Basic Economics Concepts

Scarcity

The fact that there is a limited amount of resources to satisfy unlimited wants.

Economic resources

Things that are inputs to production of goods and services. There are four economic resources: land, labor, capital, and technology. Technology is sometimes referred to as entrepreneurship.

Land

Natural resources that are used in the production of goods and services. Some examples of land are lumber, raw materials, fish, soil, minerals, and energy resources.

Labor

Work effort used in the production of goods and services. Some examples are the number of workers and number of hours worked.

Capital

Physical goods that are produced and used to produce other goods. Examples of capital would be machinery, technology, and tools such as computers; hammers; factories; robots; trucks, and trains used to transport goods; and other equipment employed in the production of a good or service.

Technology

(sometimes called entrepreneurship) The ability to combine the other productive resources into goods and services.

Occam's razor

The logical principle that states you should make no more assumptions than the minimum amount needed to perform analysis; in economics, we use the concept of Occam's razor when we invoke the ceteris paribus assumption.

Ceteris paribus

A Latin phrase essentially meaning "all else equal", which is used in economics to emphasize the idea that the only changes you should be thinking about are the ones that are explicitly described; for example, if we are talking about how someone reacts to a change in the price of a good, you should assume the only thing changing is price and not preferences, income, or anything else.

Normative statements

Statements that describe opinions or how things ought to be.

Positive statements

Statements of fact or description of how something actually is.

Market

A place where buyers and sellers meet to engage in mutually beneficial, voluntary exchanges of goods, services, or productive resources.

Households

The owners of resources—supplied to firms in the resource market—and the buyers of goods and services—demanded from firms in the product market.

Firms

Business entities that demand land, labor, and capital from households in the resource market and produce goods and services, which they supply to households in the product market.

Resource market

Where households supply land, labor, capital, and entrepreneurship/technology to firms in exchange for money.

Product market

Where firms supply goods and services to households in exchange for money.

Economic system

A system of allocating the means of production and the goods and services produced in an economy.

Wages

The payment firms make to households in exchange for their labor.

Rent

The payment firms make to households in exchange for land.

Interest

The payment firms make to households in exchange for capital.

Profit

The payment to entrepreneurs who start or own businesses.

Market economy

In its purest form, a market economy answers the three economic questions by allocating resources and goods through markets, where prices are generated.

Command economy

In its purest form, a command economy answers the three economic questions by making allocation decisions centrally by the government.