Basic Economic Concepts

Basic Economics

A. Scarcity, choice, and opportunity costs

B. Production possibilities curve

C. Comparative advantage, absolute advantage,

specialization, and exchange

D. Demand, supply, and market equilibrium

E. Macroeconomic issues: business cycle, unemployment,

inflation, growth

Economics defined

Economics is the study of how people use scarce resources in order to satisfy unlimited needs and wants.

Economic Goals

1. Economic growth – produce more and better goods and services

2. Full employment – suitable jobs for all citizens who are willing and able to work

3. Economic efficiency – achieve the maximum production using available resources

4. Price-level stability – avoid large fluctuations in the price level (inflation +


5. Economic freedom – businesses, workers, consumers have a high degree of

freedom in economic activities

6. Equitable distribution of income – try to minimize gap between rich and poor

7. Economic security – provide for those who are not able to earn sufficient income

8. Balance of trade – try to seek a trade balance with the rest of the world

EconMovies- Episode 1: Star Wars (Scarcity, Choices, and Exchange)
Office Hours: Scarcity is not a Shortage
EconMovies- Episode 2: Monty Python and the Holy Grail (Marginal Analysis)

Factors of Production

Land – all natural resources usable in the production process

Capital – all manufactured aids to production (tools, machinery, equipment, and

factory, storage, transportation, and distribution facilities used in producing goods

and services

Labor – physical and mental talents of individuals available and usable in producing

goods and services

Entrepreneurial ability – the entrepreneur 1) takes the initiative in combining the

other resources to produce a good or service, 2) makes basic business-policy decisions,

3) is an innovator, and 4) is a risk bearer.

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Production Possibilities Curve

The production possibilities curve represents the combinations of maximum output

that can be reached in the economy. It is a frontier because it shows the limit of

output. Anything under the curve is attainable, but involves inefficient use of

resources. Anything outside the curve is unattainable with current resources.

Usually, the curve is some type of consumer goods versus some type of capital goods.

Each point on the curve represents a maximum output of the two goods. Different

points on the curve mean different production combinations of the two goods.

The curve bows outwards because of the Law of Increasing Opportunity Cost, which

states that the amount of a good which has to be sacrificed for each additional unit of

another good is more than was sacrificed for the previous unit. The rationale for this

law is that some economic resources are not completely adaptable to alternative uses,

so the resources will yield less of one product.

Shifts in this curve can be caused by increases in resource supplies or advances in

technology. Also, if an economy favors “future goods” (technology, etc), the curve will

shift faster because of more economic growth.

EconMovies- Episode 3: Monsters Inc (Production Possibilities Curve)
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Determinants of Production

One must compare marginal benefits and marginal costs to determine the best or

optimal output mix on the Production Possibilities Curve.

Office Hours: Change in Demand vs. Change in Quantity Demanded


C - change in consumer population

H - has preferences

e- expectation in future price

A - allowance income

P - price of related goods

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The Supply Curve


G- government regulations

e- expectation of future price

T- taxes/subsidies

S- change in the number of suppliers

P - Productivity

A - advancement in technology

i - input costs

D - demand for related goods

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The Supply Curve Shifts

Market Equilibrium

EconMovies- Episode 4: Indiana Jones (Demand, Supply, Equilibrium, Shifts)
Office Hours: Changing Demand and Supply at the Same Time