Economics Key Concepts: Opportunity Cost, Supply & Demand, Market Equilibrium

Opportunity Cost

The value of the next best alternative given up when a choice is made.

Increasing Opportunity Cost

The principle that as production of one good rises, increasingly more of another good must be sacrificed due to resources not being equally efficient.

Factors of Production

The basic inputs used to produce goods and services—land, labor, capital, and entrepreneurship.

Economic Resources

The scarce inputs (natural, human, and capital) used in producing goods and services.

Production Possibilities Curve (PPC)

A graph showing the maximum possible combinations of two goods or services that can be produced with available resources and technology.

Consumer Goods

Goods produced for direct consumption by households.

Capital Goods

Goods used to produce other goods and services (e.g., machinery, tools, buildings).

Constant Opportunity Cost

A situation where resources are equally efficient, so the trade-off between two goods remains the same along the PPC (a straight-line PPC).

Scarcity

The fundamental economic problem of having limited resources to satisfy unlimited wants.

Absolute Advantage

The ability of a country, individual, or firm to produce more of a good with the same amount of resources compared to others.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Specialization

Focusing resources on producing a limited range of goods or services to increase efficiency and output.

Gains from Trade

The extra output, consumption, or welfare that results when parties specialize based on comparative advantage and trade with each other.

Law of Demand

As price decreases, quantity demanded increases, and as price increases, quantity demanded decreases (inverse relationship).

Law of Supply

As price increases, quantity supplied increases, and as price decreases, quantity supplied decreases (direct relationship).

Substitute Good

A good that can replace another; demand rises when the price of its substitute rises (e.g., tea and coffee).

Determinants of Demand

Factors other than price that shift demand (income, tastes, expectations, number of buyers, prices of related goods).

Determinants of Supply

Factors other than price that shift supply (input costs, technology, number of sellers, expectations, taxes/subsidies).

Complementary Good

A good consumed with another; demand rises when its complement's price falls (e.g., printers and ink).

Change in Demand

A shift of the demand curve caused by non-price factors.

Change in Supply

A shift of the supply curve caused by non-price factors.

Surplus

When quantity supplied is greater than quantity demanded at a given price.

Change in Quantity Demanded

Movement along the demand curve caused by a change in price.

Change in Quantity Supplied

Movement along the supply curve caused by a change in price.

Shortage

When quantity demanded is greater than quantity supplied at a given price.

Equilibrium Quantity

The amount bought and sold at the market-clearing price.

Price Ceiling

A legal maximum price, set below equilibrium, leading to shortages.

Equilibrium Price

The price at which quantity demanded equals quantity supplied.

Price Floor

A legal minimum price, set above equilibrium, leading to surpluses.