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Economic Thinking

Scarcity means demand exceeds supply for resources. There are two main economic systems - command economies where the government controls production and market economies where supply and demand determine production. Opportunity cost is the value of the next best alternative given up in making a choice. Production possibilities curves show the maximum amounts of two goods an economy can produce with limited resources, and can shift due to changes in resources, technology or other factors.

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Trixia Dela Cruz
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19 views

Economic Thinking

Scarcity means demand exceeds supply for resources. There are two main economic systems - command economies where the government controls production and market economies where supply and demand determine production. Opportunity cost is the value of the next best alternative given up in making a choice. Production possibilities curves show the maximum amounts of two goods an economy can produce with limited resources, and can shift due to changes in resources, technology or other factors.

Uploaded by

Trixia Dela Cruz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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ECONOMIC THINKING

SCARCITY
Is one of the key concepts of economics. It means that the demand for a good or service is greater than the
availability of the good or service.

How do you know if something is scarce?


Positive price System of allocation Less available than wanted Opportunity cost

The reason we have scarcity is because factors of production are limited. We don’t have enough:
LAND- is all the gifts of nature.
LABOR- is the mental or physical work of human individuals.
PHYSICAL CAPITAL- a machine or tools that are use to produce goods and services.
ENTREPRENEURSHIP- the process of developing, organizing, and running a new business to generate
profit while taking on financial risk

ECONOMIC SYSTEM
An economic system, or economic order, is a system of production, resource allocation and distribution of
goods and services within a society or a given geographic area
There are two main economic systems;
COMMAND ECONOMY
A system in which a central governmental authority dictates the levels of production that are permitted.
A command economy is organized by a centralized government that owns most, if not all, businesses and
where government officials direct all the factors of production. East Germany, North Korea, and the former
Soviet Union are all examples of command economies.

MARKET ECONOMY
is an economic system in which the decisions regarding investment, production and distribution to the
consumers are guided by the price signals created by the forces of supply and demand.
The best example of a global market economy is the US. The US has a free market where buyers and
sellers fully control the production and pricing. As a result, the supply and demand of a product determine
the companies' investment and manufacturing decisions.

OPPORTUNITY COST
The opportunity cost of a particular activity is the value or benefit given up by engaging in that activity,
relative to engaging in an alternative activity.
More effectively it means if you chose one activity you are giving up the opportunity to do a different option.
Example: A student spends three hours and $20 at the movies the night before an exam. The opportunity
cost is time spent studying and that money to spend on something else.

TWO TYPES OF OPPORTUNITY COST


Explicit costs are out-of-pocket costs for a firm—for example, payments for wages and salaries, rent, or
materials.

Implicit costs- are the opportunity cost of resources already owned by the firm and used in business—for
example, expanding a factory onto land already owned.

All of these things lead us to PRODUCTION POSSIBILITIES. We have scarce resources, those forces to
make choices, those choices have opportunity costs and we can organize systems to deal with that scarcity
with the command economy or the market economy. We can graph all of this with the Production
Possibilities Curve

PRODUCTION POSSIBILITIES CURVE


Is a graph that shows a maximum combination of two different goods (or categories of goods) that can be
produced with fixed resources.

INCREASING CURVE
The law of Increasing Cost is an economic principle that states that when a supplier increases the
production of a good, the opportunity cost of producing additional goods also increases.

CONSTANT COST
The Constant Cost industry is the industry where the cost of production does not change with the change in
output of the overall industry.

EFFICIENT
Any point on the curve is considered Efficient. A productively efficient use of resources.

INEFFICIENT
Any points inside the curve are Inefficient. It means not using resource properly.

SCARCITY
Any points outside the curve are Scarcity and it is also impossible. You cannot produce outside your own
production possibilities curve. But you can consume outside of your production possibilities curve through
specialization and trade

PRODUCTION POSSIBILITIES CURVE SHIFTS


Shifts in the production possibilities curve are caused by things that change the output of an economy,
including advances in technology, changes in resources, more education or training (that's what we call
human capital) and changes in the labor force.

Growth - if we have increases in productivity or we have more or better resources, that can shift our
production possibilities curve outward and we will have more ability to produce goods and services.

Loss of Resources - we might see a shift inward of the production possibilities curve. That means we
have few goods and services that can be produced.

Technology increased the production of goods but hasn’t change the production of services. We will see
an increase in the opportunity cost for producing services.

How People Make Decisions


1: People Face Trade-offs
2: The Cost of Something Is What You Give Up to Get It
3: Rational People Think at the Margin
4: People Respond to Incentives

How People Interact


5: Trade Can Make Everyone Better Off
6: Markets Are Usually a Good Way to Organize Economic Activity
7: Governments Can Sometimes Improve Market Outcomes

How the Economy as a Whole Works


8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services
9: Prices Rise When the Government Prints Too Much Money
10: Society Faces a Short-Run Trade-off between Inflation and Unemployment

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