Overview

Basic economic concepts form the foundation of macroeconomic analysis. They help explain how individuals and nations allocate scarce resources, make trade-offs, and interact in markets. Understanding these concepts allows us to explore larger economic issues like growth, inflation, and policy.

Key Themes and Concepts

• Scarcity and Choice: Resources are limited, so choices must be made. Every choice has an opportunity cost—the value of the next best alternative foregone.
• Production Possibilities Curve (PPC): A model that shows the maximum combinations of goods and services an economy can produce with current resources and technology. Illustrates efficiency, trade-offs, and opportunity costs.
• Comparative and Absolute Advantage:
  • Absolute advantage: The ability to produce more of a good with the same resources.
  • Comparative advantage: The ability to produce a good at a lower opportunity cost. This principle supports specialization and trade.
• Supply and Demand: The foundation of market economies. Demand shows consumer willingness to buy; supply reflects producer willingness to sell. The equilibrium price is where the two curves intersect.
• Determinants of Supply and Demand:
  • Demand: income, tastes, prices of related goods, expectations, number of buyers
  • Supply: input prices, technology, expectations, number of sellers
• Price Controls: Government-imposed limits on prices.
  • Price ceilings: Maximum legal price (e.g., rent control)
  • Price floors: Minimum legal price (e.g., minimum wage)
  • Tariffs: Taxes on imported goods; can raise domestic prices and reduce trade

Quick Tip

Opportunity cost is one of the most important concepts in economics—understanding it helps you think like an economist. The production possibilities curve illustrates choices and trade-offs, while supply and demand explain how markets function. Grasp these basics, and you're ready to tackle the bigger macroeconomic picture.