Unit 1 Economics

Scarcity definition

The fundamental economic problem of having unlimited human wants in a world of limited resources

Example of a scarce and non-scarce resource

Scarce: time, fresh water, oil and materials, skilled laborers

Non-scarce: sunlight, ambient air

What are the factiors of production?

The limited inputs: land, labor, and capital (tools, machinery, buildings)- used to create goods and services

What are the three main questions of economics?

What will we produce?

How will we produce?

For who will we produce for?

Command economy definition

A central authority makes decisions about production and consumption (a single groupmakes all the choices about what things get made, how they get made, and who gets to have them, no competition at all)

Ex. North Korea, Soviet Union, U.S during WWII

Market economy definition

Individual producers and consumers use prices to make decisions about production and consumption

Ex. U.S in the late 19th century

Mixed economy (most common)

Individual producers and consumers as well as a central authority make decisions about production and consumption

Ex. U.S today, Spain, China

These economies are normally involved with education and healthcare, but not with things like AI and businesses

How do you draw a productions possibility curve?

1. Draw the axes and label the two goods

2. Plot the intercepts which would be the maximum amount of that good that the economy can make if it uses 100% of its resources there

3. Connect the two end points, if the opportunity cost is constant the line is straight and if the opportunity cost is increasing draw a bowed outward curve

How does a productions possibility curve illustrate opportunity cost/trade offs?

Because resources are limited, the downward slope of the PPC demonstrates what must be given up of one good to produce more of another

How does a productions possibility curve illustrate inefficiency, efficiency, and economic growth or contraction?

Efficiency: points on the curve represent maximum utilization

Inefficiency: points inside of the curve represent waste of resources

Economic growth: an outward shift of the entire curve/line (happens when the economy gets a increase quantity or quality of resources/new technology)

Economic contraction: an inward or leftward shift of the entire curve (happens when a country experiences a lose in resources, war, natural disaster)

How to calculate opportunity cost from a PPC or table?

1. Make the x and y intercept a ratio

2. Divide x by x and y also by x to get the oppurtunity cost for 1 x

3. Do this process for y aswell

Opportuinity cost

The value of the next-best alternative you give up when making a choice

Captial goods & consumer goods

An important decision that societies have to make is how to allocate their resources between the production of capital goods and consumer goods

Capital goods- human-made resources that are used to produce goods and services (ex. buildings, machinery, equipment)

Consumer goods- products and services that satisfy human wants directly (ex. food, clothing, video games)

Absolute advantage

Refers to a person or country’s ability to produce a good more efficiently (using fewer inputs, such as time, labor, oil, lumper, etc.) than another producer

Ex. Tom has the absolute advantage in fishing and gathering coconuts because he can do so in less time

Comparative advantage

Refers to a person or country’s ability to produce a good at a lower oppurtunity cost than another producer

Ex. Even though Hank takes more time to gather coconuts, he ultimately has comparative advantage because the oppurtunity cost of that cocnut in terms of fish is lower

How to determine absoulute advantage vs. comparative advantage from a PPC or a table

1. Absolute advantage is who can make MORE, so whoever can make more of a certain good at the maximun production has the absolute advantage (just look at the numbers)

2. Finding comparative advantage from a PPC means finding the oppurtunity costs of both products from each person and finding who has the LOWER opportunity cost (they give up less)

Absolute: who can make more?

Comparative: who gives up less?