The basic economic problem is scarcity, where resources are limited, but wants are infinite, requiring choices to be made.

Opportunity cost is the next best alternative foregone when making a decision.

If a government spends money on building roads instead of hospitals, the opportunity cost is the hospitals that were not built.

Land, Labour, Capital and Enterprise

Capital refers to man-made resources like machinery and tools used in production.

Entrepreneurs take risks to organize resources and start businesses. They are responsible for the other factors of production.

Free economy, planned economy, mixed economy

Private individuals and businesses determine what, how, and for whom to produce.

Efficiency, innovation, choice for consumers.

An economy where the government makes all economic decisions.

Advantage: equal income distribution. Disadvantage: Lack of innovation and inefficiency.

A system that combines elements of both market and command economies.

People enjoy the benefits of goods and services without having to pay for them.

The quantity of a good or service that consumers are willing and able to buy at different prices.

As price increases, quantity demanded decreases, and vice versa.

Changes in income, population, tastes, price of substitutes/complements, expectations.

The quantity of a good or service that producers are willing and able to supply at different prices.

As price increases, quantity supplied increases, and vice versa.

Changes in production costs, technology, taxes, subsidies, and number of firms.

Market equilibrium is the point at which the supply and demand curves intersect.

Surplus: excess supply leads to a price fall.

Shortage: excess demand causes prices to rise.

It measures how responsive demand is to a change in price.

Demand is elastic; consumers are sensitive to price changes.

Demand is inelastic; consumers are less responsive to price changes.

It measures how responsive supply is to a change in price.

Supply is price elastic.

Supply is price inelastic.

When the market fails to allocate resources efficiently, leading to over- or under-production.

A good that is non-rivalrous and non-excludable (e.g., streetlights). It is unlikely to be provided by the private sector and more likely to be provided by the government.

Because they are underprovided by the free market.

A harmful third-party effect of production or consumption (e.g., air pollution).

Taxes, subsidies, regulation, provision of public goods.

Price controls (minimum and maximum prices) and indirect taxes/subsidies.

A legally set price below equilibrium to make goods more affordable (e.g., rent controls).

A legally set price above equilibrium to help producers (e.g., minimum wage).

Shift right: firms can produce more at lower costs.

Shift left: production costs increase, reducing supply.