whats best in my
  situation?
• Picking the best investment, for example
• Social decisions -- what institutions best
  encourage good decisions?
• Competition vs. regulation, for example

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In the U.S. health care system, scarcity
manifested in

• Limited access to health care for many people
• Health care system swallows up a large portion of
  national resources.
• 1997 national health spending 1.1 trillion
• 13.5 of gross domestic product
• 4000 per person

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High expenditure would not be bad, were it not
for the suspicion that

• Were paying too much for the health care we get.
• We're not getting the best mix of goods and
  services thatwe could for the resources we put
  in.
• Some people get more than they need, while others
  get less.

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We're paying too much for what we get

• an issue of allocation between the health care
  system and the rest of the economy

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We're not getting the best mix of goods and
services that we could for the resources we put
in.

• an issue of allocation within the health care
  system

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Some people get more than they need, while others
get less

• an issue of distributional equity

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Problems with how we solve the Economic Problem

• We overcompensate some providers, and underpay
  others
• Our administrative costs exceed any other
  country's
• Yet our system invites fraud and abuse
• We over treat some while excluding others

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Summary Main concepts

• Resources
• labor, capital, natural resources
• Goods and services
• An economic system
• The economic problem
• scarcity
• choice
• allocation
• distribution