πŸͺ΄ Knowledgebase

1.1 β€” Scarcity

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Economics is the social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants

For another detailed explanation, refer to AP Macroeconomics Scarcity.

Scarcity is the economizing problem. Society has unlimited wants but limited resources – so how do you determine what to produce?

  • How do we feed everybody?
  • How do we educate everybody?

The 5 Main Assumptions of Economics

  • Society’s wants are unlimited, but ALL resources are limited
  • Due to scarcity, choices must be made. Every choice has a cost (trade-off)
  • Everyone’s goal is to make choices that maximize their satisfaction
  • Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice
  • Real-life situations can be explained and analyzed through simplified models and graphs

Using Economic Models:

  • Step 1: Explain concepts in words
  • Step 2: Use numbers as examples
  • Step 3: Generate graphs from numbers
  • Step 4: Make generalizations using graphs

Microeconomics vs. Macroeconomics

  • Microeconomics: Study of small economic units such as individuals, firms, and Industries (competitive markets, labour markets, personal decision making, etc) pricing and output
  • Macroeconomics: Study of the large economy as a whole or in it’s basic subdivisions (national economic growth, government spending, inflation, unemployment, etc). Topics covered are similar to what you see when you open the newspaper.

Terminology

  • Theoretical Economics: Economists use the scientific method to make generalized and abstractions to develop theories
  • Policy Economics: These theories are then applied to the problem or meet economic goals
  • Positive: Factual statements. Ex: The price of gas is rising, and gas prices are expected to fall in the future
  • Normative: Opinion-based statements. Ex: The price of gas is too high
  • Tradeoff: All decisions involve a trade-off
    • Trade-offs are all the alternatives that we give up whenever we choose one course of action over others
  • Utility: Satisfaction
  • Marginal: Additional
  • Allocate: Distribute
  • Investment: The money businesses spend to improve their production: $1,000 new computer, $1,000,000 new factory, etc. Don’t confuse investments with stocks, bonds, mutual funds, company shares, etc
  • Goods: Physical/tangible objects that satisfy needs and wants
    • Consumer Goods: created for direct consumption (pizza, sneakers, jeans, etc)
    • Capital Goods: created for indirect consumption; business purchases to help produce goods (oven, blenders, knives, etc)
    • Basically goods that are used to make consumer goods
  • Services: actions or activities that one person performs for another (teaching, cleaning, cooking, etc)
  • Price: is the amount that the consumer pays
  • Cost: is the amount that the seller pays to produce a good
  • Scarcity: occurs at all times for all goods
  • Shortages: occur when producers will not or cannot offer goods or services at current prices. Shortages are temporary. Demand > Supply
  • Accountants: Look only at explicit costs. Explicit costs are traditional β€œout of pocket costs” of decision making
    • Ex: Going to Disneyland: plane ticket, hotel, transfer to hotel, tickets for disneyland, food, etc
  • Economists: Look at the explicit and implicit costs. Implicit costs are the opportunity costs such as forgone time and forgone income
    • Ex: if Sidney Crosby leaves the NHL to open a coffee shop: cost of business, lost wages from NHL

The 4 Factors of Production

  • Producing goods and services requires the use of resources
  • All resources can be classified as one of the following four Factors of Production:
    • Land: All natural resources that are used to produce goods and services. Anything that comes from nature: water, sun, plants, oil, trees, stone, animals, etc
    • Labour: Any effort a person devotes to a task for which that person is paid (manual labourers, lawyers, doctors, teachers, waiters, etc)
    • Capital: Any skills or knowledge gained by a worker through education and experience.
      • Physical Capital: tools, machinery, computers, etc
      • Human Capital: college degrees, vocational training, etc
    • Entrepreneurship: Ambitious leaders that combine the other factors of production to create goods and services
      • Entrepreneurs take the initiative, innovate, and act as the risk bearers; so they can obtain profit

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