Basic Economic Concepts Flashcards
Scarcity
The inability of limited resources to satisfy unlimited wants.
Resources
Land, Labor, Capital, Entrepreneurship
Land Resources
Resources from nature
Labor Resources
Mental or physical work from people
Capital Resources
Goods used to produce other goods & services
Entrepreneurship
Business owners who produce a product
Trade-Offs
Allocating scarce resources involved trade-offs
Shortage
The quantity supplied is less than the quantity demanded at the current price
Production Possibilities Curve (PPC)
A graph that shows all combinations of two goods or categories of goods that can be produced with fixed resources.
Concaved PPC
The two goods or categories of goods produced have an increasing opportunity cost. The resources are not perfectly adaptable.
Linear PPC
The production of one good or category of goods is going to have a constant opportunity cost in terms of the other good. The resources are perfectly adaptable.
Opportunity Cost
The cost of a choice
Productive Efficiency
Any point on the PPC curve means the resources are being used efficiently
Inefficiency
Any point within the PPC curve means resources are being used inefficiently
Impossible/Unobtainable
Any point outside the PPC curve is impossible as we have scarce resources and can’t produce everything we want
Shift In
Decrease in the quantity or quality of resources will cause the PPC curve to shift inwards resulting in the economy not being able to produce as much of either good A or good B
Shift Out
Increase in the quantity or quality of resources will cause the PPC curve to shift outward resulting in the economy being able to produce more of either good A or good B
Change in Technology
If we have a change in technology that only affects one of the goods then the good in question will kick out a bit (increase)
Change in Capital & Consumer Goods
If an economy moves from producing a lot of capital goods but not as many consumer goods (point A) to producing a lot of consumer goods but not as many capital goods (point B) then economic growth will slow.
Absolute Advantage
The ability to produce more of something with fixed resources or the same amount of something using fewer resources
Comparative Advantage
The ability to produce at a lower opportunity cost
Output Problem: Other-Over
Include goods or categories of goods that a country or economy is producing or outputting.
Input Problems: It-Over
Include units of resources that go into the production of a product.
Specialize
An economy produces solely what they have a comparative advantage in
Mutually Beneficial Terms of Trade
Mutually beneficial terms of trade will fall between the opportunity costs
Law of Demand
Ceteris Paribus, consumers buy more at low prices and less at high prices
3 Reasons Why Curve is Downward
Substitution Effect, Income Effect, Diminishing Marginal Utility
Diminishing Marginal Utility
Satisfaction gained with each additional unit decreases as each unit is consumed
Income Effect
An increase in price decreases purchasing power and vice versa
Substitution Effect
An increase in price makes substitutes more attractive and a decrease in price makes them less attractive
Individual to Market Demand
Market Demand curves come from Individual Consumer Demand curves.
Individual Consumer Demand Curve
How much of an item an individual is willing to buy at a specific price.
Demand
Every single price and every single quantity demanded for those prices
Shift
An increase in demand shifts the entire curve to the right. A decrease in demand shifts the entire curve to the left
Determinants of Demand (Non-price Determinants)
Things that shift the demand curve to the right or left. Tastes & Preferences, Market Size, Prices of Related Goods, Changes in Income, Expectations
Law of Supply
Ceteris Paribus, producers sell more at high prices and less at low prices.
Individual to Market Supply
Market Supply curves come from Individual Supply curves. An Individual Supply curve is how much of an item a supplier is willing to supply at a specific price.
Supply
The entire supply curve. Every single price and every single quantity supplied for those prices
Determinants of Supply
Things that shift the supply curve to the right or left. Input Price, Taxes, Subsidies, Regulations, Number of sellers, Technology, Prices of Other Goods
Quantity Supplied
One quantity for one price
Market Equilibrium
The price that clears the market. Quantity Demand = Quantity Supply
Surplus
When there is a low Quantity Demanded and high Quantity Supplied.
Quantity Demand <-Quantity Supply
Shortage
When there is high Quantity Demanded and low Quantity Supplied.
Quantity Demand -> Quantity Supply
Changes in Equilibrium
Changes in Supply, Changes in Demand, New equilibrium will occur, When the demand or supply curve shifts there isn’t an immediate price change.
