Mercado, Reinha Michaela G.
1. What determines whether or not a resource is scarce? Why is the concept of scarcity important to the
definition of economics?
- The scarcity of resources is determined when the demand for resources is more than the available supply,
and when its price exceeds zero. When the demand is greater than the available supply, the resources
become scarce, and the prices can increase because of the limited availability and control of the market.
Furthermore, the concept of scarcity is important to the definition of economics because scarcity
constrains people to make a decision or choice on how they will use their scarce or limited resources to
ensure more satisfaction with their desires and unlimited wants. Moreover, economics is about making
choices. Without scarcity, there would be no economic problem.
2. Some economists believe that in order to really understand macroeconomics, you must first understand
microeconomics. How does microeconomics relate to macroeconomics?
- Microeconomics is concerned about the behavior and choices made by an individual regarding how they
will use or allocate their scarce resources efficiently and effectively. The behavior and choices made by
these people are combined to learn or discover the economy-wide or macroeconomics measures, such as
inflation, unemployment, and real gross domestic product. Microeconomics studies the individual pieces
of the economic puzzle and macroeconomics will arrange or fix those pieces together. All the decisions
are made in the micro economy and the results can be seen in the macroeconomy.
3. Discuss the Circular Flow Model.
- The resource market is where the entire circulative flow begins. Firms buy resources that households sell
in the resource market and the resources that are being bought and sold are labor, capital, natural
resources, and entrepreneurial ability. So, in the circulative flow, we can see resources flow from
households to the resource market to firms so that they can be employed in the production of goods and
services. In a world of scarce resources, there is nothing free. Therefore, firms must give something up in
order to acquire those scarce resources and that is where money comes into the picture. Money makes a
circular flow function and in order for entrepreneurs to start their firms, they must have money at their
disposal so that they can begin their businesses. Using the money, firms can exchange in the resource
market for labor, capital, natural resources, and entrepreneurial ability that they need. In the other
direction in our circulative flow model, we can see the money flowing from firms to households. Money
makes the circulative flow function. Households are providing labor, capital, natural resources, and
entrepreneurial ability in the resource market which are the factors of production. These are the things
that firms need in order to make goods and services but in exchange for these things, firms need to pay
some money to households. The money that the firms will pay to the households in the resource market
is income. For labor, households earned wages, for natural resources they earned rent, for capital they
earned interest, and for entrepreneurial ability they earned profit. These incomes are the incentive that
households must have so that they can provide labor, capital, natural resources, and entrepreneurial
ability to firms in the resource market. Money is important because it allows households to acquire the
goods and services that they demand in the product market. Households are providing resources in the
form of labor, capital, natural resources, and entrepreneurial ability to the firms in the economy in the
resource market. These act as factors of production for firms which they can use to make goods and
services and then sell them in the product market. So now, households have earned money since firms
bought their resources. Therefore, what do households will be going to consume? This brings us to the
product market. With the factors of production which are labor, capital, natural resources, and
entrepreneurial ability that firms acquired in the resource market, they can now begin manufacturing or
producing goods and services. After manufacturing, firms now have a lot of goods and services using the
resources acquired in the resource market. The reason for the production that firms have undertaken is to
sell it in the product market. So, we can see the goods and services flow counterclockwise in the product
market towards the households and that is exactly what should happen next. So, in the product market,
firms are the suppliers and households are the demanders. So, firms sell the goods and services in the
product market then households are the ones who will buy the products. Nothing is free in the market
economy and in order to acquire those goods and services that the household’s demand, money must
change hands and money must flow clockwise from households to firms so that firms can earn the profits
that they so desperately seek. Circulative Flow Model is never ending and it will just flow over and over
again.
