Econ

• Microeconomics


  The study of how to best solve the basic economic problem
• Basic economic problem


  How to allocate scarce resources given unlimited wants
• Factors of production (resources)

  • Capital
  • Enterprise
  • Land
  • Labor
• Capital


  Man-made aids to production
• Enterprise


  Risk-takers who innovate and produce goods/services to make profits
• Land


  Natural resources where goods can be produced or taken
• Labor


  Human resources/workers that can produce goods and services
• The world does not provide an infinite amount of resources
• Fundamental choices in a market economy

  • What to produce
  • How to produce
  • For whom to produce
• What to produce


  Businesses decide based on consumer demand
• How to produce


  Businesses decide based on what's most cost-effective and productive to minimize use of scarce resources
• For whom to produce


  Those who can afford the goods and services in a market economy, though the government can also help
• Opportunity cost


  The cost of the next best alternative foregone when a choice is made
• Opportunity cost is used to measure whether choices made are good or bad
• If the value of the current choice is greater than the opportunity cost

  It is a good decision
• If the opportunity cost is greater than the value of the current choice

  It is a bad decision
• Production possibility frontier (PPF) or production possibility curve


  Useful tools to illustrate the ideas of scarcity and choice in economics
• PPF/PPC


  • Shows the maximum possible production of two goods or services that can be produced with a given level of factors of production
  • Shows the various combinations of two goods and services that can be produced with a given level of factors of production
• Macro PPF


  • Shows the maximum possible production of all goods and services that can be produced with the level of factors of production in the economy
  • Shows the various combinations of all goods and services that can be produced with given factors of production in the economy
• Opportunity cost


  The cost of an alternative that must be given up to pursue a certain action
• Concave PPF


  Illustrates the law of increasing opportunity cost
• Law of increasing opportunity cost


  The more that is produced of one good, the more of the other good must be given up
• Linear downward sloping PPF


  Illustrates constant opportunity cost
• Productive efficiency


  • Using all factors of production to their maximum level to get maximum production
• Productively efficient point


  • Any point on the PPF curve
• Productively inefficient point


  • Any point inside the PPF curve
• Allocative efficiency


  Whether what is being produced is satisfying consumer demand
• Pareto efficiency


  • Nobody can be made better off without making somebody else worse off
  • Any point on the PPF curve is pareto efficient
• Increasing production on a PPF

  1. Use factors of production better

  2. Reallocate factors of production

  3. Shift the PPF curve by increasing quantity and/or quality of factors of production
• Shifting the PPF curve can favor the production of one good over the other