Unit One
,FACTORS OF PRODUCTION
- Land
- Labor
- Capital
- Entrepreneurship
The Economic Problem: Scarcity
Society has unlimited wants but limited resources to satisfy them
Opportunity cost - what you give up to get something; the cost of the next best choice
PRODUCTION POSSIBILITIES CURVE
Efficient if:
- All resources are used in the most-cost effective way
- This is on any point along the PPC
increasing opportunity cost vs. constant opportunity cost
COMPARATIVE/ABSOLUTE ADVANTAGE
, Absolute - the ability to produce more with given time and resources
Comparative - the ability to produce at a lower opportunity cost
Comparative advantage → specialization in which the terms of trade are determined by
opportunity costs
*protectionism undermines comparative advantage
DEMAND
Reasons for a shift in demand
● Change in taste
● Change in income
● Change in market size
● Change in expectations
● Change in the price of related goods
Income effect: lower prices make people feel more rich and they buy more
Substitution effect: high prices incentivize people to buy cheaper alternatives
Law of Diminishing Marginal Utility: less satisfaction makes people less willing to buy
SUPPLY
Reasons for a shift in supply
● Change in the production price
● Change in technology
● Change in seller expectations
● Change in protectionism
,FACTORS OF PRODUCTION
- Land
- Labor
- Capital
- Entrepreneurship
The Economic Problem: Scarcity
Society has unlimited wants but limited resources to satisfy them
Opportunity cost - what you give up to get something; the cost of the next best choice
PRODUCTION POSSIBILITIES CURVE
Efficient if:
- All resources are used in the most-cost effective way
- This is on any point along the PPC
increasing opportunity cost vs. constant opportunity cost
COMPARATIVE/ABSOLUTE ADVANTAGE
, Absolute - the ability to produce more with given time and resources
Comparative - the ability to produce at a lower opportunity cost
Comparative advantage → specialization in which the terms of trade are determined by
opportunity costs
*protectionism undermines comparative advantage
DEMAND
Reasons for a shift in demand
● Change in taste
● Change in income
● Change in market size
● Change in expectations
● Change in the price of related goods
Income effect: lower prices make people feel more rich and they buy more
Substitution effect: high prices incentivize people to buy cheaper alternatives
Law of Diminishing Marginal Utility: less satisfaction makes people less willing to buy
SUPPLY
Reasons for a shift in supply
● Change in the production price
● Change in technology
● Change in seller expectations
● Change in protectionism
