Basic Economic Concepts

Unit 1: Basic Economic Concepts

Scarcity

  • the economic problem of having unlimited human desires (wants & needs) in a world of limited resources
  • fundamental problem that all societies face
  • permanent

Economics

  • the branch of knowledge concerned with the production, consumption, & transfer of wealth
    • macroeconomics: concerned with large-scale of general economic factors
    • microeconomics: concerned with single factors & the effects of individual decisions
    • positive economics: claims that attempt to describe the world as is
      • facts
      • ex: minimum wage laws causes unemployment
    • normative economics: claims that attempt to prescribe how the world should be
      • opinion
      • ex: the govt should raise minimum wage

1st Pillar of Economic Wisdom

  • nothing in our material world can come from nowhere, nor can it be free
  • everything in our economic life has a source, a destination, & a cost that must be paid by someone

5 Key Economic Assumptions

  1. society's wants are unlimited, but all sources are limited (scarcity)
  2. due to scarcity, choices must be made & every choice has a cost (trade-off)
  3. everyone's goal is to make choices that maximize their satisfaction, & everyone acts in their own self-interest
  4. everyone makes decisions by comparing the marginal costs & marginal benefits of every choice
  5. real-life situations can be explained & analyzed through simplified models & graphs

Marginal

  • relating to or resulting from small/unit changes in some benefit or cost
    • marginal cost: the cost added by producing one additional unit of a product or service
    • marginal benefit: the additional benefit arising from a unit increase in a particular activity

Ceteris Paribus

  • "with all other conditions remaining the same"
  • helps isolate all the different variables that may influence or change an outcome

Opportunity Cost

  • a benefit, profit, or value or something that must be given
  • the loss of potential gain from other alternatives when one alternative is chosen

Utility

  • the measurement of "usefulness" that a consumer obtains from any good

Allocate

  • the division of things into shares or portions
  • allocation of resources: process by which economic resources get allotted, apportioned, or assigned to their particular uses for satisfying human wants

Cost

  • the combination of gains & losses of any goods that have value
    • explicit costs: a direct payment made to others in the course of running a business, such as wage or rent
    • implicit costs: any cost that has already occurred but is not necessarily shown or reported as a separate expense

Investment

  • an asset or item that is purchased with the hope that it will generate income in the future

Goods

  • tangible commodities or materials that will satisfy human wants & provide utility
    • consumer goods: produced & consumed by the consumer (rather than used in the production of another good)
      • ex: finished product; burger
    • capital goods: items used to create other goods
      • ex: parts; pieces of a burger

Services

  • work performed for someone else
  • transaction in which no physical goods are transferred from the seller to the buyer

Wants & Needs

  • wants: desires of citizens
  • needs: basic requirements for survival

Shortage

  • temporary
  • price increase
  • quantity demanded > quantity supplied

Surplus

  • price decrease
  • quantity supplied > quantity demanded

Factors of Production

  1. land - natural resources
  2. labor - work exerted
  3. capital
    • human: knowledge & skills that a worker gains through education & experience
    • physical: human-made objects used to create other objects
  4. entrepreneurship - innovative & risk taker

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