Basic Economic Ideas

 Scarcity is everywhere!
 When a choice is made, the opportunity cost is the value of
what is given up.
 Therefore, all countries must make choices when answering the
three economic questions.
 What should be produced?
 Who should produce them?
 Who will get them?
 The Factors of Production (FOPS):




Land (natural resources)
Labor (people working)
Capital (things businesses use to make money)
Entrepreneurship (people who invent things, for example)
The PPF

 Shows the possible
combinations of two goods
that can be produced
 Shows scarcity and
opportunity cost: make
more of one, give up some
of the other
 Points inside the curve are
possible, but underutilizing
resources
 Points outside the curve are
impossible for now, but
might be in the future with
technology advances
Supply and Demand

 Demand curve: shows
what consumers are
willing and able to buy
at various prices
 Price goes up, quantity
demanded goes down
 Supply curve: shows
what consumers are
willing and able to by
at various prices.
 Price goes up, quantity
supplied goes up
Supply and Demand

 Markets will return to
equilibrium without
government interference
 A price of $1 will create a
shortage where the quantity
demanded is greater that the
quantity supplied.
 Government imposed=
price ceiling
 A price of $3 will create a
surplus where the quantity
supplied is greater than the
quantity demanded
 Government imposed=
price floor
Supply and Demand
Determinants

 Demand Curves will shift
due to changes in:
 Taste and Preferences of
consumers
 Income of consumers
 Buyers (number of)
 Expectations of
Consumers
 Related goods (price of)
 Supplements and
complements
 Supply Curves will
shift due to changes in:






Technology
Other goods (price of)
Number of Sellers
Expectations of Firms
Resource Prices
Subsidies and Taxes
 Subsidy- “tax in
reverse”
Shifting Supply and
Demand Curves

 INCREASE TO THE
RIGHT
 DECREASE TO THE
LEFT
Circular Flow Model

 Remember:
 Firms purchase stuff in the factor market
 People purchase stuff in the product market
 Below: Red arrows are physical flow and green arrows are monetary flow
Types of Economic
Systems

Command
Communism
Socialism
Capitalism
Free Market
•Total
amount of
government
interference
•Large
amount of
government
Interference
•ExampleChina,
North Korea
•Karl Marx
•Some
government
interference,
government
owns the
FOPS
•Market
system with
a amall
amount of
government
interference
•ExampleUnited
States
•No
government
interference
•Adam Smith
The Business Cycle
