Economics: Scarcity and Opportunity Cost

Scarcity

• Definition: The fundamental economic problem of scarcity refers to the limited availability of resources to meet unlimited human wants and needs.
• Characteristics:
  • Resources are limited
  • Wants and needs are unlimited
  • Choices must be made about how to allocate resources

Opportunity Cost

• Definition: The value of the next best alternative that is given up when a choice is made.
• Key points:
  • Opportunity cost is a subjective value, dependent on individual preferences
  • It is the cost of choosing one option over another
  • Opportunity cost is not always monetary, but can be time, effort, or other resources

Supply and Demand

• Supply:
  • Definition: The amount of a good or service that producers are willing and able to produce and sell at a given price level.
  • Determinants:
    • Production costs
    • Technology
    • Expectations
    • Government policies
• Demand:
  • Definition: The amount of a good or service that consumers are willing and able to buy at a given price level.
  • Determinants:
    • Price
    • Income
    • Consumer preferences
    • Population

Market Equilibrium

• Definition: The point at which the supply and demand curves intersect, resulting in no excess supply or demand for a good or service.
• Characteristics:
  • Equilibrium price: The price at which the quantity supplied equals the quantity demanded.
  • Equilibrium quantity: The quantity supplied and demanded at the equilibrium price.
• Types of equilibrium:
  • Stable equilibrium: Small changes in price or quantity do not affect the equilibrium.
  • Unstable equilibrium: Small changes in price or quantity can cause the equilibrium to shift.
  • Disequilibrium: A situation where the quantity supplied does not equal the quantity demanded.

Scarcity

• The fundamental economic problem of scarcity arises due to limited resources and unlimited human wants and needs.
• Resources are limited, while wants and needs are unlimited, forcing individuals to make choices about resource allocation.

Opportunity Cost

• Opportunity cost is the value of the next best alternative given up when a choice is made.
• It is a subjective value dependent on individual preferences.
• Opportunity cost can be non-monetary, such as time, effort, or other resources.

Supply

• Supply refers to the amount of a good or service producers are willing and able to produce and sell at a given price level.
• Determinants of supply include production costs, technology, expectations, and government policies.

Demand

• Demand refers to the amount of a good or service consumers are willing and able to buy at a given price level.
• Determinants of demand include price, income, consumer preferences, and population.

Market Equilibrium

• Market equilibrium occurs when the supply and demand curves intersect, resulting in no excess supply or demand.
• The equilibrium price is the price at which the quantity supplied equals the quantity demanded.
• The equilibrium quantity is the quantity supplied and demanded at the equilibrium price.
• Types of equilibrium include stable equilibrium, unstable equilibrium, and disequilibrium.

Microeconomics

Supply and Demand

• As the price of a good increases, the quantity supplied also increases, assuming all other factors remain constant (Law of Supply).
• Conversely, as the price of a good decreases, the quantity demanded also increases, assuming all other factors remain constant (Law of Demand).
• The equilibrium point is reached when the supply and demand curves intersect, resulting in the quantity supplied equaling the quantity demanded.
• Shifts in the supply curve occur due to changes in production costs, technology, or expectations.
• Shifts in the demand curve occur due to changes in consumer preferences, income, or prices of related goods.

Market Structure

Types of Market Structures

• Perfect competition is characterized by many buyers and sellers, free entry and exit, a homogeneous product, and perfect information.
• Monopoly is marked by a single seller, barriers to entry, and a single product.
• Monopolistic competition is characterized by many buyers and sellers, free entry and exit, and differentiated products.
• Oligopoly is marked by few sellers, interdependent decision-making, and non-price competition.

Types of Markets

• Perfectly competitive markets are characterized by many buyers and sellers, free entry and exit, a homogeneous product, and perfect information.
• Imperfectly competitive markets include monopoly, monopsony, monopolistic competition, and oligopoly.
• Factor markets involve the trade of inputs such as labor, capital, land, and entrepreneurship.
• Product markets involve the trade of outputs including goods and services.

Macroeconomics

Gross Domestic Product (GDP)

• GDP is the total value of goods and services produced within a country's borders over a specific time period, usually a year.
• GDP is calculated by adding Consumption, Investment, Government Spending, and the difference between Exports and Imports.
• GDP is a widely used indicator of a country's economic performance and growth.

Fiscal Policy

• Fiscal policy is the use of government spending and taxation to influence the overall level of economic activity.
• Government spending can be increased to stimulate the economy or decreased to reduce inflation.
• Taxation can be used to increase disposable income by lowering taxes or to reduce demand by increasing taxes.
• The goals of fiscal policy are to stabilize the economy, promote economic growth, and reduce unemployment.

Monetary Policy

• Monetary policy is the actions of a central bank to control the money supply and interest rates.
• Open Market Operations involve buying or selling government securities to increase or decrease the money supply.
• Changing reserve requirements can increase or decrease the money supply.
• Setting short-term interest rates can influence borrowing and spending.
• The goals of monetary policy are to promote maximum employment, price stability, and moderate long-term interest rates.

Business Cycle

• The business cycle refers to the fluctuations in economic activity, typically involving periods of expansion and contraction.
• The phases of the business cycle are expansion, peak, contraction, trough, and recovery.
• Expansion is characterized by increasing economic activity and low unemployment.
• The peak is the highest point of expansion.
• Contraction is characterized by decreasing economic activity and rising unemployment.
• The trough is the lowest point of contraction.
• Recovery is the period when economic activity begins to increase again.

Types of Unemployment

• Frictional unemployment occurs when people are changing jobs or entering the labor market.
• Structural unemployment occurs when there is a mismatch between job skills and available jobs.
• Cyclical unemployment occurs due to economic downturns.
• Seasonal unemployment occurs due to regular fluctuations in demand for certain industries.
• Long-term unemployment lasts for an extended period of time.

Budgeting

• Budgeting is a process to allocate income towards expenses, savings, and debt repayment, helping prioritize financial goals and make conscious spending decisions.
• Effective budgeting reduces financial stress and anxiety, enabling individuals to manage their finances effectively and make the most of their income.
• To create a budget, identify income and fixed expenses, categorize expenses into needs and wants, set financial goals, assign percentages of income to each category, and track and adjust expenses regularly.
• Common budgeting methods include the 50/30/20 rule, allocating 50% for needs, 30% for wants, and 20% for savings and debt repayment, and zero-based budgeting, where every dollar is accounted for and assigned to a category.

Credit Management

• Credit management involves managing credit responsibly to achieve financial goals and maintain a good credit score.
• A good credit score can lead to lower interest rates, better loan terms, and lower insurance premiums, while poor credit management can lead to debt, financial stress, and a lower credit score.
• A credit score is composed of payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit (10%).
• Effective credit management strategies include making on-time payments, keeping credit utilization ratios below 30%, monitoring credit reports regularly, avoiding multiple credit applications, and considering debt consolidation.

European Union

• 27 member states in Europe, established in 1993 after the Maastricht Treaty
• Aims to promote economic and social integration among member states
• Key institutions: European Commission, European Council, and European Parliament

EU Institutions

• European Commission: executive body
• European Council: heads of state and government
• European Parliament: directly elected by EU citizens

EU Economic Integration

• Single market: allows for free movement of goods, services, capital, and people
• Monetary union: 19 member states use the Euro as a single currency
• Fiscal policy coordination: member states coordinate budget policies
• Common agricultural and fisheries policies
• Regional development policies to reduce economic disparities

International Trade

• Exchange of goods and services between countries
• Gains from trade:
  • Specialization and comparative advantage
  • Increased efficiency and productivity
  • Greater variety of goods and services

Trade Barriers

• Tariffs: taxes on imported goods
• Quotas: limits on imported quantities
• Non-tariff barriers: regulatory and administrative obstacles

Trade Agreements

• Bilateral agreements: between two countries
• Multilateral agreements: among multiple countries (e.g., WTO)
• Regional trade agreements: among member states (e.g., EU, NAFTA)

EU Trade Policy

• Common Commercial Policy: EU speaks with one voice in international trade negotiations
• EU trade agreements: over 40 agreements with countries and regions worldwide
• EU's role in international trade organizations:
  • World Trade Organization (WTO)
  • Organization for Economic Co-operation and Development (OECD)