Basic Concepts
Scarcity
Society has limited resources and cannot produce all the goods and services people wish to have. A universal problem, not limited to poor nations. All products that have a price are relatively scarce.
Choice
Because resources are limited but wants are unlimited, society must choose how to allocate scarce resources between alternatives.
Opportunity Cost
Choosing one option means the resource used (time, money, land) cannot be used on another. The opportunity cost of the chosen option is the value of the single best alternative given up, not the sum of all alternatives given up, and not the money price.
For example: a field can produce either 10 tons of wheat or 8 tons of corn in a season. Planting wheat has an opportunity cost of 8 tons of corn.
Trade-Off
Giving up some of one thing to get more of another.
For example: if a drink costs Rs. 250 and a cinema ticket Rs. 750, the cost of one cinema visit is three drinks.
Rational People
A rational decision maker compares marginal benefit and marginal cost, and acts only if the marginal benefit exceeds the marginal cost.
Marginal Change
A small incremental adjustment to a plan of action.
Factors of Production
Land
All natural resources used in production. Renewable and non-renewable. Return: rent.
Labour
Physical and mental effort of human beings used in production. Return: wages.
Capital
Man-made aids to further production. Return: interest.
Entrepreneurship
Managing, organizing, and planning the other three factors, and bearing risk. Return: profit.
Goods
Economic Good
Uses scarce resources in its production, so its marginal cost is greater than zero.
For example: a paper clip.
Free Good
Does not require scarce resources, so its marginal cost is zero.
For example: air, sunlight.
Types of Products in an Economy
Consumer Goods
Purchased and consumed directly by individuals and households. Durable (appliances, cars) or non-durable (food, clothing).
Capital Goods
Aka. producer or intermediate goods. Used by businesses to produce other goods and services: machinery, equipment, factories, infrastructure.
Services
Intangible actions provided to meet a need, leaving no physical product. Consumed at the time of production: healthcare, education, transport, consulting.