Unit 1: Basic Economic Concepts

Scarcity

the gap between limited resources and unlimited wants requires decisions about how to allocate resources efficiently to satisfy our needs and wants. (**unlimited wants and needs vs. limited resources.)**

What are the four factors of production?

Land (Rent), Labor, Capital, Entrepreneurship

Land

natural resources and raw materials used to make products. Ex: water, vegetation, oil, minerals, and animal

Labor

the skills and abilities that individuals devote to a task for which they get paid

Capital

types of resources can be divided into two types, physical capital and human capital. Physical capital is money, property, etc. Human capital are human skills. This can also be considered investments, which can lead to a greater economic growth in the future.

Entrepreneurship

the ability of an individual to coordinate the other categories of resources to invent or produce a good or service. 

Trade-offs

each of the alternative choices that you gave up when making a decision. For example, you walk into the cafeteria for lunch at school and you have the option of pizza, a cheeseburger, or chicken sandwich for lunch. If you choose to have pizza, then **the cheeseburger and chicken sandwich** are your trade-offs

Opportunity cost

this is the value of the next best alternative or the given up alternative when making a choice.

What does the Production Possibilities Curve show?

All the possible production combinations for producing two goods given a fixed amount of resources.

If a point is on the curve of the PPC it is…

at full employment of the resources available.

If a point is inside of the curve of the PPC it is…

producing at an attainable point given the resources available but is not utilizing said resources at their maximum potential.

How is allocative efficiency applied in the PPC?

This efficiency means that we are producing at a point that is ideal for society. This is represented by a point on the PPC that meets the desires and needs of a society. (Ex. If a society needs an equal amount of wheat and sugar, allocative efficiency would be represented by a point where this is true.)

How is productive efficiency applied in the PPC?

This efficiency means that we are producing at a combination that minimizes costs. This is represented by any point on the curve.

If a point is outside of the PPC then?

The point represents an example of production that is unattainable because there aren’t enough resources available.

Opportunity cost/Per-Unit Opportunity cost on the PPC

We use this when we are trying to see what we are losing when we change our production combination. For example, if we have point A where we are producing 100 sugar and 0 wheat and move it downward so that we are producing 90 sugar and 40 wheat at point B, we need to calculate the opportunity cost. We are losing a total of 10 sugar in order to gain 40 sugar, so we need to divide 10 sugar/40 wheat, which gives us 1/4. This 1/4 is the per-unit opportunity cost. (What is lost/What is gained)

Constant Opportunity Cost in the PPC

When the opportunity cost per unit remains the same you produce more of one good and lose more of the other good. This indicates that resources are more adaptable as you produce from one good to another. (Linear slope)

Increasing Opportunity Cost in the PPC

When the opportunity cost per unit increases as you produce more of one good and give up even more of the other. Resources are less adaptable. (Curve)

Absolute Advantage

the ability to produce more of a good or service with a given amount of resources than someone else.

Comparative advantage

the ability to produce a good at the lowest opportunity cost of another.

Terms of trade

the rate at which one good can be exchanged for another. This is determined by looking at the two opportunity costs and choosing a number that falls between the opportunity costs in order for it to be beneficial to both countries.

Output problems regarding trade

focus on data associated with what each party can produce with a given set of resources and who can specialize in which good.

Input problems regarding trade

focus on how much of a resource is needed to produce one unit of a particular good or service.

In output problems, how do you determine absolute and comparative advantage?

In output problems, you just need to look at which country can produce a higher amount of a good or service. For comparative advantage, you have to determine the opportunity cost of the second good given what you do with the first good. Meaning, if Canada can produce 1000 million tons of steel and 500 million tons of coal, you have to divide 500/1000 to find the per unit opportunity cost for steel in Canada. Likewise, you divide 1000/500 to calculate the opportunity cost of coal for Canada. This shows you the opportunity cost for Canada's production of steel and coal, which you can compare with the second country.

In input problems, how do you determine absolute and comparative advantage?

To determine absolute advantage, you are looking for the country that uses the least amount of resources to produce the good. For comparative advantage, you need to see how much resources it takes to produce the amount of goods the problem is giving you. Then you divide it to find the opportunity cost. (Ex. if Australia can produce 100 phones in 50 hours, you need to divide 100/50 to find that in 1 hour Australia can produce 2 phones. If the USA can produce 100 phones in 40 hours, you do the same and divide 100/40 to find that the USA can produce 2.5 phones in 1 hour. You do the same thing with the second resource and then calculate the opportunity cost of how much of each good can be produced in one hour (or another resource).

Demand

Defined as the different quantities of goods and services that consumers are willing and able to purchase at various price levels.

Quantity Demanded

is the amount of a good or service that is desired at a particular price level.

Law of Demand

*Ceteris paribus*, there is an inverse relationship between price and quantity demanded. (If price goes up, then Q.D goes down; If price goes down, then Q.D goes up)

When there is an increase in demand, the graph will…

shift to the right.

When there is a decrease in demand, the graph will…

shift to the left.

Demand will increase if…

Income increases, the number of consumers increases, the substitute's prices increases, expectation of a future price increases, complements' price decreases, and tastes and preferences for that good increase. (**INSECT)**

Demand will decrease if…

Income decreases, number of consumers decreases, substitute's price decreases, expectation of a future price decreases, complements' prices increases, tastes and preferences for that good decrease.

Supply

the different quantities of goods and services that firms are willing and able to produce at various price levels.

Quantity supplied

is the amount of goods or service that is produced at a particular price level.

Law of Supply

*Ceteris paribus,* there is a direct relationship between price and quantity supplied. (If price increases, so does the quantity supplied.)

When there is an increase in supply the graph will go…

shift to the right.

When there is a decrease in supply the graph will go…

shift to the left.

Determinants of Demand

Income, number of consumers, substitutes, expectations for a future price, complements to the product, tastes for that product (**I.N.S.E.C.T)**

Determinants of Supply

Resources, other good prices, taxes, technology, expectations of the supplier, number of competitors (R.O.T.T.E.N)

If supply increases then…

Resources increase, other good prices' decrease, taxes decrease, technology increases, expectations of the supplier increase, number of competitors decrease.

If supply decreases then…

resources decrease, other good prices’ increase, taxes increase, technology decreases, expectations of the supplier decrease, number of competitors increase.

Equilibrium

when the quantity of goods supplied is equal to the quantity of goods demanded.

Surplus

Quantity supplied > Quantity demanded (Above equilibrium)

Shortage

Quantity demanded > Quantity supplied (Below equilibrium)