1 Economics

Economics is a term which comes from the Greek word "oikonomia" which means managing the
economy. Economics is a social science that seeks to analyse and describe the use of scarce
resources for production, followed by distribution, and consumption of wealth.
Economics is the science that studies how people and societies make decisions that allow them to
get the most out of their limited resources. Because every country, every company and every
person deals with constraints and limitations, economics is literally everywhere.
Economics gets to the heart of everyday issues, analysing individual and corporate behaviour, as
well as social and political institutions, to see how well they perform at converting humanity's
limited resources into the goods and services that best satisfy human needs and wants.

1.1 Functions, object and subjects of economics

Economic systems everywhere may perform similar functions. These functions may be cognitive,
pragmatic and methodological:
• cognitive function – economics as a science examines and recognises the economic
phenomena, laws and processes that take place in society;
• pragmatic function – economics seeks to explain and solve the problems of society in
practice and provide model procedures;
• methodological function – economics serves as a theoretical and methodological basis
for other economic sciences (sector economy, cross-sectional economy, spatial
economy, history of economic theories, history of the national economy).
Economics is split into two realms. There is big-picture macroeconomics, which is concerned
with how the overall economy works. It studies such things as employment and unemployment,
gross and net domestic product, and inflation. The object of its analysis is typically a nation.
Little-picture microeconomics is concerned with how supply and demand interact in individual
markets for goods and services. The object of its analysis is a single market.
Economics is also divided into positive normative economics. Positive economics is concerned
with the development and testing of positive (real) statements about the world that are objective
and verifiable. Normative economics deals with normative statements about what the economy
should be. The validity of normative statements can never be tested. Positive statements, on the
other hand, can be tested, at least in theory, if not always in practice.

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The economy consists of economic units and their activities. The main aim of these activities is to
satisfy human needs. Fundamental economic units are households, companies, and states
represented by governments. These economic units are dependent on each other:
• households – all those people living under one roof are considered a household (each
household is a single decision-maker);
• companies – companies are formed by profit-seeking entrepreneurs who employ
resources to produce goods and services for sale;
• governments – the government is a special economic unit which gets taxes and fees
from households and companies and provides them with grants, social benefits and
public goods and services (public lighting, public radio, maintenance of public roads and
sidewalks, etc.).
Because economic resources are limited, every society must answer three key economic
questions:
• What to produce?
• How to produce the products?
• Who will buy the products?

Vocabulary
constraints – obmedzenia
cognitive function – poznávacia (kognitívna) funkcia
phenomena – javy
pragmatic function – pragmatická funkcia
model procedures – vzory konania
methodological function – metodologická funkcia
sector economy – odvetvová ekonomika
cross-sectional economy – prierezová ekonomika
spatial economy – priestorová ekonomika
history of economic theories – dejiny ekonomických teórií
history of the national economy – dejiny národného hospodárstva

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3 Economic order
The economy is a social domain that emphasises the practices, discourses, and material
expressions associated with the production, use, and management of resources. It is the system of
trade and industry by which the wealth of a country is made and used. The economy is also a state
of a particular country or region in terms of the production and consumption of goods and
services and the supply of money.
As well as economics, the economy is divided into two realms. The first of them is
macro-economy which is represented by the economic activity of interconnected and
interdependent market subjects within the national economy. The second realm is
micro-economy which is focused on the economic activity of individual market subjects
(households, companies, governments).

Task No. 3.1:

Specify the difference between economy and economics by using the Cambridge Dictionary
available at https://dictionary.cambridge.org/

3.1 Economy as a system

An economic system is a mean by which governments organise and distribute available
resources, goods and services across a geographic region or country. Economic systems regulate
factors of production, including land, labour and capital. They are divided into traditional,
command, market, and mixed economic systems.
Traditional economy (traditional economic system)
The traditional economic system is based on goods, services, and work, all of which follow
certain established trends. It relies on people, and there is very little division of labour or
specialisation. The traditional economic system is very basic and most ancient.
Some parts of the world still run a traditional economic system. Particularly, rural settings, where
economic activities are predominantly farming or other traditional income-generating activities.
There are very little resources to share in communities with traditional economic systems. The
reason is the resources don't occur naturally, or access is restricted. Thus, the traditional
economic system lacks the potential to generate a market surplus.

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Command economy (command economic system)
In the command economic system, there is a dominant and centralised authority, which is usually
the government, which controls a significant portion of the economy. Also known as the planned
economic system, the command economic system is common in communist societies since
production decisions are a preserve of the government.
If an economy enjoys access to many resources, the government comes in and centralises the
control over valuable resources, such as gold or oil. The people regulate other less important
sectors of the economy, such as agriculture.
In theory, the command economic system works well as long as the central authority performs the
control with the general population's best interest in mind. However, command economic
systems face many challenges since they react slowly to any change because the power is
centralised.
Market economy (market economic system)
Market economic systems are based on the concept of free markets. In other words, there is very
little government interference. The government has no control or say over resources, and it does
not interfere with important segments of the economy. Instead, the regulation comes from the
people and the relationship between supply and demand.
The market economic system is mostly theoretical because a pure market doesn't exist. All
economic systems are subject to some interference from a central authority. For instance, most
governments enact laws that regulate fair trade and monopolies.
The greatest downside of the market economic system is that it allows private entities to amass a
lot of economic power, particularly those that own resources of great value. Thus, the distribution
of resources is not equitable because a few enjoy most of them, while a huge part of the remaining
population fight for the little that is left.
Mixed economy (mixed economic system)
Mixed economic systems combine the characteristics of the market and command economic
systems. For this reason, mixed economic systems are also known as dual economic systems. The
mixed economic system is defined as a market economic system under strict regulatory control in
certain segments of the economy. The mixed economic system combines the best features of
market and command economic systems.
Many countries in the west follow a mixed system. Most industries are private, while the rest,
comprising of public services, is under the control of the government. Thus, the government and
the private sector serve a significant role in maintaining a mixed economy.

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3.2 Factors of production
While people's needs and wants are unlimited, the resources available to meet those wants and
needs are limited, or scarce. Factors of production are represented by three groups of resources
that are used to make all goods and services – land, labour, capital:
• land refers to all of the natural resources used to produce goods and services (natural
resources are materials found in nature);
• labour is the effort that people devote to a task for which they are paid;
• capital is any human-made resource that is used to produce other goods and services:
o physical capital – any human-made objects used to create other goods and
services (fabric, tools, buildings, etc.);
o human capital – knowledge and skills a worker gains through education and
experience;
o financial capital – money which is used to buy physical and human capital.

To summarise, factors of production is an economic term that describes the inputs that are used in
the production of goods or services to make an economic profit:
• elementary factors of production – fundamental inputs without which company
transformation process could not happen (workforce, assets, etc.),
• derived factors of production – they provide the control of the company
transformation process (executives who carry out activities according to the
management unit in which they operate).

Task No. 3.2:

Describe the concept of factors of production, which includes entrepreneurship as the fourth
factor of production.

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3.3 Basic economic concepts
Most of the basic economic concepts focus on ways to efficiently build wealth and prosperity
over time. However, economics has an impact on every moment of our lives because, at its heart,
it is a study of choices and why and how we make them. That is why the economy is based on five
basic economic concepts.
The law of scarcity notes that economic resources (land, labour, capital) are limited, not infinite.
This assumption is easily verifiable because if resources had been infinite, everything should
have been free, and while it is not, scarcity must exist. The term scarcity refers to the idea that an
economic system cannot possibly produce all of the products that consumers want.
Furthermore, most consumers do not have the financial resources to buy all of the products they
want.
The production possibility frontier (curve) is generated because of the law of scarcity. It is a
curve representing the maximum output possibilities of two different products, given a set of
inputs consisting of fixed factors of production (resources which are limited). This means that the
production of one product can only increase when the production of the other product is reduced,
due to the availability of factors of production. It represents the point at which a country's
economy is most efficiently producing its products and, therefore, allocating its resources in the
best way possible.
According to the production possibility frontier
curve, points A, B, C, D represent the most
efficient use of resources by the economy because
they all appear on the curve. Points G, E represent
an inefficient use of resources because they appear
under the curve and point F represents the goals
that the economy cannot attain with its present
levels of resources.

Economic efficiency is when every scarce resource in an economy is used and distributed among
producers and consumers in a way that produces the most economic outputs and benefit to
consumers. It is also a situation in which it is impossible to generate a larger welfare total from
the available resources. It can involve efficient production decisions within companies and
industries, efficient consumption decisions by households, and efficient distribution of consumer
and capital goods across households and companies.
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Opportunity costs represent the benefits an individual, investor or company misses out on when
choosing one alternative over another. Such costs, however, are not recorded in the account books
but are recognised in decision making by computing the cash outlays and their resulting profit or
loss. The formula for calculating opportunity costs is simply the difference between the expected
return on the best foregone option (FO) and return on chosen option (CO).

𝑜𝑝𝑝𝑜𝑟𝑡𝑢𝑛𝑖𝑡𝑦 𝑐𝑜𝑠𝑡𝑠 = 𝐹𝑂 − 𝐶𝑂
The law of diminishing returns states that as we increase the quantity of one input which is
combined with other fixed inputs, the marginal physical productivity of the variable input must
eventually decline. The total productivity is bound to increase with an increase in the quantity of
a variable input. However, as the quantity of the inputs keeps on increasing, the marginal product
rises to a maximum, then starts to decline and eventually becomes negative.

Vocabulary
economic order – organizácia ekonomiky
interconnected – vzájomne prepojené
interdependent – vzájomne závislé
rural settings – vidiecke prostredie
a preserve of the government – výsada vlády
interference – zasahovanie
enact – uzákoniť
fair trade – spravodlivý obchod
monopolies – monopoly (výsady)
amass – nahromadiť
basic economic concepts – základné ekonomické otázky
the law of scarcity – zákon vzácnosti
the production possibility frontier (curve) – hranica (krivka) produkčných možností
economic efficiency – ekonomická efektívnosť
opportunity costs – alternatívne náklady
cash outlays – hotovostné výdavky
foregone option – obetovaná možnosť
chosen option – zvolená možnosť
the law of diminishing returns – zákon klesajúcich výnosov
marginal – hraničné (dodatočné)

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