Khan Academy Unit 1 Notes

Absolute scarcity

Resources are physically limited (ex. wood or oil)

Relative scarcity

The value we place on resources (ex. diamonds)

Opportunity cost

The value of what we give up when we choose one option over the other

Scarcity creates

a. prices go up (supply and demand)

b. prices go down (supply and demand)

c. people use the resource more efficiently or look for substitutes

d. people use the resource more exclusively

a & c

Adam Smith’s Invisible Hand

By pursuing his own self interest, he inadvertently promotes society as a whole

free resources

One person using this resource does not take away from anyone else using it (ex. air)

Factors of Production

Land, labour, capital, entrepreneurship

Capital

The financial assets or physical goods used to produce other goods and services.

Entrepreneurship

The process of knowing how to put all the factors together

Capital vs consumption goods

Capital goods are used to produce consumer goods, while consumption goods are the final products used by consumers.

Scarcity

Limited, not enough to go around, potentially unlimited wants from people

Rival good

One person using the item limits the ability for other people to use it (ex. houses)

Normative Statements

Matter of opinion, ethics, or how someone thinks the world should be

Positive Statement

Something that can be tested

Production curve

a graph that shows all of the different combinations of output that can be produced given current resources and technology, illustrating scarcity and tradeoffs

ceteris paribus

Assuming all other factors remain constant

production possibilities frontier

all of the different optimal possibilities that we can get of the two goods we can produce, given our available resources and technology

Opportunity cost

the trade-off that one makes when deciding between two options

Marginal cost

opportunity cost at a specific point

Opportunity cost of each additional unit of Good A

Loss or gain in Good B/Loss or gain in Good A

Comparative advantage

Lesser opportunity cost to produce Good A than other producers