1. Fundamental of Economics – Basics

Before I talk about two types of economics which would be very familiar to you – Micro and Macro economics – there are some basic knowledge that we should know in order to understand them properly.

 

 


 

 

RESOURCE

“Everything you NEED or WANT throughout your life”

 

Resources can be divided into two types:

 

1) Unlimited Resource

  • Exists in unlimited amount
  • things such as Sunlight, Oxygen, etc
  • Do not require economic analysis

 

2) Limited Resource

  • Exists in limited amount
  • things such as Money, House, Foods, everything you purchase
  • Subject of economic analysis

 

 

 

 

SCARCITY

“FINITE resources   BUT   INFINITE needs & wants”

 

= Resources are insufficient to satisfy all human wants and needs

-> Scarcity appears

-> The Reason Why Economics Exists (Choice should be made, but what choice would you make?)

 

  • Scarcity (shortage) -> Price (Exchange Value) ↑      <=  Marginal Utility

                                                         ≠ Use Value (Total Utility)

         ∴ Price is determined by Scarcity

 

 

 

 

Basic / Central Economic Problems

“Resources are scarce, therefore economics asks three questions…”

 

  1. WHAT to produce?   –   deciding types and quantity of supply (focusing on efficiency)
  2. HOW to produce?   –   deciding procedures of supply (focusing on efficiency)
  3. FOR WHOM to produce?   –   deciding distribution of goods (focusing on efficiency and equity)

 

 

 

 

Factors of Production (Types of Resource)

 

  1. LAND   –   Every natural resource (such as Gas, Mineral, Petroleum, etc)
  2. LABOUR   –    All kind of human resource
  3. CAPITAL (≠ money)   –   All kind of man-made goods (such as Machine, Truck, etc)
  4. ENTREPRENEURSHIP (= Enterprise)   –   Ability (of manager) to arrange and make use of resources in production

 

 

 

 

Efficiency     VS     Equality

 

EFFICIENCY : to produce as many as possible with resources

(Extreme pursuit on efficiency in Free Market economy)

-> Making the whole pie as large as possible

 

EQUALITY : to distribute given resources equally to people

(Extreme pursuit on equality in Command economy)

-> Dividing the whole pie as equal as possible

 

 

 

 

Economy Systems

 

MARKET ECONOMY

  • Most of modern nations
  • a.k.a. Capitalism
  • Market & Price decide everything

Invisible Hand (= market & price, from The Wealth of Nations by Adam Smith), Total Freedom, No Government Intervention, Private Property, Fair Competition, Self-Interest & Incentive

 

COMMAND ECONOMY

  • Only few exist(ed) (such as USSR, past China, Cuba, North Korea, Vietnam)
  • a.k.a. Communism
  • Central government decides everything
  • No private property

 

Why did command economy fail?

1. Difficult of expectation & control (since all the productions are commanded, it cannot flexibly react to external/unexpected factors; black swans)

2. No incentive to work diligently (since everyone work together and distributed equally, working hard does not guarantee higher return)

 

MIXED ECONOMY

= Market Economy + Command Economy

: based on Market economy, but has some features of Command economy (such as Tax, Subsidy, Welfare, etc)

 

 

 

 

Micro Economics     VS     Macro Economics

 

MICROECONOMICS

  • Focus on individual agents
  • Household & Firms

 

MACROECONOMICS

  • Focus on national-wide or international-wide
  • Entire society & government (such as Inflation, Deflation, Fiscal & Monetary Policies, Exchange Rate, Trades, etc)

 

 

 

 

Two Types of Statements

 

NORMATIVE STATEMENT

  • “~ should be ~.”
  • Subjective, and opinion-included (value judgement)
  • Approval / Disapproval

 

POSITIVE STATEMENT

  • “~ is ~.”
  • Objective, and evidence-based (fact judgement)
  • Provable / Disprovable

 

 

 

 

Industry Sectors

 

  1. Primary : gets products directly from the nature (such as Agriculture, Fishery, Forestry…)
  2. Secondary : processing or manufacturing (bit oddly, mining is categorised as secondary industry)
  3. Tertiary : service & wholesale / retail

 

 

 

 

 

* Things that I wrote here can be wrong or subjective. Please generously understand.

* Any feedback are welcomed.

* Words coloured like this include things that I did not discuss yet.

* I want to thank Yong-ju Kim, who introduced me to the world of economics and taught me lots of things.

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