Unit 1: Basic Economic Concepts

ALL TAKEN FROM JACOB CLIFFORD VIDEOS

(1.1) Scarcity

  • scarcity: products that are finite (have an end)

    • problem of economics: products are scarce but wants are unlimited → make choices and consider costs

  • 4 economic resources

    1. land: resources found in nature

      • payment = rent

    2. labor: all human effort

      • payment = wages

    3. capital: machinery/tools made by humans to gain resources

      • payment for use = interest

    4. entrepreneurship: innovation + ideas

      • payment: profit

    • NOT economic recources = consumer goods, waste, money/stocks (are used to facilitate production)

(1.2) Resource Allocation + Economic Systems

  • fundamental economic problem

    1. What will be produced?

    2. How will goods/services be produced?

    3. Who will get goods/services?

  • command economy: government makes decisions for who owns/produces

  • market economy: private individuals makes decisions for who owns/produces

    • creates competition between private individuals

  • traditional economy: cultural customs shape the economy

    • EX: indigenous communities using bartering and religious/cultural importance to certain goods

  • mixed economy: mix of command + market economy (private ownership with regulation)

    • most common economy in the world

  • households: consumers

  • firms: producers

  • allocation systems:

    • “first come, first serve”

    • random (lottery)

    • competition

    • command (based on need)

    • price (whoever can pay gets the good/service)

(1.3) Production Possibilities Curve

  • opportunity cost: how much X product is given up to produce Y product

    • equation = cost/gains

  • productions possibilities curve (PPC): conveys what society/factories are capable of producing with given resources

    • constant PPC: the production level stays the same → constant opp costs

    • increasing PPC: different resources → bowed out graph

      • the more technology → PPC bows out more to the right

      • most realistic PPC graph

(1.4) Comparative Advantage + Trade

  • absolute advantage: who’s objectively better at each good/service

  • comparative advantage: who has the lower opportunity cost when they produce a good → specialization

  • terms of trade: how many of an item should be traded for another to benefit two parties

    • opp cost of country 1 < ideal price < opp cost of country 2

  • output questions: asking how much things can be produced in x amount of time

  • input questions: how much time it takes to produce x amount of products

    • lower number (less time) = absolute advantage

(1.5) Cost-Benefit Analysis

  • explicit costs: out of pocket monetary costs

  • implicit costs: anything you possibly could’ve missed out on when making a choice

    • shouldn’t factor in something you were going to do anyway (eating lunch at school vs eating lunch at home)

(1.6) Marginal Analysis and Consumer Choice

  • law of diminishing marginal utility: as consumer gains more of a unit, the additional satisfaction (utils) diminishes

    • utils are subjective

    • marginal utility (MU): additional utils consumer gains after each unit

      MU table

      • marginal utility per dollar: MU / P (price)

    • utility maximizing rule: consumers money should be sent so that MU x / P x = MU y / P y