Overview
This lecture introduces foundational concepts in microeconomics, focusing on scarcity, opportunity cost, economic systems, production possibilities, comparative advantage, and marginal analysis.
Scarcity and Economic Resources
- Scarcity is the inability of limited resources to satisfy unlimited human wants.
- Scarce items typically have a positive price and require allocation systems.
- Scarcity is distinct from shortage (temporary unavailability) and from needs (focus is on wants).
- Factors of production are land (natural resources), labor (human effort), physical capital (machines/tools), and entrepreneurship (risk-taking organizers).
Economic Systems & Fundamental Questions
- All economies must answer: What to produce, how to produce, and for whom to produce.
- Command economies use government planners to make economic decisions.
- Market economies rely on individuals and firms, emphasizing private property rights.
- Most modern economies, like the U.S., are mixed systems leaning toward market organization.
Opportunity Cost & Types of Costs
- Opportunity cost is the value of the next best alternative forgone when a choice is made.
- Explicit cost is the actual money spent; implicit cost is the value of opportunities lost.
- Total opportunity cost = explicit cost + implicit cost.
Production Possibilities Curve (PPC)
- PPC shows maximum combinations of two goods that can be produced with fixed resources.
- A bowed-out PPC indicates increasing opportunity costs; straight-line PPC indicates constant costs.
- Points on the curve are efficient; inside is inefficient (unemployment); outside is impossible.
- PPC can shift outward with more/better resources or technology, inward with loss, or outward for one good with specific technological advances.
Comparative and Absolute Advantage
- Absolute advantage: ability to produce more with the same inputs or using fewer resources.
- Comparative advantage: ability to produce a good at a lower opportunity cost.
- For input questions: "it over" formula (resource for A divided by resource for B).
- For output questions: "other over" formula (output of B divided by output of A).
- Mutually beneficial trade terms fall between the opportunity costs of trading partners.
Marginal Analysis & Diminishing Utility
- Marginal benefit generally decreases, and marginal cost increases with additional units.
- Rational decision-makers act until marginal benefit equals marginal cost.
- Diminishing marginal utility: each additional unit consumed gives less satisfaction.
- Utility is maximized when the marginal utility per dollar is equal for all goods (MUx/Px = MUy/Py).
Key Terms & Definitions
- Scarcity — Limited resources cannot meet unlimited wants.
- Factors of production — Land, labor, capital, entrepreneurship.
- Command economy — Central planners make economic decisions.
- Market economy — Decisions are made by individuals and firms.
- Opportunity cost — Value of the next best alternative forgone.
- Explicit cost — Direct monetary payment for a choice.
- Implicit cost — Value of lost opportunities.
- Production Possibilities Curve (PPC) — Graph of possible production combinations.
- Absolute advantage — Ability to produce more with given resources.
- Comparative advantage — Ability to produce at a lower opportunity cost.
- Marginal analysis — Study of additional costs and benefits.
- Diminishing marginal utility — Decreasing satisfaction with each extra unit consumed.
Action Items / Next Steps
- Review and practice PPC graphs, opportunity cost calculations, and comparative advantage problems.
- Prepare for questions on marginal analysis and utility maximization for exams.
- Suggested: Read the next unit and complete related practice problems.