Introduction to Scarcity and Economic Choices

Scarcity and Economic Choices

• Scarcity: Limited resources versus unlimited wants.
• Economic meaning: Scarcity forces choices on how to efficiently allocate resources.

Principles of Economic Thinking

• People face trade-offs.
• The cost of something is what you give up to get it (opportunity cost).
• Rational people think at the margin.
• People respond to incentives.
• Trade can make everyone better off.
• Markets are usually a good way to organize economic activity.
• Governments can sometimes improve market outcomes.
• A country's standard of living depends on its production of goods and services.

Factors of Production

• Land: Natural resources.
• Labor: Human effort.
• Capital: Tools, machines, buildings.
• Entrepreneurship: Innovation and risk-taking.

Economics: Micro vs. Macro

• Economics: Study of choices to allocate scarce resources.
• Microeconomics: Individual decision-making (households, firms).
• Macroeconomics: Economy-wide phenomena (GDP, inflation).

Rationality Assumption

• Definition: People make decisions to maximize utility.
• Meaning: Choices are logical, based on self-interest.

Opportunity Cost

• Definition: The value of the next best alternative foregone.
• Meaning: Shows trade-offs in decision-making.

Positive vs. Normative Economics

• Positive: Objective analysis (what is).
• Normative: Subjective recommendations (what should be).

Economic Policy and Socioeconomic Goals

• Economic Efficiency: Maximize output, minimize waste.
• Equity: Fair distribution of resources.
• Economic Growth: Increase in GDP.
• Full Employment: Utilize all available labor.
• Stability: Control inflation and unemployment.

Production Possibilities Curve (PPC)

• Definition: Graph of maximum production possibilities for two goods.
• Assumptions: Fixed resources, constant technology, efficiency, trade-offs.

Consumption vs. Capital Goods

• Consumption: Satisfy current needs (e.g., food).
• Capital: Used to produce future goods (e.g., machinery).

Economic Growth in PPC Model

• Growth: PPC shifts outward via improved resources or technology.

Productive vs. Allocative Efficiency

• Productive: Maximum output at lowest cost.
• Allocative: Resources produce the mix of goods desired by society.

Law of Increasing Relative Cost

• Definition: Producing more of one good increases opportunity cost.

Specialization, Absolute & Comparative Advantage

• Specialization: Focusing on producing efficiently.
• Absolute Advantage: Producing more efficiently than others.
• Comparative Advantage: Lower opportunity cost in production.

Comparative Advantage & Trade

• Definition: Countries benefit from trading goods they produce most efficiently.
• Gains from Trade: Higher overall output and efficiency.

Economic Systems

• Types: Market (capitalism), command (socialism), mixed.
• Characteristics: Resource ownership, decision-making processes.

Capitalism vs. Other Systems

• Capitalism: Private property, market-driven.
• Socialism: Collective ownership, planned economy.

Features of Capitalism

• Private property
• Freedom of choice
• Profit motive
• Competition
• Limited government
• Voluntary exchange

Three Economic Questions

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

Demand

• Law of Demand: Price ↓ = Quantity demanded ↑
• Demand Curve: Downward sloping.
• Reason: Substitution and income effects.
• Individual vs. Market Demand: Individuals' demand summed to form market demand.
• Shifts in Demand: Caused by income, preference, related good prices, expectations, number of buyers.
• Other Determinants of Demand: Consumer income, tastes, substitute/complement prices, expectations, buyers.
• Change in Demand vs. Quantity Demanded: Demand shifts (external factors); Quantity demanded moves along a curve (price changes).

Supply

• Law of Supply: Price ↑ = Quantity supplied ↑
• Supply Curve: Upward sloping.
• Reason: Higher prices incentivize production.
• Individual vs. Market Supply: Individual producers' supply combined to form market supply.
• Shifts in Supply: Caused by technology, input prices, taxes, expectations, number of sellers.
• Other Determinants of Supply: Production costs, technological advancements, government policies, expectations, market competition.

Equilibrium

• Definition: Intersection of supply and demand curves.
• Shifts: Changes in curves alter price and quantity.

GDP, Unemployment, and Inflation

• GDP: Measures economic health.
• Business Fluctuations: Tracks expansions and recessions.
• Unemployment: Percentage of jobless people in the workforce.
• Types of Unemployment: Frictional, structural, cyclical.
• Natural Rate of Unemployment: Frictional and structural.
• Inflation: Rising general price levels.
• Measurement: CPI (Consumer Price Index), GDP deflator.
• Effects of Inflation: Reduces purchasing power, affects savings.
• GDP Measurement: Expenditure (C+I+G+NX), Income.
• GDP Exclusions: Underground economy, intermediate goods.
• GDP Limitations: Ignores inequality, non-market activities.

Fiscal and Monetary Policy

• Fiscal Policy: Government spending/taxation to influence the economy.
• Effectiveness of Fiscal Policy: Subject to offsets (crowding out, timing).
• Monetary Policy: Central bank controls money supply/interest rates.
• Advantages of Monetary Policy: Flexibility, speed.

Money Functions

• Medium of exchange
• Store of value
• Unit of account

This quiz explores the fundamental concepts of scarcity and the economic choices that arise from limited resources. It covers the principles of economic thinking and the factors of production, distinguishing between microeconomics and macroeconomics. Test your understanding of how these concepts shape decision-making in both individual and broader economic contexts.