A simple introduction to the basic concepts of economics.

1. WHAT IS ECONOMICSWHAT IS ECONOMICS
 Economics:Economics: Study ofStudy of
how people seek tohow people seek to
satisfy needs and wantssatisfy needs and wants
by making choices.by making choices.
 Scarcity:Scarcity: Defined asDefined as
limited quantities oflimited quantities of
resources to meetresources to meet
unlimited wants.unlimited wants.
 Needs vs WantsNeeds vs Wants
 Scarcity vs ShortageScarcity vs Shortage

2. The Factors of ProductionThe Factors of Production
 LandLand: All natural resources that are used to produce goods and: All natural resources that are used to produce goods and
services.services.
 LaborLabor: The effort that people devote to a task for which they are: The effort that people devote to a task for which they are
paid.paid.
 CapitalCapital: Human made resource that is used to create other goods: Human made resource that is used to create other goods
and services.and services. Two types: Physical and Human.Two types: Physical and Human.
Physical: Buildings and toolsPhysical: Buildings and tools
Human: Skills and Knowledge gained by workersHuman: Skills and Knowledge gained by workers
 Entrepreneur:Entrepreneur: Person who combines land, labor, and capital toPerson who combines land, labor, and capital to
create and market new goods and servicescreate and market new goods and services

3. Opportunity CostOpportunity Cost
 The most desirableThe most desirable
alternative given up asalternative given up as
a result of a decision.a result of a decision.
 Trade offs (Individual,Trade offs (Individual,
Business, and Society)Business, and Society)
 Guns or Butter.Guns or Butter.
 Thinking in the MarginThinking in the Margin::
Deciding to do or useDeciding to do or use
one additional resourceone additional resource
or unit. (Ex: Pg. 10,or unit. (Ex: Pg. 10,
Blackberry and sleepBlackberry and sleep))
 Cost/Benefit Analysis.Cost/Benefit Analysis.

4. Production Possibilities CurveProduction Possibilities Curve
 A graph that showsA graph that shows
alternative ways to use analternative ways to use an
economyeconomy’s resources and’s resources and
that scarcity exists inthat scarcity exists in
every economy.every economy.
 Illustrates opportunityIllustrates opportunity
costs by showing bestcosts by showing best
possible choices.possible choices.
 Production possibilitiesProduction possibilities
frontierfrontier: The line on a: The line on a
graph that shows thegraph that shows the
maximum possible output.maximum possible output.
 Each point on the curveEach point on the curve
reflects a trade off in usereflects a trade off in use
of resources.of resources.

5. PPC continuedPPC continued
 What the graph tells usWhat the graph tells us::
Efficiency, Growth, Cost, andEfficiency, Growth, Cost, and
Underutilization (marked byUnderutilization (marked by
A)A)
 Law of Increasing Costs:Law of Increasing Costs:
States that as we shiftStates that as we shift
production from one good toproduction from one good to
another, the cost of theanother, the cost of the
second increases.second increases.
 Marginal Benefit vs MarginalMarginal Benefit vs Marginal
CostsCosts: Change in total benefit: Change in total benefit
with each consumption.with each consumption.
 Why does the curve shift?Why does the curve shift?
Resources and TechnologyResources and Technology
 It should be said that theIt should be said that the
production possibilities curveproduction possibilities curve
focuses on production and notfocuses on production and not
distribution.distribution.

6. Absolute/Comparative AdvantageAbsolute/Comparative Advantage
 Absolute AdvantageAbsolute Advantage:: IfIf
a country uses fewera country uses fewer
resources to produce aresources to produce a
given unit than anothergiven unit than another
(China: Cheap labor).(China: Cheap labor).
 ComparativeComparative
AdvantageAdvantage: If your: If your
country can produce thecountry can produce the
unit at a lower marginalunit at a lower marginal
cost (profit) in terms ofcost (profit) in terms of
other goods thanother goods than
another country (Ex: Oilanother country (Ex: Oil
in Middle East)in Middle East)
 Every country (orEvery country (or
person, economy) has aperson, economy) has a
comparative advantagecomparative advantage
at some activity. (Ex:at some activity. (Ex:
Student smarter thanStudent smarter than
other)other)
 Law of ComparativeLaw of Comparative
Advantage:Advantage: A nation isA nation is
better off when itbetter off when it
produces goods andproduces goods and
services for which it hasservices for which it has
a comparativea comparative
advantage. (Ex: Asiaadvantage. (Ex: Asia
and Footwear)and Footwear)

7. Absolute/Comparative AdvantageAbsolute/Comparative Advantage
 Absolute AdvantageAbsolute Advantage:: IfIf
a country uses fewera country uses fewer
resources to produce aresources to produce a
given unit than anothergiven unit than another
(China: Cheap labor).(China: Cheap labor).
 ComparativeComparative
AdvantageAdvantage: If your: If your
country can produce thecountry can produce the
unit at a lower marginalunit at a lower marginal
cost (profit) in terms ofcost (profit) in terms of
other goods thanother goods than
another country (Ex: Oilanother country (Ex: Oil
in Middle East)in Middle East)
 Every country (orEvery country (or
person, economy) has aperson, economy) has a
comparative advantagecomparative advantage
at some activity. (Ex:at some activity. (Ex:
Student smarter thanStudent smarter than
other)other)
 Law of ComparativeLaw of Comparative
Advantage:Advantage: A nation isA nation is
better off when itbetter off when it
produces goods andproduces goods and
services for which it hasservices for which it has
a comparativea comparative
advantage. (Ex: Asiaadvantage. (Ex: Asia
and Footwear)and Footwear)