Fundamentals of Economic Science and Market Structures

Defining Economic Science

Economics is the science that studies how economic agents rationally utilize scarce resources to meet alternative needs to achieve specific objectives.

Rationality, Effectiveness, and Efficiency

Rationally means seeking effectiveness and efficiency:

• Effectiveness: Achieving a specific goal.
• Efficiency: Achieving that goal while using the least amount of resources possible.

Objectives of Economic Agents

Economic agents pursue distinct objectives:

• Families: Maximizing utility (welfare) through consumption.
• Companies: Producing goods and services to maximize profit (benefit).
• Public Administration: Spending or investing to maximize the welfare of its citizens.

Economic Activity, Goods, and Services

Economic activity is the specific process involved in the production of goods and services aimed at satisfying societal needs.

Goods and Services Defined

• Goods: Any material object that satisfies human needs.
• Services: Activities that satisfy human needs without creating material objects.

Classification of Goods

Goods are classified based on scarcity and use:

• Free Goods: Unlimited or very abundant in amount and generally not owned by anyone (e.g., air, beach access).
• Real Economic Goods: Scarce in relation to the desires for them.
• Consumer Goods: Intended to directly meet human needs.
  • Durables: Housing, cars.
  • Non-durables: Food.
• Capital Assets (Investment Goods): Used to produce other goods or services (e.g., machinery).
• Intermediate Goods: Goods that must undergo further changes before becoming consumer or capital goods.
• Final Goods: Goods that are fit for immediate consumption or ready to produce other goods.

Factors of Production

These are the resources or basic elements used in the production of goods and services. They are typically categorized into three types:

1. Natural Resources (Land): Resources provided by nature.
2. Labor (Human Resources): Physical and intellectual effort applied to production.
3. Capital:
   • Physical Capital: Goods used to produce other goods (machinery, buildings).
   • Financial Capital: Money invested in the purchase of physical capital.
   • Intellectual Capital: Intangible knowledge, organization, and technology originating from people.

Understanding Economic Systems

An economic system refers to the set of basic technical and institutional relationships that characterize the economic organization of a society.

The Three Fundamental Economic Questions

Any economic system must provide answers to these three core questions:

1. What goods and services should be produced, and in what quantity?
2. How should these goods be produced?
3. For whom should these goods be produced (who consumes them)?

Types of Economic Systems

Societies generally adopt one of three main systems:

1. Market Economy

Decisions regarding what, how, and for whom to produce are based on the free operation of markets where individuals buy and sell goods and services. Companies are typically private. The State's role is primarily limited to establishing the legal framework for markets.

2. Planned Economy (Centrally Planned)

Production decisions are not made in the market but centrally by a planning agency. The ownership of factors of production is public (State-owned), not private. Companies are public entities.

3. Mixed Economy

Characterized by intermediate situations where the market operates, but the State also makes significant decisions affecting economic activity. This system involves both public companies/agencies and private companies.

Market Structures and Competition

Markets are classified based on the level of competition among sellers:

• Perfect Competition: Characterized by many sellers offering a homogeneous product.
• Monopoly: A single seller dominates the production or sale of a product.
• Oligopoly: Few sellers dominate the market for a product.
• Monopolistic Competition: Many sellers offer similar products that are differentiated through branding and advertising.