Economics Chapter 1

Fundamentals of Economics

Scarcity

limited resources are available to meet unlimited wants and needs. It drives the need for making choices about resource allocation.

Economics

the study of how societies manage limited resources to satisfy unlimited wants and needs.

Shortage

occurs when the demand for a good or service exceeds its supply in a market.

Entrepreneur

a person who organizes and operates a business, taking on financial risks to do so. They are often seen as the driving force behind innovation and economic growth.

Factors of Production

the resources used in the production of goods and services, which include land, labor, capital.

Land

the natural resources used in the production process, such as water, minerals, and forests.

Labor

the human effort, both physical and mental, used in the production of goods and services.

Capital

the financial assets and physical equipment used in the production of goods and services.

Physical Capital

the tools, machinery, and buildings used in production, enabling efficiency and productivity.

Human Capital

the skills, knowledge, and experience possessed by an individual.

Effectiveness of Capital

the degree to which capital resources enhance production and increase output efficiency.

Trade-Off

the concept of giving up one benefit to gain another, often seen in resource allocation and decision-making.

Guns or Butter

a model representing the trade-off between military and civilian goods that a nation can produce.

Opportunity Cost

the cost of forgoing the next best alternative when making a decision.

Thinking at the Margin

the evaluation of the additional benefits and costs of a decision, considering one more unit of a good or service.

Cost/Benefit Analysis

a systematic approach to comparing the strengths and weaknesses of alternatives used in decision-making, evaluating their potential costs and benefits.

Marginal Cost

the cost of producing one more unit of a good or service, which includes both fixed and variable costs associated with that additional production.

Marginal Benefit

the additional benefit arising from a unit increase in a particular activity.

Production Possibilities Curve

The shape of the graph that shows the maximum combinations of two goods or services an economy can produce with its limited resources and technology at a given time

Production Possibilities Frontier

The maximum combinations of two goods an economy can produce using its available resources and technology

Efficiency

a state where scarce resources are allocated to maximize the most benefit possible for society, often by minimizing waste and ensuring that goods and services are produced at their lowest possible cost and are distributed to their most valuable uses

Underutilization

the failure to use resources or potential to their fullest capacity, leading to inefficiencies and lost productivity

Law of Increasing Costs

as an economy produces more of one good, the opportunity cost of producing additional units of that good increases, because resources are not perfectly suited for all tasks, leading to a greater sacrifice of the other good