Fundamental Economic Concepts Review

Economics: the study of the allocation of scarce resources. We have limited resources but unlimited wants! Economic
decisions always deal with how the best way to ALLOCATE (or use) our scarce resources. All resources are scarce!
Resources: The Factors of Production: Inputs – They are LAND(natural resources like water, crude oil, minerals),
LABOR (human work), CAPITAL (the tools used by business), and ENTREPRENEURSHIP (risk takers in search of
profits). The factors of production are called productive resources cause we use them to produce GOODS & SERVICES!
We always want to use our resources efficiently and productively, so we allocate them wisely!
Opportunity Cost: The value of the next best alternative not chosen. We always make choices about how to use our
resources. All decisions have trade-offs – we make trade-offs with time, money, everything! When we choose one thing
over another, the opportunity cost is the thing you lost!

Production Possibilities Curve (or frontier): illustrates opportunity cost – when you produce more of one type of good, you
must sacrifice some of the other good

Points along the curve represent: RESOURCES

FULLY EMPLOYED (points B, C, and D)

Points inside the curve represent:

Resources being wasted (point A)

Points outside the curve (E) are not possible

without more resources or advancements in
technology, which would create a NEW curve

Specialization: allows people to concentrate on a single activity or area of expertise. Specialization increases productivity
and efficient use of resources. We can specialize the Factors of Production (Land, Labor, and Capital!)
Specialization can refer to skilled labor or human capital (for example, a brain surgeon)
Specialization can also refer to workers having specialized jobs in a factory: assembly line production - everyone has a
unique job to do, so they do it faster (more efficiently) and produce more!

Major Economic Systems: Economic systems are created to answer the 3 basic Economic Questions:
“What to Produce, How to Produce, and For Whom to Produce”
Command (Central/Communism) – A central government makes all major economic decisions and owns the productive
resources (capital, land). The central govt. decides what to produce, how, and for whom.
Strengths- in theory, everyone should be provided for by govt. with equal goods
Weaknesses- lack of freedom, poor variety of goods, shortages, lack of incentives/competition
Examples of Command Countries: North Korea, Cuba, former USSR(Soviet Union), China
China: combines Command and Market principles.
Market (Free Enterprise/Capitalist) – Individuals freely make economic decisions. “Invisible Hand” of the Marketplace
that guides people to satisfy their self-interest (Adam Smith). In the Free Market, we engage in Voluntary Exchange of
our Private Property and Labor in which everyone benefits. Entrepreneurs are motivated by profits. Consumer
Sovereignty rules the market – what we purchase and don’t purchase decides what gets produced.
Strengths – freedom, competition, high productivity, wide variety of consumer goods
Weaknesses- economic inequality/lack of equity
Examples: United States, Great Britain
Mixed Economy (Mixture of Free Market with some Government role – the govt. takes taxes and provides goods and
services)Examples: Most all countries are technically mixed economies, including the U.S.
Socialist-Mixed Economies: Sweden, France (these countries have more govt. role and more taxes)
The U.S. is a Mixed Market Economy. The government plays a major role in our economy as a regulatory force (think of
regulations on food, cars, airplanes). It also taxes and spends, employs many people, and gives direct aid and assistance –
things we call Safety Nets. The govt. tries to stabilize the economy and prevent market failures. Our economy strives to
meet the broad social and economic goals of freedom, security, equity, growth, efficiency, and stability.