It is a social science that studies the processes of production, exchange, distribution, and consumption of goods and services. According to another of the most accepted definitions, typical of marginalist or subjective currents, economic science analyzes human behavior as a relationship between given ends and scarce means that have alternative uses.
This definition, proposed by Lionel Robbins in 1932, emphasizes three aspects that should be discussed in detail:
- Its object of study is human activity and, therefore, it is a social science. The social sciences differ from the pure or natural sciences in that their claims cannot be refuted or validated by laboratory experiments and, therefore, they use a different modality of the scientific method. However, economics has a set of techniques typical of scientific economists.
- Economic science is justified by the human desire to satisfy its ends. This aspect of the definition proposed by Robbins is debatable and is probably the least developed in the entire history of economic analysis except for the Austrian School and especially Ludwig von Mises. On occasions, when defining the economy, the term ends has been replaced by that of human needs, and it has been said that they are unlimited. Until now, economics has not been excessively concerned with determining how human needs are formed or whether they are unlimited or not, and for this, it should advance in the development of economic anthropology and sociology.
- The raw material of work for economists is the set of scarce resources that can satisfy alternative uses. The resources available to man to satisfy his needs are scarce or, at least, the economy only deals with those that are, and, as such, there is a need to select among them to satisfy alternative ends. If a resource is not scarce or has a single purpose, its treatment is not justified from the economic point of view, unless another utility is intended to be assigned to it.
What is Microeconomics?
It is part of Economics that studies the economic behavior of individual agents; that is, it studies the disaggregated economic phenomena of each agent (consumer, company, etc.), considering the decisions that each one makes to meet certain objectives of their own. Microeconomics has many branches of development. Some of the most important are consumer theory, demand theory, producer theory, general equilibrium theory, and financial asset markets theory. They cannot be considered entirely separate because the results of some influences are part of the basis of others. For example, companies not only offer goods and services but also demand goods and services to produce their own.
What is Macroeconomics?
Macroeconomics is the global study of the economy in terms of the total amount of goods and services produced, total income, the level of employment, productive resources, and the general behavior of prices. Macroeconomics can be used to analyze what is the best way to influence political objectives such as growing the economy, price stability, employment, and obtaining a sustainable balance of payments.
Macroeconomics seeks an image that shows the functioning of the economy as a whole. Its purpose is to obtain a simplified vision of the functioning of the economy, but at the same time allows knowing and acting on the level of economic activity in a specific country or a group of countries.
The economic problem: scarcity and the need to choose
With unlimited needs and scarce resources, we are faced with the problem of scarcity. For this reason, the need appears to choose which will be the needs that we want to satisfy.
Scarcity is a relative concept since there is a desire to acquire a quantity of goods and services greater than the quantity available. Economics considers relative scarcity since goods and services are scarce concerning the desires of individuals.
Scarcity, that is, the balance between our desires and existing resources, forces us to make economic decisions. Decision-making requires considering some objectives against others.
The opportunity cost of a good or service implies the number of other goods and services that you must give up to obtain it. It is what you give up to get something in return.
The production-possibility frontier
The scarcity of resources means that even if all factors of production are used (full employment) there can be no unlimited production of goods and services. Consequently, economic agents must choose which goods and services to produce or consume and which to do without. This fact can be studied from the model of the Production Possibilities Frontier.
The production possibilities frontier describes the different efficient combinations of goods and services that an economy can produce in a given period with existing resources and technology. The FPP highlights two basic principles:
- As resources are scarce, the amount we can produce is limited.
- We can only produce additional amounts of one good if we reduce the production of another.
Through the production possibilities frontier, we will introduce three basic concepts of economic analysis: economic efficiency, opportunity cost, and economic growth.
From an economic efficiency point of view, the technique or production method chosen will be the one that is cheapest for a set of factor prices.
In economics, the opportunity cost refers to the investment cost of available resources, in an economic opportunity, at the expense of available alternative investments, or also the value of the best-unrealized option.
Economic growth is the increase in the quantity of goods, income, or the value of goods and services produced by an economy. It is usually measured as a percentage increase in real Gross Domestic Product, or GDP. Economic growth thus defined has been considered (historically) desirable because it bears a certain relationship with the amount of material goods available and therefore a certain improvement in people’s standard of living.
The basic decisions of all economics
The influence of resources to produce goods that society requires, and the Opportunity Cost, which poses the dilemma of choosing between alternatives, makes the impossibility of satisfying all the required needs lead the economy to take one option and reject another. Hence the need to decide what, how, and for whom to produce.
- What to produce: consists of the act of choosing what will be offered to the population, what goods and services will be produced, and what will be the quantity; also taking into account the urgency of the needs and the resources available.
- How to produce: here it corresponds to defining who will be in charge of organizing and preparing said production; what techniques will be used, and the amount and type of resources that will be used to achieve such ends.
- For whom to produce: this problem consists of deciding how production is going to be distributed, depending on the participation of society in the production process and the rules established for those circumstances of people who cannot participate in it, such as children, the elderly, and the disabled.
In addition to these three questions, which make up the Basic Economic Problem; society must also face the cyclical fluctuations of the economy. Faced with such a situation, the economy must respond by guaranteeing a balanced productive process that works harmoniously, achieving economic growth that meets the natural growth of human needs and the population.
The Functioning of the Economy
To analyze the functioning of the economy, it is necessary to focus on the study of several variables that allow you to establish specific objectives and design an adequate macroeconomic policy, according to the reality of our country. The set of policies is made up of various measures designed by the government aimed at influencing the performance of the economy as a whole.
These objectives are usually inflation, unemployment, and growth, together with these the economic authorities are also concerned with the public budget, accounts with the external sector, and the level of indebtedness of our country.
It is the organization and allocation of the production and consumption of goods and services that arise from the game between supply and demand. In a market economy, producers and consumers coordinate their plans by interacting in the market. It is assumed that both types of economic agents assume the price of goods as given data and, from there, make their production and consumption decisions, maximizing profit in the case of suppliers and maximizing the utility function (satisfaction). ) in the case of consumers.
Their participation, in offering and demanding quantities of goods and services, in turn, alters market conditions, affecting the evolution of prices. This process has been named by Adam Smith as the invisible hand. The market economy is closely linked to capitalism, exchange relations are organized through the market. No one doubts today that the market is an important institution in economic life. But the regulation of society through the market means that objects, the essence of life, and men themselves must become merchandise to be exchanged.
It is one in which some means of production are privately owned and others are publicly owned. It can be said that it is an economy in which the allocation of resources and the level of activity are decided by individuals, companies, cooperatives, public corporations, and the authorities that react, create, or control market opportunities. It is made up of three fundamental sectors: The public sector, the social sector, and the private, national, and foreign sectors.
It is characterized by the presence of the market and the State in economic development. At the same time, it is the form of organization and operation of most countries in the world.
The Neoliberal Model of operation of the Market Economy
Among the basic postulates of this model, also known as the “social market economy”, are the following: freedom of price formation and stability of monetary circulation; competition without monopolies and the immutability of private property; economic independence and the responsibility of entrepreneurs; the limited economic role of the state.
Microeconomics studies the behavior of individual economic units, such as individuals, families, companies, and the markets in which they operate. For this reason, it is also usually defined as the science that studies the allocation of scarce resources between alternative purposes.
The microeconomic theory uses formal models that try to explain and predict, using simplifying assumptions, the behavior of consumers and producers.
In general, microeconomic analysis is associated with price theory and its derivations. The greatest contributor to microeconomic analysis is considered to have been Marshall.
- Agents of Microeconomics:
Consumers-households and producers-companies are the main, fundamental agents of microeconomics to which he frequently seeks to refer. In such a way that every intermediary between production and consumption, from the small vendor to the hypermarket, is considered as a company that buys from producers and resells its production to consumers; its production function then consists of the activity of remunerated storage with the difference between the purchase and sale prices of the goods. In the same way, a bank “produces” loans from the deposits it receives, an insurance company “produces” compensation from the premiums it collects, etc.
- Supply and Demand:
The market is the area where buyers and sellers of a certain good come into contact, and perform the functions of supply and demand for goods and services.
The offer is a concrete amount, well specified in terms of price and the period it covers, and not a potential ability to offer products and services.
Demand, as an economic concept, is not simply equated with the desire or need that exists for a good, but also requires that consumers, or demanders, have the desire and effective ability to pay for said good.
The amount of work and the amount of capital available in the market for goods and services are key variables in this process of balancing supply and demand. The break-even point is where supply and demand meet. The price results from that equilibrium.
For there to be supply and demand, it is required that there be a productive, labor force that generates the goods and at the same time demands inputs and finished products.
- The market equilibrium:
The situation in which, at market prices, all consumers can purchase the quantities they want and suppliers manage to sell everything produced. Freely competitive markets tend to always be in equilibrium.
- The shift of the Demand Curve:
The shape of the demand curve for all normal goods and services is always decreasing as a consequence of the universal law that at lower prices consumers will demand more of the product.
Each good will have its characteristic demand curve, more or less inclined, more or less convex. In addition, the position of the curve, higher, lower, shifted to the left or the right, will depend on several factors:
- the higher or lower income received by consumers
- tastes and fashions
- the prices of other related goods
- expectations or forecasts about the future
If the income of the consumers increases, the demand will be increasing, which will cause the shift to the right of the demand curve since at the same price the quantity demanded will be greater. Conversely, if the country’s income decreases, the demand will decrease and the demand curve will shift to the left.
In the same way, the curve will move to the right if the demand increases due to a positive change in tastes or fashion or because the prices of the products that can substitute it increases.
- The shift of the Supply Curve:
The same explanation given in the displacement of the demand is applied in the displacement of the supply, the difference is found in the factors that produce such displacement.
If the price falls, the supply decreases because it is not convenient for the producer to produce when prices are low, in which case the supply curve moves inwards, but if prices increase the supply will be higher, moving the curve outwards
The factors for these displacements are:
- Technological development: Allows greater production, which brings with it an increase in supply, but without any variation in prices;
- The increase in companies: likewise, the entry of new companies into the market increases production and therefore the supply.
It is the distribution of existing economic resources among various uses. The problem of the allocation of resources arises because the existence of these is limited, while human needs and desires are not; From there arises the need to adequately combine the available resources to maximize the utility of the consumer or the profit of the producer.
The attention of economists has focused on the problem of determining the most efficient allocation of resources possible in such a way as to achieve, with the least amount of these, the maximum achievable production. If each of the factors of production has a market cost and if each of the products that can be produced is also sold at a market price, it is possible to solve this problem using linear programming techniques that give the optimal solution for each case. For this, it is essential to take into account the concept of opportunity cost, that is, the income that is no longer obtained by not dedicating the available resources to activities other than those that are undertaken.