Review of Basic Economic Concepts and Principles

economy

Institutional structure through which individuals in a society coordinates their diverse wants and desires

economic system

System by which the economy is organized

economic institutions

Physical or mental structures that significantly

influence economic decisions, e.g., family,

corporations, governments, cultural norms

institutions

The incentive systems that structure human interaction

economic insights

General insights economists have gained into how the economy functions – how an economy seems to proceed or progress without any overall plan or coordinating agency

empirical evidence

Information obtained through observation and documentation of certain behavior and patterns or through an experiment

What and how much to produce?

How to (and who should) produce?

For whom to produce?

Three coordination problems that any economy faces

problem of scarcity

Everything costs something, there is always a resource used for something to be produced.

opportunity cost

 If we choose to produce something, we forgo the possibility of another thing to be produced by the same resources.

comparative advantage

ability to produce a particular good or service at a lower opportunity cost than its trading partners.

competition

It is a process of rivalry between firms, and, where it is effective, encourages firms to deliver benefits to customers in terms of lower prices, higher quality and more choice or a situation in a market in which firms or sellers independently strive for the patronage of buyers to achieve a particular business objective, e.g., profits, sales, and/or market share

Laissez-faire

The philosophy that government should not

interfere with commerce or trade.

pareto efficiency

it describes a situation where no further improvements to society's well being can be made through a reallocation of resources that makes at least one person better off without making someone else worse off.

pareto improvement

a change that makes some individuals better off without making anyone worse off. Economists are always on the lookout for Pareto improvements.

absolute advantage

ability of an actor to produce more of a good or service than a competitor.