Basic Economic Concepts

Scarcity means there aren't enough resources to give everyone everything they want, so every choice involves a trade-off. The inputs used to make goods and services are called factors of production (land, labor, capital and entrepreneurship), and most of them are scarce. A few things, like widely shared knowledge, aren't scarce, because one person using them doesn't leave less for anyone else.

Every society has to decide what to produce, how to produce it and who gets it. In a command economy the government makes most of those decisions. In a market economy prices and private buyers and sellers make them, and most real countries are mixed economies that combine the two.

A production possibilities curve (PPC) puts one good on each axis and shows the most of the two goods an economy can make with all its resources and current technology. Points on the curve are efficient, points inside it mean some resources are unused or wasted, and points outside it can't be reached for now. A curve bowed out from the origin shows increasing opportunity cost, and a straight line shows constant opportunity cost. The whole curve shifts outward with more resources or better technology (economic growth) and inward if resources are lost.

You have an absolute advantage if you can make more of something with the same resources. You have a comparative advantage if you can make it at a lower opportunity cost. When each side specializes in its comparative-advantage good and they trade at terms between their two opportunity costs, both can consume a combination outside their own PPC.

A rational decision counts every cost: explicit costs (money you actually pay) and implicit costs (the value of what you give up, like your time). The best choice is the one with the biggest net benefit, which is total benefit minus total cost. For a consumer, total benefit is utility (the satisfaction you get); for a firm, it's total revenue. Some all-or-nothing choices can't be split into small steps, so you judge them by comparing totals.

Marginal analysis compares the extra benefit of one more unit with its extra cost. Keep going while marginal benefit is greater than marginal cost, and stop where they're equal. Past (sunk) costs shouldn't change the decision. Each extra unit of a good usually adds less satisfaction than the last (diminishing marginal utility), so you get the most total utility from your budget when the marginal utility per dollar (MU ÷ price) is equal across the goods you buy.