User:WhaatTF/IB HL economics/Foundations of economics

Societies have needs and wants. Needs are things necessary for survival, such as food, shelter, and water. Wants are things not necessary for survival still we may wish to own, such as a car, telephone, and Spider-man suit (for whatever reason). Those needs and wants are satisfied by resources. Resource, which are not limited natural resources (as we shall see), are utilized to produce various products and services which are collectively called goods, in order to satisfy the needs and wants. Since resources are limited while demands for them is unlimited &mdash; a person can need and want infinite number of things simultanously &mdash; a conflict of what best to choose of these needs and wants arise. More cars or computer? The classic question of "butter or guns"? Are suits, in the economic sense, better than dresses? That's where economics comes into play.

What is economics
Economics is social science. More specifically, a study of choices leading to the best allocation of limited resources, to satisfy unlimited demands of consumers. Social sciences study people and their interactions in society. Among social sciences, there's psychology, sociology and history.

Scarcity and choice
Scarcity is a situation in which resources are unsufficient to meet the demands of consumers. If there wasn't scarcity, people wouldn't have to make choices. And in turn economics, being the study of choice people make, would not exist. In economics, the term "scarce" is used slightly differently from the ordinary use. For example, it may seem that the number of cars in London is not scarce at all, but since cars have a price they are relatively scarce; not all individuals who want a car can afford it. The relationship between scarcity and price is explained in next section: opportunity cost.

Opportunity cost
Opportunity cost is the cost of the second best alternative forgone as a result of making a choice. This simply means, the value of what you give up to get something else. In a simplified example, say you have one hour to devote for two activities: buying a ticket to see a new movie for $15 or reading a book that costs $20. If you decide to see the movie over buying and reading the book, opportunity cost here would be the price of the book.

What you forgo isn't necessarily always expressed in monetary terms. It could be time, labor, health, or anything associated with losing the second best alternative. Subsequently, social media, in terms of economics, is definitely not free. For every hour devoted for it, an hour that could have been devoted to another activity &mdash; for instance, editing this course for the better &mdash; is given up.

As previously mentioned, anything that have opportunity cost is relativity scarce; thus, it must have a price since it connot be supplied indefinitely. Priced goods are classified as "economic good," such as cars, houses, and products. On the other hand, some resources don't have an opportunity cost associated with them; consequently, they are classified as "free goods", such as the air; we don't give up anything to breath it, so it doesn't have an opportunity cost for which reason it doesn't have a price.

The three basic economic problems
Since resources are relatively scarse, choices have to be made. The central theme of economics, choices, give rise to three fundamental questions that every economy must answer.
 * What to produce and in what quantities. All economies must answer this question. With the available resources, what should be produced and how much of it. Do we produce a million car the next year, a new operating software for the three major OS platforms, or five hundred electric cars.
 * How to produce. There's plenty of ways to produce goods and in various combinations of production. Use more human labor and less machines, or more machines, less human labour.
 * For whom to produce. There's billions of people in the planet from all classified into numerous classes. With the good and services produced, do we distribute them among college students, Phd. experts, hospitals, companies, schools, actors, and so on.

Resources and factors of production
We have seen that resources are inputs used to produce goods. Those resources could be human labor, machines, and so on. When these resources are used in production of goods, they are collectively refered to as "factors of production" and are classified into four broad categories:
 * Land: it refers to many things: all natural resources, including all that is under it and above the land. For instance, oil reserve, forests, agriculture and non-agriculture, rivers and lakes, to name a few.
 * Labor: all human labor &mdash; mental or physical &mdash; contributed to produce goods and services. For instance, the efforts police, teachers, plumbers, or construction workers, exert cognitively and physically that contribute to producing a good or a service.
 * Capital: a produced factor of procuction used, in turn, to produce good and services through human capital and physical capital. Physical is stock of manifactured resources, such as, machinery, airport, tools, factories, electricity generators. Human capital is value of workforce. This factor is also refered to as "capital good" or "investment good". Unlike land, capital goods can be increased through labor.
 * Management (or entrepreneurship): a skill or ability possessed by some individuals organize and take risks to innovate to products and services. Management or trepreneurship involves managing and organizing the three above factors to create new goods and services. Because entrepreneurs organize and innovate goods and services with unclear outcome in hopes of making a profit, it's considered risky.

Production possibilies model
Production possibily curve (PPC) or Production possibilies frontier (PPF) is curve that shows the potential output for an economy of two goods with fixed technology and similar factors of production, look Figure 1. For example, let's consider the classic question "guns or butter", where the economy has to choose either to produce food or guns. If the company decides to allocates most its resources for the production of guns, then it will not produce much any butter (Point B). If it produces mostly food, then less guns will be produced (Point C). If the produce on point C, then the economy is allocating for the production of both goods. These choices are decided by societies. Some countries need more national security over food security, while others need the reverse. For the economy to produce in the PPC, two conditions must be met:
 * Resources must be fully utilized and nothing of them are wasted.
 * Resources must be utilized efficiently. If there's an alternative way that best produces the desired goods and is not employed, then there is a productive inefficiency. For the economy to be efficient, it must produce goods at the lowest cost possible.

In reality, no economy is ever able to reach PPC, because it can't meet the two condition, and hence it produces on inside PPC, i.e. point A. And, as you might have guessed, it can't produce outside PPC either, i.e. point X, unless PPC expands to accomodate the point through introducing more resources.

The PPC illustrates several economic concepts, to name some we've seen so far there's opportunity cost, scarcity of resources (the fundamental economic problem that all societies face), and the tree basic economic problems (what and how to produce).