Economics of the Market

• Needs


  Things that are essential for survival and well-being
• Wants


  Things that are desired but not essential for survival and well-being
• Factors of production

  • Land
  • Labour
  • Capital
  • Enterprise
• Scarcity


  Differs from shortage, which is a temporary lack of supply
• Free goods


  Goods and services that are available in unlimited quantities at zero cost
• Opportunity cost


  The value of the next best alternative that must be given up when a choice is made
• Rational economic behaviour


  Consumers and producers making choices that maximise their satisfaction or profits
• Factor mobility


  The ease with which factors of production can move between different uses and locations
• The three basic economic questions

  • What to produce?
  • How to produce?
  • For whom to produce?
• Economics is the study of how society chooses to use its scarce resources to satisfy unlimited wants
• Free goods


  Goods of which there are enough to satisfy everyone's desire for them at a zero price
• Just because a good does not cost anything to buy, it does not necessarily make it a free good as far as Economics is concerned
• Free goods


  • Sunshine
  • Wild brambles
• To the economist, all things are scarce, the only exception being free goods
• Consumers provide because their resources are limited.
• Every choice


  Is the result of scarcity
• Scarcity is not the same as being limited in supply.
• Free goods are goods of which there are enough to satisfy everyone's desire for them at a zero price.
• Just because a good does not cost anything to buy, it does not necessarily make it a free good as far as Economics is concerned.
• Examples of free goods

  • Sunshine
  • Wild brambles
• Opportunity cost


  The real cost, as opposed to the monetary cost, of any choice is the next best alternative choice that we have sacrificed
• Opportunity cost is the direct result of scarcity and occurs every time a choice is made.
• If a good has no opportunity cost it must be a free good.
• Rational economic behaviour


  Consumers, producers and governments will choose the alternative that gives them the greatest satisfaction, profit, or welfare respectively
• Factor mobility


  • The speed and ease with which a factor can move - either from place to place (geographical mobility) or from job to job (occupational mobility)
• Obstacles to labour mobility

  • Family ties
  • Cost of moving
  • Lack of qualifications
  • Different school systems
  • Age
  • Obsolete skills
  • Housing costs
• The three basic economic questions

  • What will be produced?
  • How will these be produced?
  • To whom will the goods be distributed?
• Economics is a social science.
• The basic economic problem

  Unlimited wants in relation to limited resources
• Ticket


  • £100
• Jane is offered £500 for her ticket


  The opportunity cost of her now going to see the final is £400
• Opportunity cost


  The second best preference that cannot now be achieved
• Vehicle manufacturing firm production combinations

  • 10 cars and 16 motorbikes
  • 20 cars and 12 motorbikes
  • 30 cars and 8 motorbikes
  • 40 cars and 4 motorbikes
• Opportunity cost of producing one motorbike

  5 cars
• Economics is a social science
• Basic economic problem arises due to

  • Unlimited wants of people and society
  • Limited resources available
• Choices must take place
• Goods


  • Scarce goods
  • Free goods
• Factors of production


  • Land (natural resources)
  • Labour (human resources)
  • Capital (man-made resources)
  • Enterprise (organising and risk-taking factor)
• Opportunity cost


  The second preference that cannot now be achieved