Basic Economic Concepts Summary

Basic Economic Concepts

  • Economics: Study of how to allocate scarce resources to satisfy unlimited wants.

  • Scarcity: Condition where resources are insufficient to satisfy all desires; necessitates choice.

Economics Definitions

  • Economics Defined: Social science focused on the efficient use of limited resources for maximum satisfaction.

  • Examples of choices made by individuals, businesses, and governments.

Microeconomics vs. Macroeconomics

  • Microeconomics: Study of small economic units (individuals, firms, industries).

  • Macroeconomics: Study of the overall economy (national growth, inflation, unemployment).

Positive vs. Normative Economics

  • Positive Statements: Fact-based, devoid of value judgments (describes reality).

  • Normative Statements: Subjective, includes value judgments (prescribes what ought to be).

Marginal Analysis

  • Focus on additional benefits vs. additional costs.

  • Decisions made by comparing marginal costs and marginal benefits.

Key Economic Assumptions

  1. Unlimited wants vs. limited resources (scarcity).

  2. Choices must be made due to scarcity; every choice has a cost (trade-off).

  3. Individuals aim to maximize satisfaction (self-interest).

  4. Rational behavior when comparing marginal costs and benefits.

  5. Real-life situations can be analyzed through simplified models.

Trade-offs and Opportunity Cost

  • Trade-offs: Alternatives given up when making a decision.

  • Opportunity Cost: Most desirable alternative sacrificed as a result of a decision.

Factors of Production

  • Land: Natural resources not created by humans.

  • Capital: Tools, equipment, and factories used in production.

  • Labor: Human effort and abilities.

  • Entrepreneurs: Individuals who initiate businesses or bring products to market.

Economic Questions

  • What goods/services should be produced?

  • How should these goods/services be produced?

  • Who will consume these goods/services?

Economic Systems

  • Centrally-Planned Economy: Government controls resources and decisions (communism).

  • Free Market Economy: Prices determined by supply and demand; minimal government intervention.

  • Mixed Economy: Combination of private and public ownership with market and government decisions.

Advantages and Disadvantages of Economic Systems

  • Centrally-Planned Economy:

    • Advantages: Low unemployment, job security, equal income.

    • Disadvantages: No incentives, corruption, limited freedoms.

  • Free Market System:

    • Advantages: Encourages innovation, variety of goods, responds to consumer needs.

    • Disadvantages: Income inequality, worker exploitation, market failures.

  • Mixed Economy:

    • Advantages: Balances private enterprise with government control, reduces inequality.

    • Disadvantages: Excessive intervention risks, slow decision-making, potential inefficiencies.