Introduction to Basic Economic Concepts

Historical and foundational definitions of economics, microeconomics, macroeconomics, factors of production, and market mechanisms based on Mankiw's Principles of Economics.

Economics

The study of how society manages its scarce resources or how people use limited resources to try to fulfill unlimited wants and involves alternatives or choices.

Microeconomics

The study of individual economic units ($Households$, $firms$, and $government$) and how individual decision-making units make decisions to allocate limited resources in markets.

Macroeconomics

The study of the economic system as a whole, including national income, trade cycle, unemployment rate, inflation, deflation, and the aggregate behavior of the entire economy.

Scarcity

A universal problem defined as wants always exceeding the limited resources/factors of production available to satisfy them.

Factors of Production

The basic resources used in the production process to produce economic goods and services, including Land, Labour, Capital, and Entrepreneur.

Land

A factor of production that encompasses all natural resources.

Labour

The services contributed by people in the production process that involve both mental and physical effort.

Capital

Human-made resources which are used in the production process to produce other goods and services.

Entrepreneur

The human ability to combine land, labour, and capital to develop production of goods and services.

Choice

The selection from available alternatives that must be made when scarcity exists.

Opportunity Cost

The second best alternative that has to be forgone for another choice which gives more satisfaction; the cost of the next alternative you choose not to do.

Trade-off

The act of giving up one thing you want to get another thing you want, such as trading off one goal for another.

What to produce?

A basic economic problem referring to the type and the quantity of goods and services to be produced.

How to produce?

A basic economic problem referring to the cheapest method of production with the alternative techniques of producing goods and services.

For whom to produce?

A basic economic problem referring to the distribution of income which can benefit the distribution of economic.

Efficiency

The property of society getting the maximum benefits from its scarce resources.

Equality

The property of distributing economic prosperity uniformly among society’s members; often achieved by redistributing income from wealthy to poor.

Market economy

A group of buyers and sellers that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

Price

Determined by the interaction of buyers and sellers, reflecting both the good’s value to buyers and the cost of producing the good.

Invisible Hand theory

Adam Smith’s theory that prices adjust to guide market outcomes that fulfill all parties and often maximize the well-being of society as a whole.

Property rights

The ability of an individual to own and exercise control over scarce resources, requiring government-provided police and courts for enforcement.

Market failure

A situation in which a market left on its own fails to allocate resources efficiently.

Externality

A source of market failure where the production or consumption of a good affects bystanders, such as pollution.

Market power

A source of market failure where a single buyer or seller, such as a monopoly, has substantial influence on market price.