Unit 1: Basic Economic Concepts
Lesson 1: Scarcity
Scarcity is based on the idea that we have limited resources.
Ex: physical resources(land, water), intangible resources(time, manpower).
Absolute Scarcity = physical limitations of resources. Ex: time
Relative Scarcity = the value we place on resources. Ex: diamonds
Opportunity cost is looked at based on the values to see what option should be chosen over the other.
Prices are what are used to determine how resources are used.
If resources become scarce, prices go up(think about supply and demand0.
Various economic systems determine scarcity differently.
Ex: Capitalist system = prices and market forces allocate resources.
Planned economy = Government makes decisions
Prices, tax, and regulations may be used as incentives to have people use resources wisely.
Micro-economics = actor makes decisions, and allocation of scarce resources, individual behaviors, relates to the market for a particular product
Macro-economics = aggregate economy, millions of actors
4 Factors of Production: Land, Labor, Capital, and Entrepreneurship
Land = Doesn’t necessarily need to be physical land, it could also count as natural resources(water, air, energy).
Labor= man-power and people that are doing the work
Capital = something produced to produce other things
ex: tools, building to produce goods, machinery
Entrepreneurship = putting all the factors of production together
Consumption goods are goods that are just used to make people happy they might not find pleasure in it, and it’s not being used to produce other things.
Consider the fact that production resources are scarce.
You need both capital and consumption goods to make it easier on people to have their needs fulfilled.
Scarce resource = limited resource, there isn’t enough to go around
Ex: Oil
The demand for a particular resource is driven based on the idea that when one person uses something, another doesn’t get to use it, which causes rivalry to come up.
Rival good = struggling to use a particular good, but specifically when you are using it simultaneously with someone else. It’s more of a market condition of a particular good at a specific price.
Scarce good = limited resources, and naturally occurring limitation of a resource that can’t be replenished.
Economic models and trends are predicted based on some assumptions and trends that are made.
Simplifying assumptions can make it easier for to understand the economy and it’s particular economic model.
Normative statement = Based on opinions or ethics and what someone believes should be.
Positive statement = Testable, even though it might not be entirely true.
Lesson 2: Resource Allocation & Economic Systems
Property rights will be based on the person that’s willing to pay the highest price to acquire the good.
Property rights give the owner the freedom to do what they wish with the particular property that they have acquired.
Price signals are given based on the behavior of consumers in the market.
Market demand can be determined through the use of price signals to understand what the current state of the market is to allocate the correct resources.
Ex: Entirely different from a command economy because you don’t own anything, and don’t have control over something.
Infrastructure has been built to enforce property rights. Ex: countries like the US
Economic systems are a mechanism that decides what to make, how to make it, and who gets it.
Elements of property rights that help markets function focus on exclusivity, enforceability, and transferability.
Different Types of Economic Systems
Command Economy = Government owns, and plans. Ex: Cuba, North Korea
Market Economy = Buyers and sellers interaction, and resources are owned by citizens. Based on free enterprise(competition between companies). Businesses drive supply and demand. Ex There is no true market economy, but Australia is close.
Mixed Economy = A mix between command and market economy. No pure command or market economies. Businesses are decided by government regulations. Ex: USA, Brazil(Most democratic countries)
Lesson 3: Production Possibilities Curve(PPC)
PPC’s map off the trade-off that occurs when picking a particular object over another one.
This ISN”T the optimal solution! It’s not very efficient.
Ex: Resources not used wisely, time management
Points on the frontier of the PPC are efficient while the rest isn’t.
Opportunity costs are based on what’s being missed out on to take up something else. The opportunity that you are giving up.
The opportunity cost of producing one more unit is called the marginal costs.
Sometimes represented using monetary values!
Increasing opportunity cost = based on increasing another variable or incremental variable in a particular scenario.
Shows up in economic models very often because it demonstrates the trade-offs that occur to make the quickest and smartest move.
Increasing opportunity costs often shows up in a bow-shaped curve in most scenarios because of the change between the 2 factors.
Shapes of Graphs:
Bow = increasing opportunity cost
Dip = decreasing opportunity cost
Straight line = constant opportunity cost
Production possibilities curves are based on multiple other factors in real life, besides the one just represented on the graph.
Sitting behind the production possibilities curve means that something is in-efficient.
Points in front of the production possibilities curve could be an unattainable point because it isn’t necessarily aligned with the amount of resources that we have.
When you have growth in a production possibilities curve(increase in resources), it just expands outwards.
When you have a decline in the production possibilities curve(less resources), it retracts inwards.