Principles of Economics/Basic Concepts
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[edit] Use of Models
Economists use models to portray situations. Hence, there is a focus on understanding how things work, observing patterns, and predicting results of stimuli.
[edit] Goods and Services
In economics, goods (guns, butter) consist of anything that can be bought and/or sold. Even services (seeing the doctor, hotel space), which are intangible, may in some cases be considered a type of good; however, you will often come across the phrase "goods and services", and services will generally be kept distinct. These are generally also subdivided as necessities and luxuries, though the distinction is blurry. There are four types of goods:
- Natural resources (land, minerals, fish, game)
- Labor (workers)
- Capital (infrastructure, machinery, instruments)
- Entrepreneurship (willingness to take risks)
[edit] Positive and Normative Statements
Positive statements are facts; normative statements are opinions.
Predictions are considered positive, as are any comments that do not introduce value judgments (good/bad). Normative statements try to present a subjective belief, such as advice by economists and politicians.
[edit] Supply and Demand
The supply and demand model is the beginner's tool and central component of microeconomics. In any industry, there are:
- Suppliers - firms that produce a good
- Demanders - consumers that buy a good
Unless it is a labor market, in which case the roles are reversed with individuals being the suppliers of labor.
Different parties have different levels of desires for both supply and demand; hence, each can be presented by a curve. The supply curve is upward sloping because of increasing marginal cost of production (the increasing prices are necessary to cover the increasing costs). The demand curve is downward sloping because as prices rise, fewer people are willing to buy.
In both cases, the law of diminishing returns limits the number of a good requested by all parties in society.
Note that demand refers to the demands of people who want something and are willing and able to pay for the good.
