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The study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants
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Called factors of production, these are commonly grouped into four categories of:
labor
phyical capital
land/natural resources
entrepreneurial ability
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| The imbalance between limited productive resources and unlimited human wants. Because economic resources are scarce, the goods and services a society can produce are also scarce. |
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| Scarce resources imply that individuals, firms, and governments are constantly faced with difficult choices that involve benefits and costs |
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| The value of the sacrifice made to pursue a course of action |
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| The next unit or increment of an action |
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| The additional benefit received from the comsumption of the next unit of a good or service |
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| The additional cost incurred from the consumption of the next unit of a good or service |
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| Making decisions based upon weighing the maginal benefits and costs of that action. The rational decision maker choose an action if the MC > MC |
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| Different quantities of goods that an economy can produce with a given amount of scarce resources. Graphically, the trade-off between the production of two goods is portrayed as a Production Possibility Curve or Frontier (PPF) |
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| The more of a good that is produced, the greater the opportunity cost of producing the next unit of that good |
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| Exists if a producer can produce more of a good than all other producers |
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| A producer has comparative advantage if he can produce a good at lower opportunity cost than all other producers |
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| When firms focus their resources on production of goods for which the have comparative advantage, they are said to be specializing |
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| Production of maximum output for a given level of technology and resources. All points on the PPF are productively efficient |
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| Production of the combination of goods and services that provides the most net benefit to society. The optimal quantity of a good is achieved when the MB = MC of the next unit. This only occurs at one point on the PPF. |
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| Occurs when an economy's production possibilities increase. This can be a result of more resources, better resources, or improvements in technology |
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| Market Economy (Capitalism) |
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Definition
An economic system based upon the fundamentals of:
private property
freedom
self-interest
prices
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