Unit 1: Fundamentals of 3) Capital – all the resources made
and used by people to produce &
Economics Notes distribute goods and services
Physical capital includes: tools,
Economics: Problem of Scarcity machinery, factories, roads, air-
planes, offices, warehouses
Economics – study of how people & soci- Human capital – knowledge,
eties choose to use limited resources to sat- education, training, skills & spe-
isfy their needs & unlimited wants cialized talents of people
#1 ongoing problem that all economists Financial capital - money, used
face is SCARCITY!!!!!!!!!!!! by entrepreneurs & businesses
Needs are the basic survival necessities to buy what they need to pro-
such as water, food, shelter, & clothing duce their goods or services
Wants are UNLIMITED desires that 4) Entrepreneurship – combination of
can be satisfied by consuming or pur- vision, skill, ingenuity & willing-
chasing a good or service ness to take risks that is needed to
People will always want more, but the create & run new businesses
resources available to satisfy them are innovators, inventors, investors,
limited which causes SCARCITY! risk takers
In order to be considered scarce, a good
or service must be (1) limited, (2) desir- Choices and Opportunity Cost
able, (3) have a cost Incentives – benefits offered to encour-
Scarcity affects which goods are made age people to act in certain ways (re-
and which services are provided wards or punishments)
Goods are physical objects that can be Ex: grades in school, wages paid to
purchased workers, trophies in sports, speeding
Ex: food, clothing, furniture, elec- tickets, etc.
tronics, etc. Utility – benefits or satisfaction gained
Services are work that one person per- from the use of a good or service (happi-
forms for another for payment ness)
Ex: sales clerk, tech support, teach- People make decisions according to
ers, doctors, lawyers, lawn care, etc. what they believe is the best combina-
Scarcity affects the choices of both the tion of costs & benefits
consumer (person who buys goods &
services for personal use) & the pro- “THERE IS NO SUCH THING AS
ducer (person who makes goods or pro- A FREE LUNCH!” (TINSTAAFL)
vides services
There’s ALWAYS a COST!
Productive Resources
Every choice involves costs
Ex: Studying for a test or hanging
Productive Resources – economic re-
sources needed to produce goods and ser- out with friends; eating a salad or a
vices (Factors of Production) cheeseburger; going to college or
Acronym if it helps: CELL getting a job out of high school
1) Land – includes all the natural re- The alternative that you give up when
sources found on or under the you make an economic choice is called a
ground that are used to produce trade-off
goods and services Individuals and Trade-Offs –
water, forests, wildlife, miner- studying one subject vs. another,
als, oil
college or work, watching TV or
2) Labor – all the human time, effort
& talent that go into the making of working out, etc.
products Business Trade-Offs – producing
workforce one item vs. another
Society and Trade-Offs – “guns or
butter”, capital or consumer goods
, OPPORTUNITY COST of an
economic decision is the value of
the next-best alternative over
another
o #1 Tradeoff
Marginal Costs and Benefits
The practice of examining the costs and
the expected benefits of a choice as an
aid to decision making is called cost-
benefit analysis
Marginal cost is the cost of using one
more unit of a good or service
Marginal benefit refers to the benefit PPC shows that nothing is free & ev-
or satisfaction received from using one erything has an opportunity cost, if
more unit of a good or service society wants more of one thing it must
give up something in return
Analysis of marginal costs & benefits Efficiency – condition in which eco-
helps explain the decisions consumers, nomic resources are being used to pro-
producers, & governments make as they duce the maximum amount of goods &
try to meet their unlimited wants with services (on the curve – Full Employ-
limited resources ment)
Thinking at the margin – analyzing the Underutilization – condition in which
costs and benefits of incremental economic resources aren’t being used to
(small) decisions their full potential (inefficient; inside the
If MB > MC then do it! curve - Recession)
If MB < MC then it’s probably not the Law of increasing opportunity costs
best choice to make states that as production switches from
Law of Diminishing Marginal Utility one product to another, increasingly
more resources are needed to increase
states that the marginal benefit from the production of the second product,
using each additional unit of a good or which causes opportunity cost to rise
service during a given time-period tends Points A, B, C are all efficient, operat-
to decline as each is used ing at Full Employment (on the line)
Point D is inefficient, showing the econ-
Production Possibilities Curve (PPC) omy is in a Recession (inside line)
graph used to illustrate the impact of Point E is unattainable for long periods
scarcity on an economy by showing the of time (outside the line) and represents
maximum number of goods or services that an economy experiencing an inflation-
ary gap
can be produced using limited resources
PPC can shift outward (economic growth)
PPC is based on 4 assumptions: 1. Increase productive resources
1. Resources are fixed (F.O.P: land, labor, capital)
2. All resources are fully employed 2. New technology & efficiency
(economy is at full production) 3. International Trade
3. Only 2 things can be produced
4. Technology is fixed
and used by people to produce &
Economics Notes distribute goods and services
Physical capital includes: tools,
Economics: Problem of Scarcity machinery, factories, roads, air-
planes, offices, warehouses
Economics – study of how people & soci- Human capital – knowledge,
eties choose to use limited resources to sat- education, training, skills & spe-
isfy their needs & unlimited wants cialized talents of people
#1 ongoing problem that all economists Financial capital - money, used
face is SCARCITY!!!!!!!!!!!! by entrepreneurs & businesses
Needs are the basic survival necessities to buy what they need to pro-
such as water, food, shelter, & clothing duce their goods or services
Wants are UNLIMITED desires that 4) Entrepreneurship – combination of
can be satisfied by consuming or pur- vision, skill, ingenuity & willing-
chasing a good or service ness to take risks that is needed to
People will always want more, but the create & run new businesses
resources available to satisfy them are innovators, inventors, investors,
limited which causes SCARCITY! risk takers
In order to be considered scarce, a good
or service must be (1) limited, (2) desir- Choices and Opportunity Cost
able, (3) have a cost Incentives – benefits offered to encour-
Scarcity affects which goods are made age people to act in certain ways (re-
and which services are provided wards or punishments)
Goods are physical objects that can be Ex: grades in school, wages paid to
purchased workers, trophies in sports, speeding
Ex: food, clothing, furniture, elec- tickets, etc.
tronics, etc. Utility – benefits or satisfaction gained
Services are work that one person per- from the use of a good or service (happi-
forms for another for payment ness)
Ex: sales clerk, tech support, teach- People make decisions according to
ers, doctors, lawyers, lawn care, etc. what they believe is the best combina-
Scarcity affects the choices of both the tion of costs & benefits
consumer (person who buys goods &
services for personal use) & the pro- “THERE IS NO SUCH THING AS
ducer (person who makes goods or pro- A FREE LUNCH!” (TINSTAAFL)
vides services
There’s ALWAYS a COST!
Productive Resources
Every choice involves costs
Ex: Studying for a test or hanging
Productive Resources – economic re-
sources needed to produce goods and ser- out with friends; eating a salad or a
vices (Factors of Production) cheeseburger; going to college or
Acronym if it helps: CELL getting a job out of high school
1) Land – includes all the natural re- The alternative that you give up when
sources found on or under the you make an economic choice is called a
ground that are used to produce trade-off
goods and services Individuals and Trade-Offs –
water, forests, wildlife, miner- studying one subject vs. another,
als, oil
college or work, watching TV or
2) Labor – all the human time, effort
& talent that go into the making of working out, etc.
products Business Trade-Offs – producing
workforce one item vs. another
Society and Trade-Offs – “guns or
butter”, capital or consumer goods
, OPPORTUNITY COST of an
economic decision is the value of
the next-best alternative over
another
o #1 Tradeoff
Marginal Costs and Benefits
The practice of examining the costs and
the expected benefits of a choice as an
aid to decision making is called cost-
benefit analysis
Marginal cost is the cost of using one
more unit of a good or service
Marginal benefit refers to the benefit PPC shows that nothing is free & ev-
or satisfaction received from using one erything has an opportunity cost, if
more unit of a good or service society wants more of one thing it must
give up something in return
Analysis of marginal costs & benefits Efficiency – condition in which eco-
helps explain the decisions consumers, nomic resources are being used to pro-
producers, & governments make as they duce the maximum amount of goods &
try to meet their unlimited wants with services (on the curve – Full Employ-
limited resources ment)
Thinking at the margin – analyzing the Underutilization – condition in which
costs and benefits of incremental economic resources aren’t being used to
(small) decisions their full potential (inefficient; inside the
If MB > MC then do it! curve - Recession)
If MB < MC then it’s probably not the Law of increasing opportunity costs
best choice to make states that as production switches from
Law of Diminishing Marginal Utility one product to another, increasingly
more resources are needed to increase
states that the marginal benefit from the production of the second product,
using each additional unit of a good or which causes opportunity cost to rise
service during a given time-period tends Points A, B, C are all efficient, operat-
to decline as each is used ing at Full Employment (on the line)
Point D is inefficient, showing the econ-
Production Possibilities Curve (PPC) omy is in a Recession (inside line)
graph used to illustrate the impact of Point E is unattainable for long periods
scarcity on an economy by showing the of time (outside the line) and represents
maximum number of goods or services that an economy experiencing an inflation-
ary gap
can be produced using limited resources
PPC can shift outward (economic growth)
PPC is based on 4 assumptions: 1. Increase productive resources
1. Resources are fixed (F.O.P: land, labor, capital)
2. All resources are fully employed 2. New technology & efficiency
(economy is at full production) 3. International Trade
3. Only 2 things can be produced
4. Technology is fixed
