U1: Basic Economic Concepts

1.1: Scarcity

● Economics: the study of scarcity and choice with unlimited wants and limited resources

● Economic choice: involves the personal choice of choosing one thing over another

● Scarcity: unlimited wants but limited resources (ex. time = limited supply)

● Free goods: goods with no-cost/unlimited supply (ex. sunlight)

● Positive statement: factual statement

● Normative statement: opinionated statement

1.2: Resource Allocation and Economic Systems

● Economy: a system that coordinates choice about the production with choices about consumption and distributes goods and services to the people who want them.

● Market Economy: the production and consumption results of decentralized decisions made by many firms and individuals.

● Command Economy: industries = publicly-owned and the central authority is making producer and consumer decisions.

● Property Rights: establish ownership and grant individuals the right to trade goods and services with each other.

Resource

○ Anything that can be used to produce something else

○ Factors of production (acronym to remember = CELL):

■ Capital (anything used to make anything else)

■ Entrepreneurship (creating something of value from the prior 3)

■ Land (natural resources)

● Raw materials used to produce finished goods

■ Labor (workers)

● Human effort/work

Opportunity Cost

○ The next best alternative given up when making a choice

○ Implicit costs - forgone benefits of any single transaction

■ ex. time and effort an owner puts into maintaining a company, rather than expanding it

○ Explicit costs - expenses that are paid with cash or equivalent

■ ex. wages to workers, electricity bill

★ Microeconomics: individuals/firms making decisions and how these interact

○ ex. college vs job, car industry, etc

★ Macroeconomics: overall ups and downs of the economy (aggregates)

○ ex. employment, inflation, etc

1.3: Production Possibilities Curve (PPC)

● Trade-off: giving up something for something else

PPC

○ Illustrates trade-offs an economy that compares only two goods faces

○ Show the opportunity cost of producing more of one good

○ Illustrate economic growth or contraction

● Efficiency: The point at which there are no missed opportunities; cannot make someone better off without making someone else worse off

● Productive efficiency: lowest cost possible on PPC

● Allocative efficiency: The economy allocates resources so that consumers are as well off as possible/producing what is demanded.

● Increasing Opportunity Costs: concave PPC

Economic Growth

○ Allows sustained rise in aggregate output/expansion of PPC outwards

○ Causes:

■ Increase/Development of technology

■ Increase in resources

1.4: Comparative Advantage and Trade

● Trade: people divide work and each provides goods in return for other goods

● Comparative Advantage: a situation in which an individual, business, or country can produce a good or service at a lower opportunity cost than another producer

○ Can’t have a comparative advantage in both goods

● Absolute Advantage: a situation in which an individual, business, or country can produce more of a good or service than any other producer with the same quantity of resources.

1.5: Cost-Benefit Analysis

● Terms of Trade: the rate at which goods can be exchanged

○ Mutually beneficial between opportunity costs of the 2 individuals

○ Capital goods: goods that make consumer goods

■ more capital goods = more growth in future

○ Consumer goods: goods that are consumed (final goods)

1.6: Marginal Analysis and Consumer Choice

● Marginal decisions: trade-off of doing a little more or a little less

○ Marginal benefit: benefit of producing one more unit

○ Marginal cost: cost of producing one more unit

○ Marginal analysis: the study of the additional benefits vs the additional cost of an activity