The basic economic problem

 Wants: The desires for goods and services.

 Needs: Items required for survival, such as food,
water, and shelter.
 Scarcity: A situation that exists because there are
unlimited wants but only finite resources to satisfy
them.
 Choice: The process of deciding between
alternative uses of scarce resources. Every choice
involves a trade-off.
 Opportunity cost:
Production possibility curve (PPC)
 Production Possibility Curve (PPC): A curve that
illustrates the maximum possible output
combinations of two types of goods or services that
an economy can produce when all resources are
used efficiently.
 Productive efficiency: The state where products are
produced at the lowest possible cost, making full
use of all available resources. This is represented
by any point on the PPC.
 Inefficiency/Unemployment: The state where an
economy is not using all of its available resources.
This is represented by a point inside the PPC.
 Economic growth: An increase in the productive
capacity of an economy, shown by an outward shift
of the PPC.
Allocating resources
  Resource allocation: The way resources are
distributed among competing uses to produce
different goods and services.
 Economic system: The way a country's resources
are organized and distributed. The main types are
planned, market, and mixed economies.
 Market economy: An economic system in which
resource allocation decisions are made primarily by
consumers and firms interacting through the price
mechanism.
 Planned economy: An economic system where the
government controls the allocation of resources
and makes all key economic decisions.
 Mixed economy: An economic system that
combines elements of both the market and
planned systems, with both the private sector
(firms and households) and the public sector
(government) playing a role.
 Price mechanism: The system in a market economy
where prices signal to producers what to produce
and to consumers what to buy.
 Public sector: The part of the economy controlled
by the government.
 Private sector: The part of the economy made up of
firms and households owned by private
individuals.
Microeconomics vs. macroeconomics
 Microeconomics: The study of the economic
decisions and behavior of individual consumers
and firms in specific markets.
  Macroeconomics: The study of the economy as a
whole, including aggregate demand, inflation,
unemployment, and government policy.
The market system
 Market: Any arrangement that brings buyers and
sellers into contact to exchange goods and
services.
 Market economy: An economic system in which
resource allocation is determined by consumers
and firms through the price mechanism.
 Market equilibrium: The point at which the quantity
demanded by consumers is equal to the quantity
supplied by producers at a specific price.
Demand
 Demand: The willingness and ability of a consumer
to purchase a product at various prices over a
given period.
 Effective demand: Demand backed by the ability to
pay.
 Law of demand: As the price of a good or service
falls, the quantity demanded rises, assuming all
other factors remain constant (ceteris paribus).
 Movement along the demand curve: A change in
the quantity demanded caused by a change in the
price of the product itself.
o Extension in demand: A rise in quantity
demanded due to a fall in price.
o Contraction in demand: A fall in quantity
demanded due to a rise in price.
  Shift of the demand curve: A change in demand
caused by a factor other than the product's price,
such as changes in income, tastes, or population.
 Substitute goods: Products that can be used in
place of one another (e.g., tea and coffee).
 Complementary goods: Products that are used
together, so an increase in demand for one leads
to an increase in demand for the other (e.g.,
printers and ink).
 Normal goods: Goods for which demand increases
as consumer income rises.
 Inferior goods: Goods for which demand decreases
as consumer income rises.
Supply
 Supply: The willingness and ability of producers to
offer a product for sale at various prices over a
given period.
 Law of supply: As the price of a good or service
rises, the quantity supplied increases, ceteris
paribus.
 Movement along the supply curve: A change in the
quantity supplied caused by a change in the price
of the product itself.
o Extension in supply: A rise in quantity supplied
due to a rise in price.
o Contraction in supply: A fall in quantity
supplied due to a fall in price.
 Shift of the supply curve: A change in supply
caused by non-price factors, such as production
costs, technology, or indirect taxes.
  Subsidy: A payment made by the government to
encourage the production of a good.
 Indirect tax: A tax on spending, which increases a
firm's production costs.
Price elasticity
 Price elasticity of demand (PED): A measure of how
sensitive the quantity demanded is to a change in
price.
 Price elastic demand: Demand is elastic when a
percentage change in price leads to a larger
percentage change in quantity demanded (PED >
1).
 Price inelastic demand: Demand is inelastic when a
percentage change in price leads to a smaller
percentage change in quantity demanded (PED <
1).
 Price elasticity of supply (PES): A measure of how
sensitive the quantity supplied is to a change in
price.
 Income elasticity of demand (YED): A measure of
how sensitive the quantity demanded is to a
change in consumer income.
Market failure
 Market failure: Occurs when market forces lead to
an inefficient allocation of resources.
 Externality: The cost or benefit of an economic
activity that is borne by or received by a third
party.
 Negative externality: Occurs when an economic
activity imposes a cost on an unrelated third party
(e.g., pollution).
 Positive externality: Occurs when an economic
activity provides an unintended benefit to an
unrelated third party (e.g., education or vaccines).
 Social benefits: The total benefits to society of an
economic activity, including private benefits and
external benefits.
 Public goods: Goods that are non-rival (one
person's use does not reduce availability for
others) and non-excludable (it is not possible to
prevent people from using it).
 Merit goods: Goods that the government believes
consumers under-consume if left to market forces,
creating positive externalities (e.g., healthcare and
education).
 Demerit goods: Goods that the government
believes consumers over-consume if left to market
forces, creating negative externalities (e.g.,
cigarettes and alcohol).