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Message Unit 1: Basic Economic Concepts1.1 Scarcity1.2 Opportunity Cost and the Production Possibilities Curve (PPC)1.3 Comparative Advantage and Gains from Trade1.4 Demand1.5 Supply1.6 Market Equilibrium, Disequilibrium, and Changes in Equilibrium

Unit 1: Basic Economic ConceptsTopic 1.1ScarcityYou Will Learn To: Define scarcity and economic resources. Explain why individuals and societies must make choicesregarding the use of resources.ScarcityThe fundamental problem in economics is the issue of scarcity. People and societies have unlimited wants, but there are only so many resources available to satisfy those wants. Scarcity is the condition resulting from the inability of finite resources to satisfy infinite wants. Economics is the study of how individuals and societies allocate these scarce resources.The four types of resources used to produce goods and services, called factors of production, are land, labor, capital, and entrepreneurship.Four Types of Economic Resources Land includes all natural resources used to produce goods and services in an economy. Examplesinclude lumber, water, minerals, farmland, and anything naturally found in or on the land.

Unit 1: Basic Economic Concepts Labor includes the human skill and effort needed to produce goods and services. Capital, sometimes called physical capital, includes objects, such as tools and machinery, used to make goods and services. Entrepreneurship includes the ideas of an individual or group of people used to combine the other factors of production to make new goods and services.These four types of resources are combined in different ways to create everything in the economy. Individuals and society must make choices about how to use these resources, as well as the time they have available, to produce what society or individuals want. There are always trade-offs related to the production of goods because a resource must be chosen for one purpose over another. This means that once a productive resource is put into use, it cannot be used to make something else. For example, whenlumber is used to make a house, it cannot also be used to make a piece of furniture.Things to Remember Individuals and societies are forced to make choices because the finite resources of land, labor, capital, and entrepreneurship are scarce. These choices result in trade-offs regarding how to use those resources and what to produce.1.1 VocabularyScarcity The condition resulting from the inability of finite resources to satisfy infinite wants.Land Natural resources that are used to produce goods and services.Labor Human skill and effort used to produce goods and services.Capital Objects, such as equipment or machinery, used to produce goods and services. Sometimes referred to as "physical capital."Entrepreneurship The ability to combine land, labor, and capital in new ways to produce goods and services.Trade-off A circumstance in which one course of action is taken over another.

Unit 1: Basic Economic Concepts1.1 Check for Understanding1. Scarcity exists because resources are infinite.A. TrueB. False2. The physical objects, such as tools and machinery, used to produce goods and services are calledA. landB. laborC. capitalD. entrepreneurship3. The ability to combine other factors of production to produce new goods or services is calledA. landB. laborC. capitalD. entrepreneurship4. Once a productive resource has been put to use, it cannot be used to make something else.A. TrueB. False

Unit 1: Basic Economic ConceptsTopic 1.2Opportunity Cost and the Production Possibilities Curve (PPC)You Will Learn To: Calculate opportunity cost from given data. Define and illustrate the production possibilities curve and explain how it operates under various conditions.Opportunity CostEconomic resources are scarce, and choices must be made when putting those resources to use. Opportunity cost is what someone gives up when choosing one option over another. The table illustrates an economy's ability to produce capital goods and consumer goods when using its resources efficiently. Capital goods are the physical assets used in the production process of other goods, such as factories, machinery, and equipment. Consumer goods are goods bought by households and are used for consumption rather than production.A B C D E FCapital Goods 100 80 60 40 20 0Consumer Goods 0 15 30 45 60 75The opportunity cost of moving from one point to another can be calculated by subtracting the units remaining from the units previously produced. For example, when moving from point A to point B, the economy shifts from producing 100 capital goods and 0 consumer goods to producing 80 capital goods and 15 consumer goods. The opportunity cost of producing the 15 consumer goods is the loss of 20 capital goods.Production Possibilities Curve (PPC)The production possibilities curve (PPC) is an economic model illustrating the trade-off between the production of two goods and the opportunity cost incurred. The PPC shows the maximum quantities that can be produced of two different products if they require the same available factors of production and if they use the economy's resources efficiently.

Unit 1: Basic Economic ConceptsThe PPC is created by connecting the points for all possible combinations of two goods the economy can produce when operating efficiently, illustrated by points A through F. Any of these points on the line demonstrates an efficient use of resources. Any points inside the curve illustrate inefficient or underutilized resources, illustrated by point G. Any points outside the curve are unattainable with the economy's currently available resources, illustrated by point H. These points are only achievable through economic growth, acquiring more resources or trade.Three Shapes of the PPCThe PPC can be shaped three different ways, depending on what type of opportunity cost is illustrated. The opportunity cost due to the trade-off between two goods can be increasing, decreasing, or constant.

Unit 1: Basic Economic ConceptsThe increasing opportunity cost PPC shows the production of capital and consumer goods. As the economy increases production of consumer goods, it must give up more capital goods because consumergoods require specialized resources. The same is true moving in the other direction. If the economy is producing only consumer goods and wants to increase production of capital goods, it must give up more consumer goods for each increase in capital goods. This PPC is concave to the origin. In other words, the curve bends outward, a bowed-out curve.The decreasing opportunity cost PPC in the image shows the production of pears and grapefruit. The economy must give up fewer pears each time it produces a grapefruit, and fewer grapefruit each time it produces an additional pear. This PPC is convex to the origin. In other words, the curve bends inward, a bowed-in curve.The constant opportunity cost PPC shows the production of cake and cupcakes. Because these two goods are closely related and the resources can be used interchangeably, as the economy moves from

Unit 1: Basic Economic Conceptsproducing cakes to making cupcakes, it gives up the same amount of cake for each cupcake gained. ThisPPC is a line, not a curve.Changes in the PPCThe PPC can shift when there are changes in: the quantity of the factors of production. quality or productivity of the factors of production. technology that affect the goods being produced.Increased production over time is called economic growth and is illustrated by an outward shift in the PPC, as shown in the figure above. It is commonly measured as the increase in real gross domestic product (GDP) and will be discussed in Topic 2.6. An increase in the population is an example of a change in the quantity of resources that could lead to economic growth.

Unit 1: Basic Economic ConceptsEconomic growth can also result from increased production of capital goods. For example, an economy chooses to produce at point A instead of point B, making more capital goods and fewer consumer goods. In the future, it may have the ability to produce more of both goods due to the increased availability of physical capital, thereby shifting the PPC outward.If any of the factors of production were to decrease in quality or quantity, or the technology had a negativeimpact on the economy, this change would result in an inward shift of the PPC, called an economic contraction, illustrated above. An example of such a change might be a natural disaster that destroys a factory or the means of production.If a factor of production only affects one of the goods being produced, then a shift would occur in the PPC for only that good. For example, an increase in available land for growing corn would increase the economy's ability to grow corn but would not change its ability to make computers, as illustrated in the figure.

Unit 1: Basic Economic ConceptsThings to Remember The production possibilities curve (PPC) illustrates the concepts of scarcity, choice, trade-off, and opportunity cost. A PPC can be used to show efficient use of resources, underutilized or inefficient use of resources, economic growth, and economic contraction. The shape of the PPC depends on whether opportunity costs are increasing, decreasing or constant. Changes in the quantity of resources, quality or productivity of resources, and technology will causeshifts in the PPC.1.2 VocabularyCapital goods Objects, such as equipment or machinery, used to produce goods and services. It is sometimes called "physical capital."Consumer goods Goods bought by individuals or households for personal use.Production Possibilities CurveA model indicating the possible quantities of two different products that can be produced if they require the same available factors of production.Trade-off A circumstance in which one course of action is chosen over another.Opportunity cost What someone gives up when choosing one option over another.Efficiency The situation in which resources are being used in a way that optimizes production.Economic growth The expansion of a society's output over time, commonly measured as the increase in real gross domestic product (GDP) per capita.Productivity The average value of real output per worker.Specialization Production in which all factors are employed according to the uses for which they are considered best suited.

Unit 1: Basic Economic Concepts1.2 Check for Understanding1. On the production possibilities curve, which point(s) represents inefficient use of resources?A. Point AB. Points A, B, and CC. Point DD. Point E2. On the production possibilities curve above, which point(s) represents efficient use of resources?A. Point AB. Points A, B, and CC. Point DD. Point E3. On the production possibilities curve above, Point A represents the most efficient use of resources. A. TrueB. FalsePoint A Point B Point C Point D Point ECapital goods 20 18 14 8 0Consumer goods 0 25 50 75 100

Unit 1: Basic Economic Concepts4. Using the table, what is the opportunity cost of moving from Point B to Point C?A. 4 capital goodsB. 32 capital goodsC. 25 consumer goodsD. 50 consumer goods5. Which of the following could cause the shift in the production possibilities curve illustrated above? A. A decrease in availability of flourB. An increase in the number of bakersC. A decrease in the demand for cakeD. An increase in the wage of workers6. If the opportunity cost for producing two goods is increasing, the production possibilities curve has what shape?A. Straight lineB. Bowed-inC. Bowed-outD. None of these