Unit 1

• Scarcity


  The fundamental problem in economics - the inability of scarce resources to satisfy unlimited human wants
• Scarcity


  • Likely to have a positive price
  • May require a system to allocate scarce resources (e.g. organ transplants)
  • Less available than is wanted
• Scarcity is not the same as shortage
• Factors of production


  • Land
  • Labor
  • Human capital
  • Physical capital
  • Entrepreneurship
• Shifts in production possibilities curve

  • Outward shift = growth (more resources, higher productivity)
  • Inward shift = loss of resources
• Absolute advantage


  The ability to produce more or using fewer resources than someone else or some other country
• Comparative advantage


  The ability to produce something at a lower opportunity cost
• Calculating comparative advantage


  1. Opportunity cost of A = A / B

  2. Opportunity cost of B = B / A

  3. Lower opportunity cost = comparative advantage
• Mutually beneficial terms of trade will fall between the opportunity costs of the trading entities
• Law of demand


  Consumers buy more of a good at low prices and less of a good at higher prices, causing a downward sloping demand curve
• Price changes quantity demanded, price does not change demand
• Shift in demand curve

  Rightward shift is an increase, leftward shift is a decrease
• Law of supply


  Producers produce and sell more at high prices and less at low prices, causing an upward sloping supply curve
• Price changes quantity supplied, price does not change supply
• Market equilibrium


  Where the supply and demand curves intersect, giving the equilibrium price and quantity
• Increase in demand

  Equilibrium price and quantity increase
• Decrease in demand

  Equilibrium price and quantity decrease
• Increase in supply

  Equilibrium price decreases, equilibrium quantity increases
• Decrease in supply

  Equilibrium price increases, equilibrium quantity decreases
• Double shifts (two variables changing) can make one axis indeterminate depending on the size and direction of the shifts