Unit 1 Micro Key Ideas
Unit 1: The Basic Economic Problem
- Scarcity exists because we have limited resources and unlimited wants. No society has ever had enough
resources to produce all the goods and services to produce all the goods and services its members wanted.
- Goods and services are produced from productive resources. These resources-land, labor, capital, and
- Scarcity requires people to make choices. If we use scarce resources for one purpose,
we cannot use them for another.
- Opportunity cost is the forgone benefit of the next best alternative when resources are used
for one purpose rather than another.
- Because of scarcity, ever decision has an opportunity cost.
- Economic costs take account of the opportunity cost of doing one thing rather than another.
- Economic costs include explicit costs, which are paid directly, and implicit costs, which are not paid directly.
Both implicit and explicit costs are opportunity costs.
- Using free goods does not involve opportunity costs because free goods are available in unlimited quantities.
- Economics is concerned with marginal decision-making. In economics, “making decisions at the margin” is
very important. Marginal choices involve the effects of additions and subtractions from the current situation.
- A production possibilities curve can be used to illustrate scarcity, choices, and opportunity cost diagrammatically.
- The slope of a production possibilities curve shows the opportunity cost of reducing another unit of one
good in tem s of the amount of the other good that must be given up in order to produce the additional good.
- Because resources are scarce, using them efficiently allows us to get the most from them. Efficiency is
increased through specialization and trade. Economists use the concepts of absolute and comparative
advantage to explain why trade takes place between countries and between individuals. These concepts are
based on differences in the opportunity costs of producing goods and services in different areas or by different individuals.
- Because of scarcity, people and societies use economic systems to determine what to produce,
how to produce, and for whom to produce.
- Throughout history, nations have used tradition, command, and market systems to allocate resources.
- The law of comparative advantage shows how everyone gains through trade.
- Economic theory is useful in analyzing and understanding the world around us.
- The test of an economic theory is its ability to predict the future consequences of economic actions.
- The broad social goals of a society influence decisions about how best to use resources.
- A diagram of the circular flow of resources, goods and services, and money payments is a simplified way of
illustrating how a market economy operates. Prices in the product market and prices in the factor, or resource,
market are determined by the interaction of supply and demand. This diagram is also called the circular flow of income.