INTRODUCTION
Economics provides a series of tools to understand how the decisions get made to achieve our needs, personal, and common goals. Every decision we make involves tons of information and variables. Economic growth is the quantity of goods and services produced in a given economy in a specific time, increasing, and generating improvement in real GDP per capita. Productivity is a measure of output per unit of worker. It is a measure of input, including labor, of resources used to produce goods and services, compared to the output. Human capital is related of a worker’s experience and skills. So, human capital is an intangible asset generated by improvements in education, intelligence, training, and knowledge, and valued as an asset that increases productivity and thus profitability in the economy. We need to understand how to better run the businesses and achieve our goals.
We need to understand concepts like choice, Scarcity, Opportunity Cost, production possibilities, the supply and demand model, competitive equilibrium model firms, industries changing over time, and economic growth.
Improvements in capital goods, labor force, technology, and human capital contribute to economic growth. So, Productivity and Human Capital are directly related to the Productivity and Economic growth, which is an improvement and increase in the production of economic goods and services in one period of time. Real and nominal GDP are commonly used to measure economic growth in a certain period of time. Real GDP is adjusted to remove inflation. Economic growth has to deal with challenges expansion, peak, contraction, and trough. Increases in government spending are generally effective to increases the GDP or increases in aggregate production in an economy. It’s about every decision we make.
THE MANTRA OF ECONOMICS.
People make choices with scarce resources, interact with others, and make these choices. So, individual face tradeoffs when they have to choose different types of goods. We need to face the opportunity cost of our choices between alternatives options. We deal with limited resources. Economic resources are scarce. Almost everything is scarce. So, we must develop skill to learn how to allocate our scarce resources with sapience. So, the Economics study the tools and skills used to make good choices with scarce resources and teach individuals, households, and firms how to make those decisions. Facing scarce resources, we must make choices that implies choose one alternative over another. In sum, scarcity, choice, and opportunity cost are central ideas when we interact with other people in the market.
Because our resources are limited, we can’t desire everything. Consequently, to say yes to one good services, we must say no to another. In this scenario, opportunity cost and trade off are part of our everyday life since opportunity cost is the trade-off between two choices. We make choices all the time since the scarcity forces us to choose among alternatives. So, scarcity limits our choices and desire. What should be produced? Facing scarce resources, firms and industries have to produce one thing and giving up another and for whom they should produce goods and services. So, government must intervene in the economy so that scarce resources are well allocated.
All segment of the society must work together to determine what must be produced and how the good and services are distributed to the whole society efficiently.
OPPORTUNITY COST AND TRADE-OFFS
In economics, the interaction between our unlimited wants and our limited resources is called trade-off or opportunity cost. Trade-offs are defined as decision to opt for an alternative. The opportunity cost is understood as a value of the forgone alternative. Opportunity cost refers to the value of the next best alternative of an economic decision. Any decision that you take has an opportunity cost in terms of what else you could have done.
We make decisions under scarce resources. We make decision or tradeoff between work and leisure. Ever our time is scarce. We face scarce resources. Hence, tradeoffs are inescapable whenever dealing with scarce resources. So, in our everyday life, making tradeoffs is unavoidable. Trade-offs in economics implies the decision-making in which people and firms choose between competing options – like exporting, creating a joint venture or strategic alliance in another country. In economics individual, firms and household make decision to choose between several viable alternatives. However, these choices imply to prioritize one option over another. So, we must sacrifice some the benefits of the option not chosen. We choose one alternative pursue better alternative, at least one person’s view. Everything involves pros and cons, and tradeoffs, and there’s doubts to every decision we make.
Opportunity cost is the value of the next-best lost alternative to making a choice. Opportunity cost is the real cost of a decision. If we choose to study law instead economy, the economy is our Opportunity cost. Then, an opportunity cost is the cost of any action in terms of what you could have done instead since you chose another option.
In personal life, we decide how to allocate our time between studying and posting in social media. If they choose to go to study, they give up the opportunity to posting in social media. In this case, the trade-off consists in between studying or having fun in social media. In the marketplace, we need to make choices since we deal with scarce resources. So, scarcity is the fundamental problem the economic agents seek to solve. So, in our everyday life we must forgo something to get something else. Tradeoffs are linking all important question when we have to make decision in the marketplace. In the marketplace, we must struggle between our unlimited wants and limited resources.
When our unlimited wants and limited resources meet, we must make choices. In the context of scarcity, opportunity cost is a fundamental principal. Opportunity cost is the value of the best alternative forgone to make another choice.
If you choose to spend your money or value buying a pair of shoes, you have at the same time chose to forgo the benefits of spending the same amount to have fun in the movies. If the pair of shoes is the most valuable of those alternatives, so the opportunity cost is the value to have fun in the movies. Opportunity costs increase as production increases.
Opportunity cost is the value or time, not necessary the amount of money you spend to buy something. We must make choices to buy goods or services that may improve our position. Hence, we need to take into consideration our preferences for various types of quantities and goods, considering our budget constraints. But our preferences may follow some rules since our preferences need to be logically consistent.
The opportunity cost of producing something is the option to produce other product. We have already seen to make one decision requires giving up other option.
An economy has a comparative advantage in producing any good when the opportunity cost of producing that good is lower for that economy than for any other.
Finally, since the goods are scarce, the principals of scarcity, choice, and opportunity cost / trade-off, comparative advantage, specialization are essential to understand economics. In this scenario, we must learn to make choices, since we may be worried about these issues. So, we should be primarily concerned with the scarcity of resources when we haveto make decisions about consuming those resources.
SOURCES OF ECONOMIC GROWTH
The government policies must promote increase in real GDP and expand the Economic capacity to produce more. An increase in real GDP is not necessarily economic growth. The economy has to promote its ability to produce more. When an economy recovers from and experience an increase in real GDP is not economic growth because is not expanding its capacity to produce more. So, economic growth is an increase in the capacity to produce more goods and services. Then, more physical capital drives to more economic growth. Besides, when the capital per worker does not decrease, the increasing in the workforce implies more production. Besides, improvements in education improve the productivity of workforce. The improvement in technology drives to increase in the productivity. Then, these resources lead to the economic growth.
GOVERNMENT POLICIES
Government policies can impact economic growth. So, Government policies can impact increasing in physical capital, education on the workforce, technology, income, and social welfare. Increasing in Infrastructure, for instance, can promote economic growth. Besides, Government policies must pay special attention in workforce education since this policy affect productivity and impact economic growth positively.
Government policies must also promote capital accumulation and technological improvement. The policies must encourage people to save in order to increase Net Capital, which lead to higher economic growth. Government policies must also to encourage firms and industry to invest technological innovation to promote more economic growth.
Government policies can address market failures, like situation in which a company emits pollutants and people who suffers harm as a result. Government policies can address the interests of society as whole, not only a specific industry or segment of the society, including consumers and households.
It is desirable that Governments have clear goals to achieve but they need to indicate the rules they will be implemented to achieve their objectives. In fact, the government have to intervene in the economy when the market failure or when the market fails to promote social justice and efficient outcomes.
Government must adopt policies that guides the economy to the desirable directions and encourage people and industry to save, spend and invest. Note that individual motivation is crucial to the desirable economic outcomes.
GAINS FROM TRADE
Gains from trade are improvements in income, production, or satisfaction due to the exchange of goods or services. This economic interaction with a foreign country, for instance, can lead to the Specialization, Division of labor, comparative advantage, and increasing in productivity. The exchange in the market makes individuals or firms better off since nobody can produce everything they need.
On the other hand, specialization and comparative advantage can lead people and countries to produce one good with higher quality and at a lower cost. Then, countries invest their efforts in what they are better. Specialization and comparative advantage can also lead to greater productivity due to greater efficiency. International trade, for instance, can lead to the poverty reduction in the development countries. Specialization can lead to progress over time. The specialization can increase o productivity and resources can be used more efficiently. Specialization can also lead to comparative advantage.
SPECIALIZATION
Specialization is necessary to all sphere of our life since we can develop our “natural” talent and skills to be well succeeded and achieve our goals. Specialization means that people, firms, and countries produce goods and services in which it has a comparative advantage. Firms and countries focus on producing some types of specific goods to gain a greater degree of efficiency. Many countries specialize in producing the goods and services that they do better than other countries and, therefore, they have a comparative advantage. This specialization is the reason why countries trade with each other. So, firms and countries produce limited products to become more efficient and gain advantage. It increases productivity and provide a comparative advantage for the whole economies. Therefore, specialization can occur in microeconomic and macroeconomic levels.
So, individuals, firms, and countries invest in specialization to offer better goods and services. Specialization is important since they can invest in their capacities, talents, abilities, skills, and interests to provide services and goods.
Specialization helps people to exploit their talents in areas which people can do their best. People’s specialization improves productivity, increases income, and promote great benefits in the economy as whole.
Individual firms can experiments gain from specialization since they can increase their efficiency and provide to the market specific good and services instead of producing the entire product, like a car or computer, or varieties of products. They can focus on specific skill, activity, or production process to sell their product at a lower price and higher quality. So, they become more competitive. They win comparative advantage and produce good or service at a lower cost than another good or service. Selling their products at a lower, firms and countries can take advantage from international trade and, therefore, they could increase their profits, income, and national wealth.
When a country can produce any good or services at a lower cost, a country can apply their resources primally to produce this specific good to take advantage with international trade. So, people, firms and countries specialize in particular fields, good and services in which they have a comparative advantage. The quality and quantity of goods and services offered are higher and better than they would provide without specialization. Consequently, the gains they achieve are enormous.
In sum, specialization implies that a country or firm should produce the goods and services in which they have comparative advantages.
PRODUCTION POSSIBILITY
Economists aim to analyze economic efficiency levels and growth. They want to comprehend which factors could contribute to determine the efficiency and inefficiency of production. Things like specialization and comparative advantage may take important role to determine the production possibilities. since the resources are scarce. Economies cannot produce an unlimited quantity of goods and services since the resources are scarce.
According to the production possibility concepts, since the resources are limited firm and countries must make tradeoffs when they want to produce two products, like movies or computer. So, these goods must be produced so that all resources are used efficiently. So, resource allocation affects the production of one goods to favor another. The economist wants to know how scarcity, economic growth, inefficiency, efficiency, technology, physical capital, and other factors will affect production.
In fact, scarce resources determine the production of goods in an economy. So, firms and countries have to decide how to allocate limited resources to produce goods.
So, as resources are scarce, firms cannot produce an unlimited quantity of goods and services. In this scenario, the economics want to measure nation’s economy to determine if it has reached the highest level of efficiency possible.
Because firms must deal with finite resource to produce any goods, firms must give up producing one product to produce another. They need to pursue the best efficiency they can. Notes that if one firm wants to produce higher quantity of a specific good, the other good must decrease since there are limited resources. So, if one firm desires to produce more of one product, the resources must come from the other good since they need to reallocate resources from one good to produce as many goods as possible. Then, we need to reallocate resources because we can produce more of a specific good if we decide to produce less other good.
So, to achieve maximum resource efficiency, we make tradeoffs. Then, the economy must pursue the most efficient allocation of resources to maximize their efficiency. Economies must reach an optimal production capacity. However, scarcity forces firms or country to forgo some choice in favor of another.
The production possibilities theory helps people, firms, and economists to examine choices in the production of goods and services. Under the production possibilities model, the economists presume that the economy can produce two goods, and the factors of production remain the same. The decision to invest more resources to specific good or service, and less resources to other goods and services implies the choice – opportunity cost / tradeoffs – we have pointed out. So, the choices about what to produce in the marketplace are related to people preferences. Hence, firms and industries decide what they want to produce considering what people value more. In general, people value things like food, housing, education, medical care, and leisure. An economy must allocate its resources on the basis of comparative advantage. Inefficient production implies that the economy could produce more goods without using any additional resources.
The production possibilities provide data to measure how goods and services have been produced. The production possibilities provide data to measure if the economy is operating efficiently and use full factors of production. The economy must be producing in its entirely capable of production.
In sum, under the theory of production possibility, the economists aim to measure how all resources are efficiently used. The economists try to explain how the resources are used efficiently when other economics factors remain constant.