Unit 1: Basic Economic Concepts

Scarcity

when unlimited wants face limited resources

Production Possibilities Curve (PPC)

a model showing all efficient combinations of two goods/services an economy can produce

point on: ideal, attainable

point above: unattainable with current resources (consumption > production capacity)

point inside: inefficient use of resources

constant OC: straight line

increasing OC: bowed out (resources not perfectly adaptable)

slope of PPC: OC of good on x-axis

Opportunity cost

the value of the next best alternative foregone when making a decision

Comparative advantage

ability to produce a good at a lower OC

OOO- Output Other Over (calculations)

Absolute advantage (AA)

ability to produce more output or use fewer inputs than another producer

Example — Output:

• Country A: 50 apples, 40 oranges

• Country B: 60 apples, 30 oranges
  → Apples: B has AA (60 > 50)
  → Oranges: A has AA (40 > 30)

Example — Input:

• Farmer A: 2 hours per chair, 4 hours per table

• Farmer B: 3 hours per chair, 5 hours per table
  → Chairs: A has AA (2 < 3 hours)
  → Tables: A has AA (4 < 5 hours)

Specialize

focusing on the good you have CA in

Terms of trade (TOT)

rate at which goods are exchanged between parties

both have to be between both OCs to be good

Gains from trade (GFT)

extra output or benefit from specializing/trading

increased consumption possible

Ceteris parbus

Latin for ‘all else equal’

only one variable changes at a time

“If pizza production increases, ceteris paribus, hotdog production must decrease.”

Capital goods

man-made tools, machines, or buildings used to produce other goods

Consumer goods

goods for personal use

Trade-off

giving up something to gain more of another

Output problem

when given total production

OOO- output other over

Input problem

when given resources/time per unit

this good/other good—other under

Exporting goods

whoever has the lower OC should

Importing goods

whoever has the higher OC should

Factors of production

land, labor, capital, entrepreneurship

need all four