Economics

The economy of a modern country is generally typified by two poles - consumption and production.

Let us define consumtion. Consumption is the use of goods and services to satisfy human wants/needs. (The only difference between a want and a need is really academic - one can say that a want is more generalised and a need is closer to the predispositon of action. In any event the consumption takes place by an individual in a household - termed the consumption unit. Production, that is the "process of providing anything that can be used, directly or indirectly, takes place in the firm or production unit" (van den Bogaerde, 1983, p1). The firm combines the four factors of production (labour, land and capital, through entrepreneurship) to produce these goods and services. So one can see that firms need the factors of production and have a demand for these and are prepared to pay a price to obtain them from the owners and individals and households who own the factors of production, supply these to firms at a price.

Why would households be prepared to sell the factors of production? - they need the income to pay for goods and services rendered by firms to satisfy their needs since they cannot produce all of what they need themselves. Through specialisation and trade, maximum individual, and therfore social benfit, can be derived.

Through this a "money-goods flow" arises between households and firms.

Economics is interested in the reasons for the flow, the volume of the flow and specifically the price at which the flow takes place.

INTRODUCTION

What is Economics.

It is the study of the way humans go about making things and trading them so as to optimise their satisfaction levels. There are more sophisticated definitions but this is the gist of it! Do familiarise yourself with these more academic definitions.

Micro-economics is the study of the individual economic behaviour – the individual person or the individual firm. It for example investigates the level of production of the firm under different pricing conditions.

Macro-economics would study larger economic units such as countries and would investigate issues such as monetary and fiscal policy, the phenomena such as inflation, unemployment and balance of payment issues.

Different economic systems. When one discusses the different economic systems one can get bogged down with myriads of fine and finer distinctions – there really are only two – Free Market and Controlled (one may also talk about Capitalist and Socialist) as the the basic templates. The main difference being?

Within these two broad categories the major distinguishing factor is where property rights reside. If it is with the individual we are looking at the Free Market side and if it resides with the Government, the state or some other collective one would be looking at a socialist organisation of the means of production.

Often one would hear about people referring to a “mixed” economy – well though one might find elements of the free market and elements of Government control in most economies, this is not to say that it is a desirable situation in as much as one would say that a little poison mixed in with the tea is desirable. It is commonly accepted that the freer the economy, the higher the standard of living is experienced by the people participating in that economy. This has been consistently documented by the EFW report over the past number of years (http://www.fraserinstitute.org/).

In these series of documents we will be exploring these and other concepts and prepare you to intelligently discuss the various phenomena found on a day to day basis within a society (and to help you pass an Economics examination where necessary.

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