Summary
Highlights
Microeconomics studies how to solve the basic economic problem: allocating scarce resources given unlimited wants. Individuals have endless desires, but the Earth's resources are finite. Resources, also known as factors of production, are scarce.
The four types of resources (factors of production) are Capital, Enterprise, Land, and Labor (CELL). Capital refers to man-made aids to production like machinery, factories, and computers. Enterprise involves risk-taking entrepreneurs who innovate and produce for profit. Land encompasses natural resources like farmland and rainforests. Labor signifies human resources or workers.
Given scarce resources and unlimited wants, societies must make three fundamental choices: what to produce, how to produce it, and for whom to produce. In a market economy, businesses decide what to produce based on consumer demand and how to produce it based on cost-effectiveness. Production is for those with sufficient income to afford goods and services.
Economics is the study of choice, and opportunity cost is key to measuring if those choices are good or bad. Opportunity cost is the value of the next best alternative foregone when a choice is made. A good decision means the value of the chosen option exceeds the opportunity cost, while a bad decision implies the opportunity cost was greater.