Unit 1: Foundations of Microeconomic Thinking

Scarcity

The central problem of economics due to unlimited wants but limited resources.

Economics

A social science focused on the efficient use of scarce resources to satisfy economic wants.

Factors of Production

The resources used to produce goods and services, categorized into four groups: Land, Labor, Capital, and Entrepreneurship.

Land

All natural resources involved in the production process, such as water and minerals.

Labor

The physical and mental effort contributed by people to create goods and services.

Capital

Human-made resources used in the production of other goods, including physical items like machinery.

Human Capital

The skills, knowledge, and experience of the labor force.

Entrepreneurship

The ability to combine the factors of production to create products or services, involving risk-taking.

Opportunity Cost

The value of the next-best alternative that is foregone when making a choice.

Marginal Benefit

The additional benefit gained from producing one more unit of a good or service.

Marginal Cost

The additional cost incurred from producing one more unit of a good or service.

Production Possibilities Curve (PPC)

A graphical representation that shows the trade-offs between two goods, demonstrating scarcity and efficiency.

Productive Efficiency

Occurs when an economy uses all its resources to their maximum potential on the PPC.

Inefficiency

Represented by points inside the PPC where resources are underutilized.

Law of Increasing Opportunity Costs

Suggests that as more of a good is produced, the opportunity cost increases.

Constant Opportunity Cost

The scenario where resources are perfectly adaptable between two goods, resulting in a linear PPC.

Economic Growth

Indicated by an outward shift of the PPC, caused by an increase in resources or technology.

Absolute Advantage

The ability to produce more of a good with the same resources or produce a unit using fewer resources.

Comparative Advantage

The ability to produce a good at a lower opportunity cost compared to another producer.

Output Method

A calculation method for opportunity cost where 'other goes over,' relating to total goods produced.

Input Method

A calculation method for opportunity cost where 'other goes under,' relating to resources needed to produce.

Terms of Trade

The conditions under which trade is mutually beneficial, typically between the opportunity costs of trading partners.

Allocative Efficiency

Occurs when the mix of goods produced is aligned with societal preferences, as indicated by the PPC.

Mixing Efficiency with Equity

A common mistake where efficiency (production) is confused with equity (distribution), not addressed by PPC.

Unemployment in PPC

Represented by points inside the PPC; does not shift the curve itself.

Input/Output Confusion

A common error in economics where the method of calculating opportunity costs is misapplied, based on data type.