BASIC CONCEPTS IN ECONOMICS
public goods.
 FUNDAMENTAL ECONOMIC CONCEPTS (6)
 MICROECONOMIC CONCEPTS (6)
 MACROECONOMIC CONCEPTS (7)
 INTERNATIONAL CONCEPTS (3)
FUNDAMENTAL ECONOMIC CONCEPTS
1. Scarcity - Is the condition that results from the imbalance
between relatively unlimited wants and the relatively limited
resources available for satisfying those wants.
2. Opportunity costs and trade-offs
 Opportunity cost is the forgone benefit of the next
best alternative when scarce resources are used for one
purpose rather than another.
 Trade-offs involve accepting or choosing less of one
thing to get more of something else.
3. Productivity - Is a measure of the amount of output (good
and services) produced per unit of input (productive
resources) used.
4. Economic Systems
 Economic systems are the ways in which people
organize economic life to deal with the basic economic
problems of scarcity and opportunity cost.
5. Economic institutions and incentives
 Economic institutions include households and
families and formal organizations such as corporations,
government agencies, banks, labor unions, and
cooperatives.
 Incentives are factors that motivate and influence
human behavior.
6. Exchange, money, and interdependence
 Exchange is a voluntary transaction between buyers
and sellers in which producers trade their surpluses.
 Money serves as a medium of exchange.
 Interdependence means that decisions or events in
one part of the world or in one sector of the economy
affect decisions and events in other parts of the world
or sectors of the economy.
MICROECONOMIC CONCEPTS
7. Markets and Prices
 Markets are institutional arrangements that enable
buyers and sellers to exchange goods and services.
 Prices are the amounts of money that people pay in
exchange for a unit of a particular good or services.
8. Supply and Demand
 Supply is defined as the different quantities of a
resource, good, or service that will be offered for sale at
various possible prices during a specific time period.
 Demand is defined as the different quantities of a
resource, good, or service that will be purchased at
various possible prices during a specific time period.
9. Competition and Market Structure
 Competition is determined by the number of buyers
and sellers in particular markets.
 Market structure refers to the extent to which
competition prevails in particular markets.
10. Income Distribution
 Income distribution may be classified into functional
distribution – the division of an economy’s total income
into wages and salaries, rent, interest, and profit; or
income distribution may be classified into personal
distribution of income, classifying the different
population groups by the number of them receiving
different amounts of income.
11. Market Failure
 Market failures occur when there are inadequate
competition, lack of access to reliable information,
resource immobility, externalities and the need for
12. The Role of Government
 The role of government includes establishing a
framework of law and order in which a market economy
functions. The government plays a direct and an indirect
role in the economy as both a producer and a consumer
of goods and services.
MACROECONOMIC CONCEPTS
13. Gross Domestic Product
 Gross domestic Product (GDP) is defined as the
market value of the total output of all final goods and
services produced with a country’s boundaries during
one year.
14. Aggregate Supply
 Aggregate Supply is the total amount of goods and
services produced by the economy during a period of
time at a given price level.
15. Aggregate Demand
 Aggregate demand is the total amount of spending on
goods and services in the economy during a period of
time at a given price level.
16. Unemployment
 Unemployment is defined as the number of people
without jobs who are actively seeking work. This is also
expressed as a rate when the number of unemployed is
divided by the number of people in the labor force.
17. Inflation and Deflation
 Inflation is a sustained increase in the average price
level of the entire economy.
 Deflation is a sustained decrease in the average price
level of an entire economy.
18. Monetary Policy
 Monetary policy consists of actions that affect the
amount of money and the cost of credit available in the
economy.
19. Fiscal Policy
 Fiscal policy consists of changes in taxes, in government
expenditures on goods and services, and in transfer
payments that are designed to affect level of aggregate
demand in the economy.
INTERNATIONAL ECONOMIC CONCEPTS
20. Absolute and comparative advantage and barriers to
trade
 Absolute advantage and comparative advantage are
concepts that are used to explain why trade takes place.
Comparative advantage is based on opportunity cost and
refers to a country’s ability to produce goods and
services relatively more efficiently.
 Barriers to trade deny the citizens the benefits of
relatively more efficient production in other countries.
21. Exchange rates and balance of payments
 Exchange rate is the price of one nation’s currency in
terms of another nations’ currency.
 Balance of payment of a country is a statistical
accounting which records, for a given period, all
payments of a country makes to the rest of the world
and all the receipts that it receives from the rest of the
world.
22. International aspects of growth and stability
 These are more important today than in the past because
all nations are much more interdependent.