The Economic Problem

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07nelvjose
Created by 07nelvjose over 5 years ago
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The Economic Problem
1 Scarcity
1.1 Infinite needs and wants but only limited resources available to meet the needs
1.2 Economy require the best way to allocate the resources to maximise the benefit to the society as a whole
1.2.1 Maximising objective of each agents combined with signals of price(rewards of factor of production) helps to allocate resources where consumers want them most
1.2.1.1 Adam Smith
1.2.1.1.1 Invisible hand moving resources to their best use
1.3 Opportunity Cost
1.3.1 The next best alternative forgone when an economic decision is made
1.4 Economic Goods
1.4.1 Scare and opportunity cost involved
2 Free Goods
2.1 No opportunity cost involved
2.1.1 E.g. Air
3 Economic Resources
3.1 Factors of Production
3.1.1 Land
3.1.1.1 Reward:Rent
3.1.2 Labour
3.1.2.1 Reward:Wages
3.1.3 Capital
3.1.3.1 Reward:Interest
3.1.4 Enterprise
3.1.4.1 Reward:Profit
3.1.5 Factor Market
3.1.5.1 Markets where factors of production are bought and sold
4 Objectives of individuals, firms and government
4.1 Individuals
4.1.1 Rational consumers
4.1.2 Decisions based on maximising our own welfare
4.2 Workers
4.2.1 Higher wages
4.2.2 Better working conditions
4.2.3 Job security
4.3 Firms
4.3.1 Maximise profits
4.4 Government
4.4.1 Political Objective
4.4.2 Chances of re-elected
5 Free market economy
5.1 Limited intervention of the government
5.2 High prices
5.2.1 Indicates profits
5.2.1.1 Signals higher output or new firms entering the market
5.2.1.1.1 E.g. Rise in oil prices
5.2.1.1.1.1 Consumers tend to ration more
5.2.1.1.1.2 Development of new oilfields in tougher environments
5.2.1.1.1.2.1 Supply increased due to higher profit incentive
5.2.2 Incentive Function
5.2.3 Rationing function
5.2.4 Signalling function
6 Assumption
6.1 Assume consumers wants to maximise their own satisfaction
6.2 Assume firms want to maximise profit

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