Economics Key Concepts: Scarcity, Opportunity Cost, Market Types, and Supply-Demand Analysis

What is scarcity?

Resources are limited while human wants are unlimited.

What is opportunity cost?

The value of the next-best alternative given up.

Why does every choice have an opportunity cost?

Choosing one option means giving up another option.

What does economic decision-making focus on at the margin?

Compare the additional benefit with the additional cost of one more action.

What is a market economy?

Households and firms interact in markets; prices help allocate resources.

What is a centrally planned economy?

The government makes major decisions about production and resource allocation.

What is a mixed economy?

Markets allocate many resources while government regulates and provides some goods/services.

What is positive analysis?

A statement about what is; it can be tested with evidence.

What is normative analysis?

A statement about what ought to be; it involves a value judgment.

What is microeconomics?

The study of individual consumers, firms, and markets.

What is macroeconomics?

The study of the economy as a whole.

What does a PPF show?

The maximum combinations of two goods producible with available resources and technology.

What does a point on the PPF mean?

It is attainable and efficient.

What does a point inside the PPF mean?

It is attainable but inefficient; resources are not fully used.

What does a point outside the PPF mean?

It is unattainable with current resources and technology.

What can shift a PPF outward?

More resources, improved technology, or greater productivity.

What is opportunity cost on a PPF?

The amount of one good given up to produce more of another.

What does the slope of a PPF represent?

Opportunity cost.

What is absolute advantage?

Ability to produce more using the same amount of resources.

What is comparative advantage?

Ability to produce at a lower opportunity cost than another producer.

Which advantage determines specialization?

Comparative advantage.

Can a producer have comparative advantage without absolute advantage?

Yes. Comparative advantage depends on opportunity cost, not total output.

Why can specialization create gains from trade?

Specialization based on comparative advantage can increase combined production.

What is physical capital?

Machines, factories, tools, and equipment used to produce goods and services.

What is NOT physical capital?

Financial assets such as stocks and bonds.

What does the law of demand say?

Price rises → quantity demanded falls; price falls → quantity demanded rises.

What causes movement along a demand curve?

A change in the good's own price.

What causes a demand curve to shift?

A change in a non-price determinant of demand.

What are major demand shifters?

Income, related-good prices, tastes, expectations, and number of buyers.

What is a normal good?

A good people buy more of when income rises.

What is an inferior good?

A good people buy more of when income falls.

What is a substitute?

A good that can be used instead of another good.

What is a complement?

A good used together with another good.

What happens to demand if a substitute's price rises?

Demand for the other good is likely to increase.

What happens to demand if a complement's price falls?

Demand for the related good is likely to increase.

What does the law of supply say?

Price rises → quantity supplied rises; price falls → quantity supplied falls.

What causes movement along a supply curve?

A change in the good's own price.

What causes a supply curve to shift?

A change in a non-price determinant of supply.

What are major supply shifters?

Input prices, technology, taxes/regulations, expectations, and number of sellers.

What is market equilibrium?

The point where quantity demanded equals quantity supplied.

What is a shortage?

Quantity demanded is greater than quantity supplied.

What is a surplus?

Quantity supplied is greater than quantity demanded.

What usually causes a shortage?

A price below equilibrium.

What usually causes a surplus?

A price above equilibrium.

What happens to price during a shortage?

There is upward pressure on price.

What happens to price during a surplus?

There is downward pressure on price.

How do you calculate a shortage or surplus?

At the given price, subtract the smaller quantity from the larger quantity.

What is consumer surplus?

The difference between willingness to pay and the price actually paid.

Where is consumer surplus on a graph?

Below demand and above the market price, up to quantity purchased.

What happens to consumer surplus when price falls?

Consumer surplus generally increases.

What is producer surplus?

The difference between the price received and the lowest acceptable price.

Where is producer surplus on a graph?

Above supply and below the market price, up to quantity sold.

What happens to producer surplus when price rises?

Producer surplus generally increases.

What is economic surplus?

Consumer surplus plus producer surplus.

What is deadweight loss?

The loss of economic surplus when mutually beneficial trades do not occur.

What does deadweight loss look like on a graph?

Usually a triangle between supply and demand over units no longer traded.

What is a price ceiling?

A legally determined maximum price sellers may charge.

When is a price ceiling binding?

When it is set below the equilibrium price.

What does a binding price ceiling create?

A shortage.

What is a price floor?

A legally determined minimum price sellers may receive.

When is a price floor binding?

When it is set above the equilibrium price.

What does a binding price floor create?

A surplus.

What does binding mean?

The price control is set at a level that changes the market outcome.

What is health insurance?

A contract where payments are made in exchange for help paying medical bills.

What is fee-for-service?

Doctors and hospitals receive payment for each service they provide.

What is a single-payer health care system?

One entity, usually the government, provides national health insurance to residents.

What is socialized medicine?

A system where government owns most hospitals and employs most doctors.

What is the key difference between single-payer and socialized medicine?

Single-payer describes who pays; socialized medicine describes government ownership and employment.

What is the key rule for own-price changes?

A change in the good's own price causes movement along the curve.

What is the key rule for non-price changes?

Non-price changes shift the curve.

How do you analyze a supply-and-demand graph shift?

Identify the affected curve, shift direction, new intersection, then equilibrium changes.

How do you determine whether a price control is binding?

Compare the legal price with the equilibrium price.