Core Economic Principles: Production, Markets, and Government Role

What is the Economy?

The economy involves factors like the price level, employment and unemployment, and the growth of foreign trade production nationally. Economic development is linked to the concept of quality of life, which gained prominence in the 80s, 90s, and 2000s. It emphasizes theories that explain the factors determining cultural, material, and spiritual progress, as well as overall well-being (income level).

Positive vs. Normative Economics

Positive economics: seeks to explain how the economic and social reality works. Normative economics: describes how reality should ideally be.

The Concept of Balance

The concept of balance: refers to the state where interacting forces are balanced, leading to a desirable solution from a societal perspective. This includes optimal demand and production.

Variables and Graphs

Graph: A single line showing the relationship between variables, allowing us to understand ideas in different fields, including economics. A variable is an element of interest that can be measured or quantified. Variables help build theories. Examples include the price of goods, streets, and domestic violence. The Cartesian plane uses two perpendicular lines (axes), graded from -infinity to +infinity, designated as x and y, intersecting at the origin.

The slope of a line or curve represents the change in the ordinate variable divided by the change in the abscissa (- or +).

Problems of Economic Organization

Problems of economic organization: include what to produce, how to produce, and for whom to produce.

What to Produce

What to produce: involves deciding which goods, products, and services are required to develop or manufacture in a given society.

How to Produce

How to produce: once the first problem is solved, the second arises: deciding which inputs and in what ratio they will be used.

Productive Factors

Productive factors: are the material and human means that producers use to create goods and services. These include:

1. Land: agricultural land and natural resources.
2. Labor: work and worker services.
3. Capital: goods like machinery and equipment.

For Whom to Produce

For whom to produce: involves deciding who will receive the output, i.e., the distribution of goods and services. This is resolved according to the economic system, which can be centralized (socialist) or free market (capitalist).

Law of Diminishing Returns

Law of diminishing returns: states that in a specific productive process, increasing the use of one variable factor while keeping others fixed will increase total output, but marginal production will eventually decrease.

Economic Efficiency, Equity, and Stability

Economic efficiency: is achieved when governments promote competition, reduce pollution externalities, and provide public goods. Equity: is promoted when governments use taxes or spending programs to redistribute income to certain groups. Stability and Economic Growth: are fostered through the reduction of unemployment and inflation, while economic growth is encouraged through fiscal and monetary control.

Human Capital and Transfers

Human capital: refers to the education people receive, which leads to the development of various productive skills. Education can be primary, secondary, university, technical, or vocational. Transfers or subsidies: are payments by the government to a firm or household that produces or consumes a good. For example, the government may provide food subsidies to low-income households.

Fiscal and Monetary Policy

Fiscal policy: is managed by the finance ministry, while the central bank is responsible for monetary policy. Both constitute economic policy, which involves the collection of revenue by the government and its use through government spending.

Marginal Product

Marginal product is estimated as the increase in total production divided by the increased use of a variable factor, such as labor. It is the slope of the total product curve: (PTf-PTi)/(Tf-Ti).

Functions of Government in the Economy

The government has three main functions in the economy:

• Efficiency: addressing imperfect markets, externalities, and providing public goods.
• Equity: through aid, subsidies, and emergency programs.
• Stability: through fiscal and monetary policy.

Function Application

Function application: relates the quantity of goods or services to different variables to determine the symbols.