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Unit 1 - Basic Economic Concepts & Factors of Production


Basic Economic Concepts
Economics- the study of how choices are made given the fundamental condition of scarcity
Scarcity - limited resources are met with unlimited wants and needs [Permanent]
Ex: Oil  
(fundamental economic prob. all societies face)
1st Pillar of Economic Wisdom - "nothing in our material can come from nowhere or go nowhere, not can it be free. Everything in economic lives has a source, destination and cost must be paid"
5 Key Economic Assumptions 
                    A.   Society’s wants are unlimited, but all resources are limited (Scarcity)
B.    Due to scarcity, choices must be made. Every choice has a cost (Trade-off).
C.    Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own "self-interest."
D.   Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice.     
E.    Real life situations can be explained and analyzed through simplified models and graphs 
Marginal - having to do w/ a specific change in the quantity used of a good or service
                   * Marginal Cost: the cost of a one unit increase in an activity
                   * Marginal Benefit: what you gain when you get one more unit of something
Ceteris Paribus - "other things being equal" → cause and effect
Opportunity cost- The next best thing, what you must give up to get something of higher value, alternative is forgone.
Macroeconomics - study of economy-wide phenomena, including inflation, unemployment, and economic growth (large economic systems)
Microeconomics - the study of small units within the economy
Utility - ability or capacity of a good to be useful and give satisfaction
Allocate- to distribute
Price - what consumer pays
Cost - what producer pays
Explicit Costs - traditional out-of-pocket cost
Implicit Costs - opportunity costs (ex: forgone time, income)
Investment - money spent by businesses to improve production
Wants- Desires of the citizens (broader)
Needs - Basic requirement for survival
 
Shortage - quantity demanded > quant. supplied [Temporary]
 
Surplus - quant. supplied > quant. Demanded
 
Goods - Tangible item (commodity)
  • Consumer Goods  - direct consumer consumption [Finish good]
           (ex: tablet, hamburger)
  • Capital Goods - items used in the creation of other goods
                   (steel, engine, motor)
 
Services - activities that one performs for another
Positive Economics -  claims that attempt to describe the world as is
  • Very descriptive 
  • FACTS
                  Ex: Minimum-wage laws causes unemployment
                         (anytime wage increases, people are laid off somewhere)
 
Normative Economics - claims that attempt to prescribe how the world should be
  • Opinion
                    Ex: The gov't should raise min. wage
Factors of Production
  • Land - natural resources
  • Labor - work exerted
  • Capital
                      - Human: knowledge and skills a worker gains through education and experience
                      -Physical: human-made objects used to create other goods and services
                       (Ex: Building,  machines, tools)
  • Entrepreneurship - risk-taker and innovative
 

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