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Three Basic Economic Questions
What goods/services will be produced?
How will they be produced (use of land, labor, capital)?
Who will receive them (distribution)?
Factors of Production (FOPs)
Land → natural resources (rent)
Labor → human effort/skills (wages)
Capital → tools/machines (interest)
Entrepreneurship → risk-taking, organizing FOPs (profit)
Production Possibilities Frontier (PPF)
On curve = efficient
Inside curve = inefficient
Outside curve = unattainable
Concave shape = increasing opportunity cost
Productive efficiency
least cost
Allocative efficiency
right mix of goods society wants
Opportunity Cost
Formula: Opportunity Cost = What you give up ÷ What you gain
Law of Increasing OC: Costs rise as more resources are shifted.
Economic Growth (PPF shifts outward)
↑ Resources (labor, land, capital)
↑ Human capital (education, training)
↑ Technology (innovation, productivity)
↑ Investment in capital goods
Absolute advantage
Produce more with the same resources.
Comparative advantage
Produce at lower opportunity cost.
Imports
goods produced abroad and sold domestically
Exports
goods produced domestically and sold abroad
Autarky
no trade
Moving along
change in what we produce.
Cause: A change in the price of the good or service.
Effect: A change in the quantity demanded or quantity supplied, but the underlying relationship between price and quantity remains the same.
Example: If the price of bread rises, a bakery may produce and sell more bread, moving along its supply curve to a higher quantity supplied at the new, higher price.
Shifting
change in how much we can produce overall.
change in production
Cause:
A change in any factor other than the price of the good or service.
Demand shifts: are caused by changes in consumer income, tastes and preferences, the price of related goods (substitutes or complements), and consumer expectations.
Supply shifts: are caused by changes in input costs, technology, the number of sellers, or expectations about future prices.
Effect:
The entire demand or supply curve moves to the left or right, meaning that a different quantity is demanded or supplied at every given price.
Example:
If consumers' incomes rise, they might buy more bread at the original price, causing the entire demand curve for bread to shift to the right.