Overview
This lecture introduces microeconomics, focusing on the basic economic problem of scarcity and choice, the allocation of resources, and the role of opportunity cost.
The Basic Economic Problem
- Economics studies how to allocate scarce resources to satisfy unlimited wants.
- Scarcity exists because the planet's resources are limited while human wants are unlimited.
Factors of Production (Resources)
- Four factors of production: capital, enterprise, land, and labor.
- Capital: man-made aids to production (e.g., machinery, factories, computers).
- Enterprise: entrepreneurship; people who innovate and take risks to produce goods/services for profit.
- Land: natural resources (e.g., farmland, rainforest).
- Labor: human effort or workers involved in production.
Three Fundamental Economic Choices
- What to produce: based on consumer demand in a market economy.
- How to produce: businesses choose the most cost-effective and productive methods.
- For whom to produce: primarily for those who can afford goods/services, though governments may intervene.
The Concept of Opportunity Cost
- Opportunity cost: the value of the next best alternative foregone when making a choice.
- Good decisions occur when the value of the chosen option exceeds the opportunity cost.
- Bad decisions occur when opportunity cost is greater than the chosen option's value.
- Opportunity cost helps measure the effectiveness of resource allocation.
Key Terms & Definitions
- Scarcity — the condition of limited resources versus unlimited wants.
- Factors of Production — resources used to produce goods/services: capital, enterprise, land, labor.
- Capital — man-made aids to production like machinery and factories.
- Enterprise — entrepreneurship; risk-takers who innovate and organize production.
- Land — natural resources used in production.
- Labor — human effort in producing goods/services.
- Opportunity Cost — the value of the next best alternative sacrificed when a choice is made.
Action Items / Next Steps
- Review the concept of opportunity cost and be prepared to discuss production possibility frontiers in the next lecture.