economics

• Microeconomics


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


  How to allocate scarce resources given unlimited wants
• People have unlimited wants but there aren't enough resources to fully satisfy those wants</b>
• Factors of production (resources)

  • Capital
  • Enterprise
  • Land
  • Labor
• Capital


  Man-made aids to production
• Enterprise


  Risk-takers who innovate and produce goods and 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 doesn't provide an infinite amount of resources, they are scarce
• 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 was a good decision. If the opportunity cost is greater, it was a bad decision.
• Production possibility frontier (PPF) or production possibility curve


  Very 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


  • Curve that shows the maximum possible production of all goods and services that can be produced with the level of factors of production in the economy
  • Curve that 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 forgone in order to pursue a certain action or choice
• Concave PPF


  Illustrates the law of increasing opportunity cost
• As a firm moves further along a concave PPF, the opportunity cost of producing an additional unit of one good increases
• Linear PPF


  Illustrates constant opportunity cost
• Types of efficiency that can be shown on a PPF

  • Productive efficiency
  • Allocative efficiency
  • Pareto efficiency
• Productive efficiency


  Using all factors of production to their maximum level to achieve maximum production
• Any point on the PPF curve is productively efficient
• Any point inside the PPF curve is productively inefficient
• Allocative efficiency


  Whether the goods/services being produced are satisfying consumer demand
• A PPF diagram cannot tell us if allocative efficiency is being met
• Pareto efficiency


  A situation where nobody can be made better off without making somebody else worse off
• Demand


  The quantity of a good or service consumers are willing and able to buy at a given price in a given time period
• Any point on the PPF curve is Pareto efficient
• Demand has to be effective in economics for it to exist
• Effective demand


  Consumers have to be both willing and able to buy something
• Law of demand


  There is an inverse relationship between price and quantity demanded
• Ways to increase production on a PPF

  1. Use factors of production better to increase output

  2. Reallocate factors of production to specialise in one good

  3. Shift the PPF curve by increasing quantity and/or quality of factors of production
• As price increases


  Quantity demanded decreases
• As price decreases


  Quantity demanded increases
• The demand curve is downward sloping to show the inverse relationship between price and quantity demanded
• Ceteris paribus


  All other factors remain unchanged