Economics Basics: Scarcity and Opportunity Cost

Study Notes

Definition: The fundamental economic problem of scarcity occurs when the needs and wants of individuals exceed the resources available to satisfy them.
Characteristics:
- Universal: Scarcity affects everyone, regardless of their economic situation.
- Relative: Scarcity is a relative concept, as the availability of resources can change over time.
- Permanent: Scarcity is a permanent feature of the economic system.

Definition: The value of the next best alternative forgone when choosing one option over another.
Key points:
- Opportunity cost is a subjective value, as it depends on individual preferences.
- Opportunity cost is not always monetary; it can be time, effort, or other resources.
- Opportunity cost increases as the scarcity of resources increases.

Definition: The process of assigning resources to different uses to maximize efficiency and satisfy consumer wants.
Methods of allocation:
- Market mechanism: Resources are allocated based on market forces of supply and demand.
- Command economy: Resources are allocated by a central authority.
- Traditional economy: Resources are allocated based on custom, habit, and tradition.
Goals of allocation:
- Efficiency: Maximizing output with minimal waste.
- Equity: Distributing resources fairly among different groups.

Definition: A state in which the quantity of a good or service that consumers are willing to buy (demand) equals the quantity that producers are willing to supply (supply).
Conditions for equilibrium:
- The quantity demanded equals the quantity supplied.
- The market is in a state of rest, with no tendency for change.
Types of equilibrium:
- Partial equilibrium: Equilibrium in a single market.
- General equilibrium: Equilibrium in all markets simultaneously.

Supply:
- Definition: The quantity of a good or service that producers are willing to produce and sell at a given price level.
- Law of supply: As the price of a good increases, the quantity supplied also increases, ceteris paribus (all other things being equal).
Demand:
- Definition: The quantity of a good or service that consumers are willing to buy at a given price level.
- Law of demand: As the price of a good decreases, the quantity demanded increases, ceteris paribus.
Interaction between supply and demand:
- Equilibrium price and quantity: The price and quantity at which the supply and demand curves intersect.
- Changes in supply and demand: Shifts in the supply and demand curves can lead to changes in the equilibrium price and quantity.

Scarcity is a fundamental economic problem that occurs when the needs and wants of individuals exceed the resources available to satisfy them.
Scarcity affects everyone, regardless of their economic situation, and is a universal concept.
Scarcity is relative, as the availability of resources can change over time, and is a permanent feature of the economic system.

Opportunity cost is the value of the next best alternative forgone when choosing one option over another.
Opportunity cost is a subjective value, depending on individual preferences.
Opportunity cost is not always monetary; it can be time, effort, or other resources.
Opportunity cost increases as the scarcity of resources increases.

Allocation of resources is the process of assigning resources to different uses to maximize efficiency and satisfy consumer wants.
Methods of allocation include:
- Market mechanism: Resources are allocated based on market forces of supply and demand.
- Command economy: Resources are allocated by a central authority.
- Traditional economy: Resources are allocated based on custom, habit, and tradition.
Goals of allocation include:
- Efficiency: Maximizing output with minimal waste.
- Equity: Distributing resources fairly among different groups.

Market equilibrium is a state in which the quantity of a good or service that consumers are willing to buy (demand) equals the quantity that producers are willing to supply (supply).
Conditions for equilibrium include:
- The quantity demanded equals the quantity supplied.
- The market is in a state of rest, with no tendency for change.
Types of equilibrium include:
- Partial equilibrium: Equilibrium in a single market.
- General equilibrium: Equilibrium in all markets simultaneously.

Supply:
- Definition: The quantity of a good or service that producers are willing to produce and sell at a given price level.
- Law of supply: As the price of a good increases, the quantity supplied also increases, ceteris paribus (all other things being equal).
Demand:
- Definition: The quantity of a good or service that consumers are willing to buy at a given price level.
- Law of demand: As the price of a good decreases, the quantity demanded increases, ceteris paribus.
Interaction between supply and demand:
- Equilibrium price and quantity: The price and quantity at which the supply and demand curves intersect.
- Changes in supply and demand: Shifts in the supply and demand curves can lead to changes in the equilibrium price and quantity.