Overview
This lecture summarizes the core concepts of Unit 1 in microeconomics, focusing on key terms, economic systems, the production possibilities curve, and the concept of comparative advantage.
Basic Economic Concepts
- Economics is the science of scarcity: unlimited wants, limited resources.
- Scarcity requires individuals and societies to make choices.
- Trade-offs are all alternatives given up when making a decision.
- Opportunity cost is the most desirable alternative given up when a choice is made.
- Economics uses logic and graphs to explain choices and outcomes.
Key Economic Terms and Assumptions
- Microeconomics studies individual units like households and firms; macroeconomics studies the economy as a whole.
- Five assumptions: resources are scarce, choices have a cost, everyone acts in self-interest, decisions compare marginal benefits and costs, and graphs can explain economic concepts.
- Investment in economics means businesses buying tools and equipment, not stocks or bonds.
- Consumer goods are for direct use; capital goods are used to produce other goods.
- Human capital is workers’ skills and knowledge.
- The four factors of production: land, labor, capital, entrepreneurship.
Economic Systems
- Economic systems determine how to allocate scarce resources.
- Three basic questions: What to produce? How to produce? Who gets it?
- Centrally planned economies: government answers all questions, controls resources.
- Free market economies: individuals decide, driven by profit and competition (capitalism).
- The Invisible Hand: self-interest leads to societal benefit.
- Most real-world economies are mixed (elements of both government and markets).
Production Possibilities Curve (PPC)
- The PPC illustrates trade-offs, scarcity, opportunity cost, and efficiency.
- Points on the curve are efficient; inside is inefficient; outside is unattainable with current resources.
- Straight-line PPC: constant opportunity cost (resources equally adaptable).
- Bowed-out PPC: increasing opportunity cost (resources not easily adaptable).
- Capital goods investment leads to greater economic growth in the future.
Comparative and Absolute Advantage
- Absolute advantage: producing more of a good with the same resources or using fewer resources.
- Comparative advantage: producing a good at a lower opportunity cost.
- Countries benefit by specializing in goods where they have a comparative advantage and trading.
- Per unit opportunity cost helps determine comparative advantage.
Output vs Input Questions and "Quick and Dirty" Method
- Output questions: who can produce more goods.
- Input questions: who uses fewer resources (like hours) to produce goods.
- "Quick and dirty" method multiplies cross possibilities to identify comparative advantage quickly.
Terms of Trade
- Terms of trade are agreed exchange rates that benefit both trading countries.
- Both countries benefit only if the terms fall between their opportunity costs.
Circular Flow Model
- Shows interactions between households, firms, and the government in product and resource markets.
Key Terms & Definitions
- Scarcity — Limited resources vs unlimited wants.
- Opportunity Cost — The highest-valued alternative forgone.
- Trade-off — All alternatives given up when making a choice.
- Microeconomics — Study of individual economic units.
- Macroeconomics — Study of the entire economy.
- Consumer Goods — Products for direct consumption.
- Capital Goods — Goods used to produce other goods.
- Human Capital — Skills and knowledge of workers.
- Factors of Production — Land, labor, capital, entrepreneurship.
- Absolute Advantage — Producing more with the same or fewer resources.
- Comparative Advantage — Producing at a lower opportunity cost.
- PPC (Production Possibilities Curve) — Graph showing maximum possible output combinations.
- Terms of Trade — The rate at which goods are exchanged between countries.
- Invisible Hand — Self-interest benefits society in free markets.
Action Items / Next Steps
- Complete practice PPC, output, and input questions in the review packet.
- Calculate per unit opportunity cost for specialization problems.
- Try the multiple-choice questions for Unit 1 and check your answers.
- Watch the circular flow model video for further clarification.