Key Economic Concepts

Economic resources are the factors of production: land, labour, capital, and entrepreneurship.
The fundamental economic problem is the issue of scarcity in the face of infinite wants, resulting in the need for choice.
Opportunity cost represents the next best alternative forgone as a result of making a decision.
Production possibility curves illustrate the concept of opportunity cost and the choices an economy has to make.

The market mechanism is how resources are allocated in a free market through supply and demand.
Perfect competition is a market structure with a large number of small firms, no barriers to entry, and a homogeneous product.
Market failure occurs when the price mechanism fails to allocate scarce resources efficiently, leading to a loss of economic and social welfare.

Demand is the quantity of a good or service that consumers are willing and able to buy at any given price in a given period.
Supply represents how much the market can offer at any given price in a given period.
The point where demand equals supply is known as the market equilibrium. At this point, the allocation of goods is most efficient.

Price elasticity of demand measures how responsive demand is to a change in price.
Income elasticity of demand measures how much demand changes in response to a change in income.
Price elasticity of supply measures the responsiveness of the quantity supplied to a change in the price of the good.

Negative externalities occur when the consumption or production of a good has a harmful effect on a third party.
Positive externalities occur when the consumption or production of a good benefits a third party.
Public goods are non-excludable and non-rival in consumption, leading to free riders and under-provision.

Government intervention is used to correct market failure, regulate monopolies, and to redistribute income.
This intervention can occur in the form of taxes, subsidies, laws, and regulations.
Indirect taxes are used by the government to reduce consumption of demerit goods, whilst subsidies are used to promote production and consumption of goods with positive externalities.
The government also uses regulation to control negative externalities and safeguard social welfare.