Fundamentals of Economics and Resource Allocation

Economics

The study of how individuals, businesses, and governments allocate scarce resources to satisfy unlimited wants.

Purpose of Economics

To understand decision-making under scarcity and improve resource allocation.

Land

Natural resources (e.g. water, minerals).

Labour

Human effort (e.g. workers, teachers).

Capital

Man-made resources (e.g. machinery, tools).

Enterprise

Entrepreneurship (e.g. business owners who take risks and innovate).

Needs

Essential for survival (e.g. food, shelter).

Wants

Non-essential but desired (e.g. iPhones, designer clothes).

Scarcity

Limited resources vs. unlimited wants.

Choice

Must decide how to allocate resources, which leads to opportunity cost.

Opportunity Cost

The next best alternative foregone when a choice is made.

Trade-offs

Choosing between alternatives due to limited resources.

Production Possibility Frontier (PPF)

A graph that shows the maximum feasible amount of two goods that can be produced with available resources.

Efficient point on PPF

On the curve.

Inefficient point on PPF

Inside the curve.

Unattainable point on PPF

Outside the curve.

Economic growth

PPF shifts outward (more resources or better tech).

Economic decline

PPF shifts inward (natural disasters, war).

Unemployment and PPF

Leads to inefficient use of resources = point inside the PPF.

Law of demand

Inverse relationship: As price ↑, quantity demanded ↓.

Non-price demand factors

Income, Tastes/preferences, Population, Prices of substitutes/complements, Consumer expectations.

Law of supply

Direct relationship: As price ↑, quantity supplied ↑.

Non-price supply factors

Production costs, Technology, Weather (agriculture), Taxes/subsidies, Number of producers.

Movement along curve

Caused by price changes.

Shift of curve

Caused by non-price factors.

Government tariff

Tax on imports that decreases supply of imports, increases prices, and decreases quantity.

Government subsidy

Increases supply (or demand if to consumers), decreases price, and increases quantity.

Material standards

Tangible goods/services (income, housing, GDP).

Non-material standards

Quality of life (freedom, environment, happiness).

Examples of material indicators

GDP per capita, income, employment rate.

Examples of non-material indicators

Life satisfaction, health care quality, crime rate.

Government influence on economy

Through taxes, welfare, education, healthcare, minimum wage laws.

Infrastructure projects

Stimulate economy by creating jobs, increasing demand for materials, and improving productivity.

Short-term effects of infrastructure projects

↑ Employment, ↑ spending.

Long-term effects of infrastructure projects

↑ Business efficiency, ↑ economic growth.