Because of this shortage, economic goods have a positive price in the market. That is, consumers have to pay to get them.
What is an example of a good which is not scarce? Water in the ocean? Sand in the desert? Any good whose supply is greater than the demand if their price were zero is called a free good , since consumers can obtain all they want at no charge. We used to consider air a free good, but increasingly clean air is scarce. There are four productive resources resources have to be able to produce something , also called factors of production :. Productive resources and factors of production are explained again in more detail in the following video:.
Improve this page Learn More. Skip to main content. Module 1: Economic Thinking. Search for:. Understanding Economics and Scarcity Learning Objectives Describe scarcity and explain its economic impact Describe factors of production.
A good can be produced using different techniques of production. When writers are trying to explain an unfamiliar idea, they rely on definitions. All definitions attempt to explain or clarify a term. This lesson will introduce you to the three different types of definitions: formal, informal, and extended. Skip to content.
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Related Resources. Market Economies. View Article. Gross Domestic Product. Educational Resources in Your Inbox. The effects of keeping food prices low is famine. Two things happen when governments lower food prices: 1 farmers make less so they work less and grow less, and 2 since prices are low those who do find food buy more.
This created a shortage. To handle the shortage they had to issue ration coupons. If you wanted to buy gas, you first needed a coupon. The government created the shortage. The government created allocative inefficiency.
In response, the Arab oil producers refused to sell oil tot he US. This would have caused the price of gasoline to increase greatly, but President Nixon prevented the price from rising. Gas stations had long lines queues. Some would only sell gasoline on certain days or limit a purchase to 5 gallons. In the early 's the government of Iraq invaded the country of Kuwait disrupting oil exports from the Persian Gulf. But there was no shortage of gasoline! If you wanted to buy gas you just had to drive to a gas station and fill 'er up.
Why wasn't there a shortage of gasoline this time? Because the government allowed the market to work and the price increased. As a result two things happened: 1 gasoline producers did all they could to produce more gasoline, and 2 drivers conserved, carpooled, and drove less.
This was allocatively efficient. In a market economy, or pure capitalism, the price will adjust to achieve allocative efficiency. Inefficiency occurs when the government interferes or if one or a few firms have control over the market.
The third way to use our existing resources to achieve the maximum satisfaction possible is equity. Equity is a "fair" distribution of income, or goods and services. NOTE: this is not the same definition used by accountants. One problem with this definition is agreeing on what "fair" means. Fair does not mean "equal". Would an equal distribution of income be good for society? Would it be good if doctors were paid the same as janitors? Probably not. If we paid doctors the same as janitors we would have few doctors, and the would not put in the time needed to learn medicine.
We know that equity is good for society it is one of the five Es. So equitable cannot mean the same as equal. But we can't measure "fairness". This is a problem for economists. But we can DESCRIBE the actual distribution of income and I will also try to explain how equity does help society achieve the maximum satisfaction possible from its limited resources. When economists describe the distribution of income they usually divide the population into groups of equal sizes usually five called quintiles according to their income levels.
In the fifth quintile they put the richest twenty percent. Comments discussion forum? How does equity help society achieve the maximum possible satisfaction from its limited resources?
Now, let's say that President Bush gives us each a pair of pants. We should be able to agree that this is more fair, more equitable, right? So what happens to society's satisfaction? We are more satisfied since each of us has a pair of pant. This brings us to the Law of Diminishing Marginal Utility. Utility is the reason we consume a goods or services. You might call it satisfaction. I get satisfaction utility when I drive my boat. I get utility satisfaction? According to the law of diminishing marginal utility the EXTRA not the total utility diminishes for each additional unit consumed.
The first time I drive my boat in the Spring I really enjoy it. But after a few weekends of boating it doesn't give me as much additional satisfaction as the first time. I still go boating. My total utility still goes up. Since we start with no pants, the first pair we get from President Bush gives us a lot of utility satisfaction.
Also since President Bush still has millions or billions of pairs of pants left, giving us million causes his utility satisfaction to go down only a little. From the same amount of resources we are receiving more satisfaction. Here we will define full employment as using ALL available resources, not just labor. This means that if we have full employment we are using all of our labor, factories, mines, fields, etc. How does full employment help society achieve the maximum satisfaction from its limited resources?
Even though it seems simple to me, students have a difficult time understanding why employment of all our resources is necessary if we are to produce all we can and achieve the maximum satisfaction possible from our existing resources. If we have full employment, we produce MORE. If we have unemployed resources, we produce LESS. This is why society's strive for full employment - it reduces scarcity and helps achieve the maximum satisfaction possible. Issues would include the determination of prices of individual products, studying individual industries, or making individual consumer choices.
The only component of economnics not included in either a Macroeconomics course or a Microeconomics course is "Reducing consumer wants.
One last thing I'd like to discuss briefly in this introductory lecture is "why study economics? Most of you are probably business majors management, finance, marketing, accounting, etc.
Another reason to take an economics course is to become a more informed voter and citizen. Much of what the candidates and political leaders discuss can be better understood with a knowledge of economics.
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