Economics essentially studies the way in which mankind provides for the material well being. Its thus concerned with the way people apply their knowledge, skills and effort to the gift of nature in order to satisfy human their material wants. Economics is a social science which studies the allocation of scarce resources which have alternative uses among competing and usually limitless wants of the consumers in the society.
Basic Economic Concepts
- Human wants This refers to people desires for goods and services and circumstances that enhance their material well being.
- Economic Resources These are ingredients that are available for providing goods and services in order to certify the human wants. A resource must be scarce and have money value. Resources can be categorized as natural, or man made.
- Natural Resources refer to anything given God or nature such as fertile soil, rivers, lakes, mountains etc.
- Man Made Resources refers to anything created man to assist in further production such as tools, equipments, roads and buildings etc.
N/B Economics resources also refer to as factors of production which includes land, labour, capital and entrepreneurship.
- Scarce and Choice if the resources available are not enough to produce goods and services to satisfy all the wants then they are said to be scarce. As a result, individuals and society cannot have all the things that they want. Since resources are limited, choices have to be made. The choice to satisfy one want implies others are forgone. Individuals have to make choices e.g. consumers with their limited income and unlimited wants have to choose how they spent their income.
- Opportunity Cost refers to the value of benefit expected from the best second alternative forgone. It is based on the fact that resources being scarce have competing alternative uses. The choice to satisfy one alternative means that
another is forgone. The value of the second best forgone alternative is the opportunity cost.
Production Possibility Frontier/Capacity (PPF/PPC)
It provides a graphical illustration of the problem of scarcity and choice which is the basic economic problem. The curve shows what a country produces with existing supply of land, capital and entrepreneurship ability. With limited supply of economics resources a country has a wide variety of options and variety of goods and services it can produce. Assume a simple hypothetical economy where a country produces two types of goods i.e. agriculture and manufactured goods. The two extreme possibilities are:
- The country commits all its resources to the production of agriculture and non to manufacturing.
- All the resources are put to manufacture and non to agriculture.
These two extreme cases are unlikely and the country will most likely choose to produce goods of both commodities. The opportunity cost of producing either of them is increasing which the law of diminishing return.