Chapter 1: Basic economic ideas and resource allocation
3 A standard for deferred payment: Not all payments we make are immediate. Some household bills are paid monthly, others may be paid annually. Following on from money as a unit of account, payments can be made in the future once terms have been agreed between the parties involved. 4 A store of wealth: Money can be held or ‘stored’ for a period of time, usually with a bank or other financial institution, before it is used. This important function means that money is a measure of value over time. Where this value is accumulated, then it represents a source of wealth to its owner. In 2011, the two richest people in the world were both from the USA: Warren Buffet and Bill Gates. Their personal wealth was in a wide range of assets, not just in bank accounts. Money was the common basis on which their wealth was estimated.
These functions of money are vital for the smooth operation of all economies. If any of the functions breaks down – as in the case of Zimbabwe, where money lost all meaning as a store of value or wealth – economic collapse is the inevitable outcome. It is therefore essential that a prudent government puts economic policies in place to ensure that this does not happen.
Classification of goods and services The fundamental economic problem of scarce resources in relation to unlimited wants only arises in situations where we are dealing with what are known as private goods. These are also known as economic goods since they have a cost in terms of the resources used and are scarce. A price must therefore be charged when they are used or consumed. KEY TERM
Private goods: consumed by someone and not available to anyone else.
Private goods are those bought and consumed by individual consumers or firms for their own benefit. Most of the goods we consume on a daily basis are private goods. They have two important characteristics: 1 Excludability: It is possible to exclude some people from using a private good. This is normally done through charging a price. If the price is not acceptable, then KEY TERM
Excludability: where it is possible to exclude one from consumption.
that good will not be consumed. Once a private good has been purchased by one person it cannot be consumed by others. 2 Rivalry: The consumption by one person reduces the availability for others. In some ways it seems obvious that when we purchase food, clothes or a textbook then this means that fewer of these goods are available for purchase by others. KEY TERM
Rivalry: where consumption by one person reduces availability for others.
We can also recognise what are known as free goods. These have zero opportunity cost since consumption is not limited by scarcity. They have no prices – as their name indicates – and in theory, no factors of production are required to produce them. It is not easy to think of examples! In some economies, wild fruit and berries may be gathered or some animals hunted for their meat. The air we breathe could also be seen as a free good along with water in a local river.
Public goods There are two specific characteristics of a public good. These are: 1 It must be non-excludable. This means that once the good has been provided for one consumer, it is impossible to stop all other consumers from benefitting from the good. 2 It must also be non-rival. As more and more people consume the good, the benefit to those already consuming the product must not be diminished. KEY TERMS
Public good: one that is non-excludable and non-rival and for which it is usually difficult to charge a direct price. Non-excludable: where it is not possible to stop all benefiting from consumption. Non-rival: as more consume, the benefit to those already consuming is not diminished.
There are a number of goods that can be seen as public goods. Take the example of a lighthouse. Once a lighthouse is built to warn one ship at sea away from a dangerous area of rocks, then by its very nature, this service will automatically be provided to all ships that sail within a certain distance of the lighthouse. It is nonexcludable. Equally, the fact that other ships see the light given by the lighthouse and are warned away from the
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