Basic Economic Concepts
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- Scarcity, choice, and opportunity cost
- When one chooses to produce one good or service, the opportunity cost is the value of an alternative good or service that one gives up producing.
- Production possibilities curve
- This curve or frontier tracks the combination of possible production for 2 goods using all available resources.
- An economy is efficient is it is using all its resources, e.g. on the production possibilities curve.
- Comparative advantage, specialization, and trade
- Absolute advantage: can produce good using fewer resources per unit; comparative advantage: can product at a lower opportunity cost.
- When there's a comparative advantage for a good produced by one group, and for another good produced by another group, trade occurs so that both groups can enjoy a consumption possibilities frontier that is larger than their production possibilities frontiers
- Economic systems
- Property rights and the role of incentives
- Marginal analysis
- Supposed inputs for production are labor and capital, so the cost of those two inputs are wage and rental rate.
- Marginal product of labor {$MP_L$} is the additional output produced on an additional unit of labor
- Marginal product of capital {$MP_K$} is the additional output produced on an additional unit of capital
- Together, the marginal product of an input is called marginal physical product
- Can show that the cost of production is minimized when
{$$ \frac{\text{wage}}{\text{rental rate}} = \frac{MP_L}{MP_K}, \qquad \text{or} \qquad \frac{MP_K}{\text{rental rate}} = \frac{MP_L}{\text{wage}}.$$}
See more under production and costs.