Overview
This lecture introduces key economic concepts including the basic economic problem, factors of production, opportunity cost, production possibility curves, and an overview of microeconomics and macroeconomics. It also outlines how resources are allocated in economies, the roles of market systems, demand and supply, and government intervention.
The Basic Economic Problem
- Economics studies how scarce resources are allocated to satisfy unlimited wants.
- The three main economic agents are households, firms, and governments.
- Three basic questions for all economies: What to produce? How to produce? For whom to produce?
- Goods are physical items; services are non-physical activities.
- Needs are essential for survival; wants are non-essential desires.
- Economic goods are scarce and have opportunity costs; free goods are unlimited and have no opportunity costs.
Factors of Production
- The four factors are land (natural resources), labour (human input), capital (machinery/equipment), and enterprise (organizing/decision-making).
- Each factor earns a reward: rent (land), wages (labour), interest (capital), profit (enterprise).
- Mobility of factors: Geographical (moving locations) and occupational (changing jobs).
- Factors can change in quantity/quality due to costs, technology, migration, or government policy.
Opportunity Cost
- Opportunity cost is the value of the next best alternative forgone when making a decision.
- All choices (by consumers, workers, firms, governments) involve opportunity costs due to scarcity.
Production Possibility Curve (PPC)
- A PPC shows the maximum possible output combinations of two goods/services an economy can produce.
- Points on the curve show efficient use of resources; inside the curve shows underutilization; outside is unattainable.
- Movements along the curve reflect opportunity cost; shifts show changes in productive capacity (due to growth, disasters, etc.).
Introduction to Microeconomics and Macroeconomics
- Microeconomics examines individuals, households, and firms, and decision-making in particular markets.
- Macroeconomics looks at the economy as a whole, focusing on aggregate variables (like national output, inflation, unemployment).
- Key difference: micro is market-specific; macro covers the entire economy.
The Allocation of Resources and Market Systems
- The market system allocates resources through demand (buyers) and supply (sellers).
- Market equilibrium: where demand equals supply—no shortage or surplus.
- Price mechanism: prices allocate resources based on demand and supply without government interference.
- All systems must answer: what, how, and for whom to produce.
Demand and Supply
- Demand reflects consumers’ willingness and ability to buy at different prices; follows the law of demand (inverse relationship between price and quantity demanded).
- Supply is the willingness and ability of firms to offer goods/services at different prices; follows the law of supply (direct relationship).
- Determinants of demand: habits, income, substitutes/complements, advertising, government policy, economy.
- Determinants of supply: time, weather, opportunity cost, taxes, innovation, production costs, subsidies.
- Non-price factors shift demand and supply curves; price changes cause movements along the curves.
Key Terms & Definitions
- Scarcity — the limited nature of society’s resources.
- Opportunity Cost — the next best alternative forgone.
- Factors of Production — land, labour, capital, enterprise.
- Market Equilibrium — when quantity demanded equals quantity supplied.
- Price Mechanism — system where prices allocate resources based on demand and supply.
- Demand/Supply Curve — graphical representation of how much will be bought/supplied at different prices.
- Microeconomics — study of individuals and firms in specific markets.
- Macroeconomics — study of the whole economy.
Action Items / Next Steps
- Review definitions and be able to provide real-world examples.
- Practice drawing and interpreting PPC, demand, and supply curves.
- Prepare answers for review questions on opportunity cost and resource allocation.
- Prepare for discussion on the basic economic problem and factors of production.