The economic reality of unlimited / infinite demand (needs / wants) for limited / finite economic resources.

Scarcity is the fundamental problem in economics.

Due to scarcity, economies must make choices or trade-offs in allocating resources for the production of specific goods and services.

Land: natural resources or the "gifts of nature" for the production of goods/services

Labor: human resource for the production of goods/services ; human capital ; the workforce / the workers

Capital: physical capital of tools, machines, and technologies in the production of goods/services

Entrepreneurial Ability / Entrepreneurship: the organization and innovation of production of goods/services ; the inventors, the innovators, and the investors

1. Low Unemployment

• to achieve the full employment of economic resources to produce at the economy's maximum potential and output

2. Low and Stable Inflation

• promotes efficient use of economic resources / inputs

3. Economic Growth

• increase in the quantity of economic resources (land, labor, capital, entrepreneurship)

• increase in the quality of economic resources (land, labor, capital, entrepreneurship)

• improved or advanced technologies

• investment in educational opportunities and skill developments

Economic systems determine how to allocate resources in determining the solutions to the following questions:

1. What goods and services to produce?

2. How to produce the goods and services?

3. Who to produce the goods and services for?

An economic system where resources are allocated by the state / government or other central planning agency in the production of goods and services.

i.e. communism ; socialism

An economic system where resources are allocated by consumers and producers in the production of goods and services based on the market forces of supply and demand and on the principles of economic liberty, private property, self-interest, incentives, competition, and prices.

i.e. capitalism

An economic system where resources are allocated by a mutual relationship of consumers / producers and the state / government in the production of goods and services.

A situation in which a country / economy / producer can produce more of a specific good / service than another country / economy OR can produce a specific good with less economic resources / inputs than another country / economy.

Input problem:

• when two producers apply their potential amounts of resources to produce an equal amount of goods

• In other words... which producer can use the LEAST amount of resources to produce one good?

Sample Input Problem

United States and Canada can produce one car and one train.

United States can produce one car in 4 days OR one train in 6 days.

Canada can produce one car in 9 days OR one train in 12 days.

Absolute Advantage (cars) = United States 

• United States needs only 4 days to produce one car whereas Canada needs 6 days to produce one car ; 4 < 6

Absolute Advantage (planes) = United States

• United States needs only 9 days to produce one train whereas Canada needs 12 days to produce one train ; 9 < 12

Output problem: 

• when two producers apply equal amounts of resources to produce their potential amounts of goods

• In other words... which producer can make the MOST amount of goods using the same amounts of resources?

Sample Output Problem

United States and Canada can produce a total amount of cars and trains in one week.

United States can produce 4 cars OR 6 trains in one week.

Canada can produce 9 cars OR 12 trains in one week.

Absolute Advantage (cars) = Canada

• Canada can produce 9 cars in one week whereas United States can only produce 4 cars in one week.

Absolute Advantage (planes) = Canada

• Canada can produce 12 trains in one week whereas United States can only produce 6 trains in one week.

A situation in which a country / economy / producer can produce a specific good / service at a lower opportunity cost than another country / economy.

Comparative advantage is the basis for specialization and trade between two countries / economies / producers.

Specialization: the use of resources of a country / economy / producer to produce one or few goods / services rather than the entire range of goods / services as determined by a lower opportunity cost

Mutually beneficial terms of trade based on calculating comparative advantage in determining specialization can result in an economy consuming beyond its production limits.

No matter if the problem is an input problem or an output problem, it depends on which producer has the lower opportunity cost.