Economics Key Concepts: Scarcity, PPC, Trade, and Market Models

Scarcity

The condition where human wants are unlimited but resources are limited, forcing decisions to be made.

Production Possibilities Curve (PPC)

This model demonstrates the different combinations of two goods that can be produced using all available resources at maximum efficiency.

PPC Shifts

The curve shifts outward when there is an increase in resources or a gain in productivity due to new technology.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Supply and Demand Models

Changes in markets are explained using the supply and demand graph.

Choice as the Outcome of Scarcity

Individuals decide on personal allocation, businesses decide on production levels and hiring, and governments decide on public services and policies.

Factors of Production: Land

Resources provided by nature, such as water, minerals, crude oil, and sunlight.

Factors of Production: Labor

The work performed by humans.

Factors of Production: Capital

Includes physical capital (tools, machines, and factories) and human capital (knowledge, experience, and training).

Entrepreneurship

The individual who aggregates resources, starts the business, and assumes the risk.

Money vs. Resources

Money is NOT an economic resource because it cannot produce anything on its own; it is merely a medium for transactions.

Microeconomics

The study of small units (individuals and firms) and specific market costs.

Macroeconomics

The study of collective decisions and the entire economy, focusing on growth, unemployment, and inflation.

Mixed Economy

Systems where both individuals and the government play a role.

Centrally Planned Economy

Systems where the government owns factors of production and dictates the what, how, and for whom of production.

Definition of Opportunity Cost

The cost of the next best alternative given up when a choice is made.

Production Possibilities Curve (PPC) Model

Assumes a world where only two goods are produced with scarce resources.

Points on the PPC

Efficient; resources are used to the fullest.

Points Inside the PPC

Inefficient; resources are under-utilized.

Points Outside the PPC

Impossible/unattainable given current resources.

Absolute Advantage

The ability to produce more of a good than another producer using the same resources.

Per Unit Opportunity Cost Formula

Per Unit Opportunity Cost = Units Given Up / Units Gained.

Trading Logic

A country should trade if the terms of trade are lower than their internal opportunity cost of production.

Law of Demand

Inverse relationship. As Price (P) increases, Quantity Demanded (Qd) decreases.

Demand Shifters

Factors that can shift the demand curve include tastes and preferences, number of consumers, price of related goods, income, and future expectations.

Law of Supply

Direct relationship. As Price (P) increases, Quantity Supplied (Qs) increases.

Supply Shifters

Factors that can shift the supply curve include price of resources, number of producers, technology, government intervention, and expectations of future profit.

Equilibrium

The point where Qd = Qs.

Surplus

Occurs when price is above equilibrium; sellers lower prices to clear excess inventory.

Shortage

Occurs when price is below equilibrium; consumers bid up prices.

Double Shift Rule

If both Demand and Supply shift simultaneously, one variable (Price or Quantity) will be indeterminate or ambiguous.