BASIC ECONOMIC CONCEPTS
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Done
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@November 10, 2025
ECONOMICS
Microeconomics: individual actors (entities with a capacity and willingness to
act in a specific way)- make decision/allocation of scarce resources (food,
water, labor, time…)
Ex: firm, households
Macroeconomics: aggregate economy - million of actors
→ focus on policy-related question
SCARCITY
-Limited resources → not produce all goods and services people wish to have
Ex:
+Seawater/oxygen is a free resource → too much for the demand to be over
matched
+Clean water is a scarce resources
RIVALRY
-One person consuming it limits ability for others to use (simultaneously)
4 FACTORS OF PRODUCTION
1. Land - natural resources
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2. Labor
3. Capital - man-made assets (machines, tools, buildings…) used to help produce
goods
4. Entrepreneurship - put all factors together → create
ECONOMIC MODELS
-Complex real-world → simplify assumptions → ceteris paribus ( people have
same access to infor, and become rational)
NORMATIVE AND POSITIVE STATEMENTS
Normative - moral opinions (should) → reflect personal or societal values,
beliefs
Positive: can be tested, concerned with data, facts and observable
phenomena
Common errors
Not all costs are monetary costs. Opportunity costs are usually expressed in
terms of how much of another good, service, or activity must be given up in
order to pursue or produce another activity or good.
The fourth economic resource referred to as either entrepreneurship or
technology. The terms are used interchangeably but mean the same thing: the
ability to make things happen. Take the example of computers—a computer
itself would be considered a good, but our ability to make computers would be
considered technology.
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Everyday language: financial capital.
In an economics context: physical capital—equipment, machinery, or tools
used to produce goods and services. Physical capital is tangible, but financial
capital isn't always so.
PROPERTY RIGHTS
→ Ability to own and use resources (and anything made from those resources)
-Price signal → identify customer preferences and how much customers are
willing to pay
-Market is formed when multiple parties exchange things of value → best way to
allocate resources
-3 real properties to own:
Exclusive
Enforceable
Transferable
KEY TERMS
Term
Definition
Households
The owners of resources and the buyers of
goods and services
Firms
Business entities
Resource market
Households supply resources to firms in
exchange for money
Product market
Firm supply good and services
Economic system
A system of allocating the means of
production and the goods + services
Market economy
Answer 3 questions:
+ What is to be produced? (quantity, cost)
+ How are the goods to be produced?
+ For whom?
⇒ Allocate resources and goods
Command economy
Also answer 3 questions, but decisions
centrally by the government
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Term
Definition
Opportunity cost
The cost of the alternative choice
(*) Trade-off creates opportunity cost
Marginal cost
Change in cost when change the produced
quantity
(more specific to production decisions)
Comparative advantage
❗
When a country produce a good at lower
opportunity cost than other.
Land → rent
Labor → wages
Capital → interest
Entrepreneur → profit
❗
Only one of the productively efficient choices will be the allocatively
efficient choice for society as whole.
CIRCULAR FLOW MODEL
PPC
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