Basic Economics ConceptsLeo Koo, Chris Mendoza,

Daniel YePeriod 4 Mr. Lohman

Scarcity• “Limited quantities of

resources to meet unlimited wants.”

• Limited resources of the world

• Economics is the process of allocating the limited resources of the world

Trade-offs

• Given that resources are scarce it is implied that we face trade-offs

• Trade-offs: accepting less of one thing in order to get more of something else

Opportunity Costs

• The next best alternative that is given up in exchange for the better alternative

• “There is no such thing as a free lunch”• Ex: Going to the movies in exchange for study

time

Production Possibilities

Curve/Frontier(PPC or PPF)

•An economic model demonstrating scarcity, trade-offs, and opportunity costs•A=Impossible at the current production level•B=Underutilization

Comparative Advantage

• One individual or nation can produce a good at a lower opportunity cost than another

• Specialization-Production of one good due to its lower opportunity cost

Absolute Advantage

• One individual or nation can produce more with the same resources as compared to another individual or nation

Supply• The quantity firms are

willing and able to produce at a range of prices

• Law of Supply-As the price of a good increases, the quantity produced increases

Determinants of Supply

• Cost of input resources• Technology and productivity• Producer expectations• Taxes or subsidies• The number of producers

Demand• The quantity consumers

are willing to purchase at a range of prices

• Law of Demand-As the price of a good increases, the quantity demanded decreases (Inverse Relationship)

Determinants of Demand

• Consumer Income• Price of a substitute good• Price of a complementary good• Consumer tastes and preferences• Consumer expectations• The number of consumers

Market Equilibrium

• The intersection point of a supply and demand graph, therefore where the quantity demanded equals the quantity produced

The Business Cycle

• The fluctuations in economic activity (GDP) over several months or years

• Recession-An instance of sustained decline in GDP

• Expansion-Period of economic recover and increase in GDP

Unemployment• Those who are jobless and are actively looking for

work are considered unemployed• Discouraged workers-unemployed workers who have

stopped trying to find jobs

Types of Unemployment

• Cyclical Unemployment– Unemployment due to fluctuations in the business

cycle• Frictional Unemployment– The transition of a worker from one job to another

• Structural Unemployment– A mismatch between the demanded skills and the skills

of a worker• Seasonal Unemployment– Unemployment due to the changes in season

Inflation• A sustained increase of

prices over a period of time• Often measures by the

Consumer Price Index (CPI)• Stagflation-A decrease in

output (RGDP) as prices and unemployment increase

• Hyperinflation-A rapid increase in prices due to the rapid decrease in the value of a currency

Growth

• An increase in the production of goods and services in the economy over a period of time; therefore an increase in productivity