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The Nine Central Concepts of Economics

1. Scarcity:

  • The starting point of economics; limited resources must be used to satisfy unlimited needs and wants.

2. Choice:

  • Due to scarcity, societies must choose between alternatives, leading to opportunity costs.

3. Efficiency:

  • Refers to the optimal use of resources to minimize waste and maximize societal benefits.

4. Equity:

  • Concerns fairness and justice in the distribution of income, wealth, and opportunities, distinct from equality.

5. Economic Well-Being:

  • Relates to the quality of life and prosperity, including financial security, basic needs fulfillment, and personal satisfaction.

6. Sustainability:

  • Ensuring that economic activities do not harm the environment or deplete resources for future generations.

7. Change:
The economy is constantly evolving, so economists must analyze how key variables like inflation, employment, and GDP change over time to understand trends and anticipate future developments.

8. Interdependence:
Economic agents are deeply interconnected, meaning their decisions and actions influence one another. Economists carefully evaluate these interactions to grasp the broader impact on the economy.



9. Intervention:

  • Refers to government actions in markets, such as taxes and subsidies, to correct market failures and improve societal outcomes.



The Economic Problem

  • Scarcity: The core economic issue where society's needs and wants are unlimited, but resources to meet these demands are limited. This requires societies to make choices about what needs and desires to prioritize.

  • Goods: Physical, tangible items (e.g., cars, bread).

  • Services: Intangible offerings (e.g., haircuts, repairs).

  • Resources (Factors of Production): Inputs used to produce goods and services, including land, labor, capital, and entrepreneurship. These resources are finite, while human desires are infinite.

Factors of Production

  1. Land: Encompasses natural resources like minerals, forests, and land itself.

  2. Labour: Human effort, both physical and mental, required for production (e.g., teachers, construction workers).

  3. Capital: Manufactured resources like machinery and factories used in production.

  4. Entrepreneurship: The ability to organize other factors of production to create goods and services, taking on business risks.

Opportunity Cost

  • Definition: The next best alternative for when a choice is made. It highlights the cost of choosing one option over another.

  • Economic Goods: Goods produced with scarce resources, involving opportunity cost.

  • Free Goods: Items like air and sunlight that are abundant and do not involve opportunity costs.

The Three Basic Economic Questions

  1. What to Produce?

    • Societies must decide which goods and services to produce with limited resources.

  2. How to Produce?

    • Decisions about the methods and combinations of resources used in production (e.g., intensive vs. extensive agriculture).

  3. For Whom to Produce?

    • Determines who gets to consume the produced goods and services, based on availability, need, or ability to pay.

Means of Answering Economic Questions

  • Market vs. Government Intervention:

    • Free Market Economists: Believe in minimal government intervention, trusting markets to allocate resources efficiently.

    • Interventionists: Argue for government involvement to correct market failures and ensure resources are allocated in society's best interest.

Economic Systems

  • Free Market Economy: Resources are privately owned, and economic decisions are made by consumers and producers through the price mechanism.

  • Centrally Planned Economy: The government makes all economic decisions, and resources are state-owned.

Comparison of Economic Systems

  • Centrally Planned Economy:

    • Advantages: Controlled production of demerit goods, equality in resource distribution.

    • Disadvantages: Lack of personal freedom, inefficiencies in resource allocation.

  • Free Market Economy:

    • Advantages: Higher quality and variety of goods and services due to competition.

    • Disadvantages: Potential under-provision of merit goods, inequality in access to goods and services.

Mixed Economies

  • In reality, most economies are mixed, incorporating elements of both free markets and government intervention. The degree of government involvement varies by country (e.g., high in China, low in the USA and UK).

. Using Models in Economics

  • Definition: Models in economics are simplified representations of reality.

  • Purpose: Used to explain relationships, theories, and connections between variables.

  • Forms: Expressed via mathematical equations, analysis, or diagrams.

  • Assumptions: Necessary to focus on specific variables, simplifying complex realities.

2. The Production Possibility Curve (PPC) Model

  • Definition: Also known as the Production Possibility Frontier (PPF).

  • Purpose: Illustrates the production capabilities of an economy with scarce resources.

  • Assumptions:

    • Only two goods are produced.

    • Goods are produced with available resources.

    • The amount of resources and technology is fixed at a specific time.

    • Points on the PPC mean full employment of resources.

3. Important Concepts

  • PPC Curve: Shows maximum combinations of goods/services a country can produce efficiently.

  • Efficiency and Unemployment:

    • Points on the curve represent economic efficiency.

    • Points inside the curve indicate unemployment or inefficiency.

    • Points outside the curve are unattainable due to scarce resources.

4. Actual and Potential Growth

  • Actual Growth: Actual growth occurs when a country increases its production of goods and services. If a country moves from point D to point G, as shown in Figure 2, it signifies actual growth. This transition means the country is now producing more of both good X and good Y by making greater use of   its scarce resources.

  • Potential Growth: Occurs when the productive potential of an economy increases, enhancing its overall capability. This allows the economy to produce more goods and services at its maximum capacity than before.

  • Causes of Potential Growth:

    • Increased quantity or quality of resources.

    • Technological improvements.

5. Opportunity Cost, Scarcity, and Choice

  • Opportunity Cost: The cost of forgoing the next best alternative when making a decision.

  • PPC and Opportunity Cost: Moving along the PPC illustrates the trade-off between goods due to scarcity.

6. Increasing vs. Constant Opportunity Cost

  • Increasing Opportunity Cost: PPC is curved; not all factors are equally suited for producing both goods.

  • Constant Opportunity Cost: PPC is a straight line; factors are equally efficient in producing both goods.






Households are the owners of all factors of production and offer them to firms in exchange for an income. Firms hire and organise these factors to produce goods and services, which are then consumed by households.



The assumptions of the model are:

  1. Households own all the factors of production.

  2. Firms produce all goods and services.

  3. There is no government.

  4. There are no other countries to trade with (it is a closed economy).

  5. There are no banks or commercial institutions.

Households provide the factors of production: land, labour, capital and entrepreneurship. In exchange for their services, firms will pay for each of these factors of production in different ways:

  • For land, they will pay rent.

  • For labour, they will pay wages.

  • For capital, they will pay interest.

  • For entrepreneurship, they will pay dividends.