Unit 1 - Basic Economic Concepts

  • Economics: a social science that studies the way people and societies allocate scarce resources in order to satisfy unlimited needs and wants.

    • allocation: distribution

    • scarce: unlimited wants > limited resources

    • resources: service or asset used to produce goods and services

  • Economic Problem: how to arrange our limited resources to satisfy as many of our wants as possible

  • Macro Level: considers the big picture - nation’s economy as a whole

    → “bigger” scale

  • Micro Level: filters the scope to individuals in an economy

    → “smaller” scale

    i.e → countries/businesses/etc. (macro) & individuals (micro)

  • Factors of Production: resources that are scarce; broken down into four categories (doesn’t include money):

    • land: natural resources and raw material

      • ex. water, oil, minerals

    • labor: physical labor devoted to a task where workers are paid

    • capital: liquid asset or monetary value

      • physical capital: tools and equipment used to produce

        • ex. machinery

        • most commonly used

      • human capital: education/trining and individual has/uses to produce

    • entrepreneurship: ability of an individual to coordinate the other categories of resources to produce a good or service

  • The study of economics can be broken down into two more ways:

    • positive economics: based on facts and figures

      → theories to understand behavior are proved via hypothesis & testing

    • normative economics: based on assumptions

      → economic behaviors are analyzed and evaluated by researcher’s opinions

  • Fundamental Economic Reality

    • everyone faces trade-offs

    • we want more than what is freely available. When we are forced to choose one thing over something else, we must make a trade-off

    • in our decision making, we must weigh the costs and benefits of each option

  • Opportunity Cost: costs we sacrifice when opting for another choice

    • potential benefits missed when choosing one alternative over another

      • implicit cost: non-monetary costs

      • explicit cost: costs involving monetary payment

  • Trade-offs: giving up something to receive something in exchange

    *opportunity cost ≠ trade-off

  • Marginal: having a little bit more or a little bit less

    • Thinking on the margin means to compare the marginal cost with the marginal benefit.

    • Sunk Costs are past costs that are irrelevant to decision making.

  • Marginal Analysis and Consumer Choice:

    • utility: the measure of personal satisfaction (units → util)

    • marginal utility: added utility a consumer gets from having one more of something

    • total benefits and costs: used when decisions can’t be taken with margins

      → total net benefits: difference between total benefit and total cost, maximized at optimal choice

  • Three Big Economic Questions:

    1. what goods and services will be produced?

      → decision making of what is needed to properly allocate resources

    2. how will goods and services be produced?

      → how businesses will go about producing these goods and services

    3. for whom will the goods and services be produced?

      → who will be able to consume these goods and services

  • Economic Systems:

    4 Main Economic Systems