Basic Economic Concepts Overview

Introduction

Why Can't Everyone Have a Mansion, Limousine, and Yacht?

It seems like everyone fantasizes about being rich and having a lifestyle where they can have the big house and expensive car. Yet, the fantasy is not a reality for everyone - why?

This short video will offer an explanation and get you thinking about the most basic economic issue - scarce resources versus our unlimited wants and desires.

Module Lessons Preview

In this module, we will study the following topics:

Scarcity and Opportunity Cost: Our unlimited wants are continually colliding with the limits of our resources, forcing us to pick some activities and to reject others. Scarcity is the condition of having to choose among alternatives. It is within the context of scarcity that economists define what is perhaps the most important concept in all of economics, the concept of opportunity cost. Opportunity cost is the value of the best alternative forgone in making any choice.

Absolute and Comparative Advantage: To understand why certain countries import or export certain products, you need to realize that every country (or region) can’t produce the same products. The cost of labor, the availability of natural resources, and the level of know-how vary greatly around the world. Most economists use the concepts of absolute advantage and comparative advantage to explain why countries import some products and export others.

Supply and Demand: You may not realize it, but every time you purchase something, you are participating in a market for that good. Some people supply it, and some people—you!—demand it. We will examine how to analyze supply and demand curves and the impact changes in market conditions and government policy can have on market equilibrium.

Productivity: An economy's productive capacity is determined by the quantity/quality of its productive resources and technology.

Key Terms

Scarcity - The lack of plentiful and desired resources to fulfill a want or desire
Opportunity Cost - The loss of the 2nd best option's tangible and intangible benefit when a choice is made
Absolute Advantage - When comparing 2 nations, the nation that can produce more if they dedicate all of their resources towards the production of that item (it also means that the nation uses less resources in the production of that item).
Comparative Advantage - When comparing 2 nations, the nation that has a lower opportunity cost when they produce an item
Demand - The willingness and ability of an entity to buy a good or service
Law of Demand - The inverse relationship between the quantities demanded from the buyer and the price (as the price goes up, the quantity demanded from the buyer will go down).
Supply - The willingness and ability of a business to make and sell a good or service
Law of Supply - States as the price of the item goes up, the supplier will supply more of the item (the quantity supplied will go up).
Price Ceiling - The highest legal price the item can be sold for. In order to be effective, the price must be placed below the market price, which creates a shortage. Rent controls are the best example of a price ceiling.
Price Floor - The lowest legal price that the market will allow. In order to be effective, the floor must be placed above the equilibrium price, which causes a surplus in the market. Minimum wage is an example of an attempted price floor.
Surplus - When the price is too high, the quantity supplied exceeds the quantity demanded, meaning there are two many items in the market and not enough buyers.
Shortage - When the market price is too low, there are too many buyers and too few items to buy. The suppliers will respond my increasing the quantity and price until the market equilibrium is met.
Market Equilibrium - The price in the market that causes the quantity demanded to equal the quantity supplied.

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