Understanding Scarcity, Production, and Economic Choices
Understanding Key Economic Concepts
Scarcity: The fundamental economic problem of having limited resources to satisfy unlimited wants. It’s a basic fact of economic life.
Capital: Finished goods produced for use in the production of other goods, such as equipment and structures.
Entrepreneurship: The process of assembling resources to produce new or improved products and technologies.
Factors of Production: Resource inputs used to produce goods and services (e.g., land, labor, capital, entrepreneurship). These are scarce in relation to our desires for goods and services.
All economic activity entails opportunity costs.
Opportunity Cost: The value of the next best alternative forgone when making a choice.
Production Possibilities and Economic Choices
Production Possibilities: The alternative combinations of final goods and services that could be produced in a given period with all available resources and technology.
A Production Possibilities Curve (PPC) illustrates the limits to production—the various combinations of goods and services that could be produced in a given period if all available resources and technology are used efficiently. The PPC also illustrates opportunity costs—what is given up to get more of something else.
The shape of the PPC reflects the law of increasing opportunity costs: Increasing quantities of any good can be obtained only by sacrificing ever-increasing quantities of other goods. Inefficient or incomplete use of resources will fail to attain production possibilities. Additional resources or better technologies will expand them. This is the essence of economic growth.
Every country must decide WHAT to produce, HOW to produce, and FOR WHOM to produce with its limited resources. These choices can be made by the market mechanism or by government directives. Most nations are mixed economies, using a combination of these two choice mechanisms.
Market Failure, Government Failure, and Economic Study
Market Failure: Occurs when market signals generate sub-optimal outcomes, preventing optimal outcomes.
Government Failure: Occurs when government intervention worsens economic outcomes.
The challenge for economic theory and policy is to find the mix of market signals and government directives that best fulfills our social and economic goals.
The study of economics focuses on the broad question of resource allocation.
Macroeconomics is concerned with allocating the resources of an entire economy to achieve aggregate economic goals (e.g., full employment).
Microeconomics focuses on the behavior and goals of individual market participants.
Economics: The study of how best to allocate scarce resources among competing uses.
Efficiency: Maximum output of a good from the resources used in production.
Economic Growth: An increase in output (real GDP), an expansion of production possibilities.
Market Mechanism: The use of market prices and sales to signal desired outputs (or resource allocations).
Laissez-faire: The doctrine of nonintervention by government in the market mechanism.
Ceteris Paribus: The assumption of nothing else changing.