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Economic Principles (Liz):waterhelp

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ECONOMIC PRINCIPLES

Because so many of the principles that are useful in developing ways to minimize and eliminate conflicts involving water access issues are related to complex economic concepts, the section below aims to explain economic basics in an easy-to-follow manner. The following section is adapted from www.investopedia.com. It condenses and simplifies the information from that site. For further information, go to the site and type “economics basics” in the search section.

Economics - Scarcity

First, scarcity means that there are limited resources to meet unlimited wants and needs. This imbalance causes tension and is a source of potential conflict. As a result, individuals, organizations, villages, and countries have to make decisions regarding what goods and services they can buy and which ones they must forgo. Because of scarcity, people and economies must make decisions about who gets what resources. Economics is the study of why people and groups of people make these decisions and how they allocate our resources most efficiently.

Economics – Types of Economies

Economics can be viewed at both the macro and micro levels. Macroeconomics examines the total output of a nation and the way the nation allocates its limited resources of land, labor and money. Microeconomics examines these issues on the level of the individual people and groups within the economy. It shows us how individuals and groups react to changes in prices. There are several types of economies that governments can choose for their organization. The market economy can also be called a competitive market. It uses competition to determine how resources should be allocated. The pure form of this type of economy would say that water should be privatized. The command economic system, on the other hand, allows the government to decide how the country's resources would best be allocated. It is important to remember that people and governments do not always make the right decisions, and there can be a great deal of conflict in even determining what type of economic system to follow.

Market structures can be broken down further into three major systems – monopoly, oligopoly, and perfect competition. In a monopoly, there is only one producer or seller for the given product, and that producer or seller sets the price. The reason there is only one producer is because it is very difficult to enter into the market for the product. The main reason for difficult entry is that costs are high. Often, a government will create a monopoly for something that all of its people need. Key examples would be water and electricity. A monopoly may occur in the case of natural resources or when a firm comes up with a product, like a drug, that can be patented. An oligarchy is another market system. It occurs when there are only a few firms within a given industry. Like in a monopoly, the firms have great control over how to set prices. The products are very similar to one another, and the firms are competing for market share. In this situation, the people of the economy only need a fixed certain number of the product. The firms each try to gain the greatest share of the market that the consumers demand. The opposite of a monopoly is perfect competition. In this situation, there are many buyers and sellers in the market. It is not particularly difficult for a firm to enter the market. Also, the prices within a perfect competition system are determined by supply and demand, which means that the firms participating are mostly competing on the basis of price. For example, if one firm decides to raise the price of the product, the customer can easily switch to the less expensive company’s product.

Economics – Supply and Demand

Another important economic concept to learn in remember in the allocation of water is the principle of supply and demand. According to www.investopedia.com

Demand refers to how much (quantity) of a product or
service is desired by buyers. The quantity demanded is the
amount of a product people are willing to buy at a certain
price; the relationship between price and quantity demanded
is known as the demand relationship. Supply represents how
much the market can offer. The quantity supplied refers to
the amount of a certain good producers are willing to supply
when receiving a certain price. The correlation between price
and how much of a good or service is supplied to the market
is know as the supply relationship. Price, therefore, is a
reflection of supply and demand.

According to the law of demand, the higher the price of water, the less people are going to demand it. In contrast to the law of demand, the law of supply would say that the higher the price of water, the higher the quantity to be supplied. In other words, people want to pay as little as possible for the water, while producers want to be paid as much as possible.

Adapted from Investopedia

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