Foundations of Economics
Scarcity
The excess of wants resulting from having limited resources in satisfying the infinite wants and
needs of human beings
Factors of Production
Inputs used to produce all goods and services that people need and want
● Land
○ All natural resources that are above ground (eg. forests, agricultural land) and all
natural resources that are underground (eg. oils, minerals)
○ Payment: rent
● Labour
○ All human effort or work that goes into producing goods and services (eg. work done
by teachers, lawyers)
○ Payment: wage
● Capital
○ Also known as physical capital: man-made inputs (eg. machines, tools, factories,
equipment)
○ Payment: interest
● Entrepreneurship
○ The human effort used to organize the other three factors of production (risk-taking,
innovation, management)
○ Payment: profit
Three Basic Economic Problems
● What to produce?
○ What goods and services will be produced by the available resources, and in what
quantities will they be produced?
● How to produce?
○ What factors of production will be used to produce the goods and services, and in
what combinations and quantities?
● For whom to produce?
○ How will the goods and services produced be distributed among their potential users,
who will get what, and in what quantities?
Resource Allocation
Assigning particular resources to the production of particular goods and services
● Overallocation: too many resources are assigned (overproduction)
● Underallocation: too little resources are assigned (underproduction)
, ● Reallocation: changing the amounts of resources assigned to each good and service →
changing the combination and quantities of goods and services produced
● Misallocation: assigning the wrong amount of resources to the production of particular
goods and services → overallocation or underallocation
Opportunity Cost
The value of the next best alternative forgone, what must be given up in order to undertake any
economic activity
Production Possibility Curve
Model used to show the tradeoffs associated with allocating resources between the production of
two goods
Assumptions:
● The nation's resources are fixed in quantity
● The economy is closed, i.e. does not trade with other countries
● Represents only one country's economy
● A point on the PPC is attainable only if a nation achieves full-employment of its productive
resources
Observations:
● Points ON the PPC (A) are attainable and
desirable, since a country producing on the line is
achieving full employment and efficiency
● Points INSIDE the PPC (F) are attainable but
undesirable, because a nation producing here has
unemployment and is inefficient
● Points OUTSIDE the PPC (G) are unattainable
because they are beyond what is presently
possible given the country’s scarce resources (but
desirable)
Straight vs Curved PPC:
Straight:
● Indicates that the two goods require similar resources to produce
(eg. basketball and volleyball)
● The opportunity cost of product A is one product B → the same
quantity of one good is given up anywhere on the PPC
Curved:
● Indicates that the two goods require very different resources to
produce (eg. books and computers)
● Output of one good ↑, opportunity cost ↑
,Economic Growth vs Economic Development
Economic Growth:
● ↑ total output of goods and services
● Monetary measure of increase in material-well being
● Shows more productive capacity (more and better resources)
● Shown with an outward shift
Economic Development:
● Improvement in peoples’ standards of living (eg. health,
education, equality, life expectancy, income…)
● Shown by movement towards the production of ‘good’
goods
The Circular Flow
Market economies are characterized by a circular flow of money, resources, and products between
households and firms in resource and product markets.
, Competitive Markets - Demand and Supply
Markets
Any kind of arrangement where buyers and sellers exchange goods, services or resources
Competitive Market
Where resources are allocated through the forces of demand and supply, so that no one can
influence the price
Demand
The quantity of a good or service that consumers are willing and able to buy at various prices over
a time period (ceteris paribus)
● Demand vs quantity demanded:
○ Demand: relationship between price and Qd
○ Quantity demanded: an actual number (quantity demanded at a given price)
● Market demand: the sum of all individual demands for a good/service
Changes in Demand
● Change in price:
○ Movement along… (contraction/expansion)
○ Changes quantity demand
● Non-price determinant:
○ Shift in…
○ Changes demand (increase, decrease)
Scarcity
The excess of wants resulting from having limited resources in satisfying the infinite wants and
needs of human beings
Factors of Production
Inputs used to produce all goods and services that people need and want
● Land
○ All natural resources that are above ground (eg. forests, agricultural land) and all
natural resources that are underground (eg. oils, minerals)
○ Payment: rent
● Labour
○ All human effort or work that goes into producing goods and services (eg. work done
by teachers, lawyers)
○ Payment: wage
● Capital
○ Also known as physical capital: man-made inputs (eg. machines, tools, factories,
equipment)
○ Payment: interest
● Entrepreneurship
○ The human effort used to organize the other three factors of production (risk-taking,
innovation, management)
○ Payment: profit
Three Basic Economic Problems
● What to produce?
○ What goods and services will be produced by the available resources, and in what
quantities will they be produced?
● How to produce?
○ What factors of production will be used to produce the goods and services, and in
what combinations and quantities?
● For whom to produce?
○ How will the goods and services produced be distributed among their potential users,
who will get what, and in what quantities?
Resource Allocation
Assigning particular resources to the production of particular goods and services
● Overallocation: too many resources are assigned (overproduction)
● Underallocation: too little resources are assigned (underproduction)
, ● Reallocation: changing the amounts of resources assigned to each good and service →
changing the combination and quantities of goods and services produced
● Misallocation: assigning the wrong amount of resources to the production of particular
goods and services → overallocation or underallocation
Opportunity Cost
The value of the next best alternative forgone, what must be given up in order to undertake any
economic activity
Production Possibility Curve
Model used to show the tradeoffs associated with allocating resources between the production of
two goods
Assumptions:
● The nation's resources are fixed in quantity
● The economy is closed, i.e. does not trade with other countries
● Represents only one country's economy
● A point on the PPC is attainable only if a nation achieves full-employment of its productive
resources
Observations:
● Points ON the PPC (A) are attainable and
desirable, since a country producing on the line is
achieving full employment and efficiency
● Points INSIDE the PPC (F) are attainable but
undesirable, because a nation producing here has
unemployment and is inefficient
● Points OUTSIDE the PPC (G) are unattainable
because they are beyond what is presently
possible given the country’s scarce resources (but
desirable)
Straight vs Curved PPC:
Straight:
● Indicates that the two goods require similar resources to produce
(eg. basketball and volleyball)
● The opportunity cost of product A is one product B → the same
quantity of one good is given up anywhere on the PPC
Curved:
● Indicates that the two goods require very different resources to
produce (eg. books and computers)
● Output of one good ↑, opportunity cost ↑
,Economic Growth vs Economic Development
Economic Growth:
● ↑ total output of goods and services
● Monetary measure of increase in material-well being
● Shows more productive capacity (more and better resources)
● Shown with an outward shift
Economic Development:
● Improvement in peoples’ standards of living (eg. health,
education, equality, life expectancy, income…)
● Shown by movement towards the production of ‘good’
goods
The Circular Flow
Market economies are characterized by a circular flow of money, resources, and products between
households and firms in resource and product markets.
, Competitive Markets - Demand and Supply
Markets
Any kind of arrangement where buyers and sellers exchange goods, services or resources
Competitive Market
Where resources are allocated through the forces of demand and supply, so that no one can
influence the price
Demand
The quantity of a good or service that consumers are willing and able to buy at various prices over
a time period (ceteris paribus)
● Demand vs quantity demanded:
○ Demand: relationship between price and Qd
○ Quantity demanded: an actual number (quantity demanded at a given price)
● Market demand: the sum of all individual demands for a good/service
Changes in Demand
● Change in price:
○ Movement along… (contraction/expansion)
○ Changes quantity demand
● Non-price determinant:
○ Shift in…
○ Changes demand (increase, decrease)
