AP Microeconomics Unit 1

Scarcity

As a society, we have unlimited wants and needs but a limited number of resources available

Economics

The study of how society manages scarce resources

Shortage

A temporary situation where quantity demanded is greater than quantity supplied

Productivity

A measure of efficiency that compares output to input

• Because resources are scarce, improving this allows firms to produce more goods with fewer resources

Theoretical Economics

The use of the scientific method and models to make generalizations and abstractions to develop theories

Policy Economics

The use of theoretical economics to put policies in place to fix problems and meet economic goals

Positive Statements

Economics statements based on facts alone

Normative Statements

Economic statements that include value judgements and opinions

What are the 4 factors of production?

Land, Capital, Labor, and Entrepreneurship

Land

Natural resources

Labor

Efforts a person devotes to a task for which they are paid

Physical Capital

Man made resources

Human Capital

Skills or knowledge gained through education or experience

Only one that isn’t scarce

Entrepreneurship

Leaders who take initiative, innovate, and act as risk bearers

The Profit Motive

Entrepreneurs take the risk so they can earn the profit. High risk, high reward.

People face trade offs

Making decisions may require giving up one goal for another

The cost of something is what you give up to get it

The opportunity cost of an item is everything you give up to get it

Rational people think at the margin

Economic decisions are rarely “Should we do this or that”. More likely you will be asking “Should we do more of this or more of that”

People respond to incentives

Economic policies change peoples costs, benefits, and as a result, their behavior.

Trade can make everyone better off

Trade allows people to specialize in what they do best and trade for other goods

Markets are a good way to organize economic activity

Resources can be allocated through decentralized decisions of many firms

Governments can sometimes improve market outcomes

The government can help enforce property rights so individuals can own and control scarce resources

A country’s standard of living depends of its ability to produce goods and services

In national that have higher productivity, most people enjoy a higher standard of living

Prices rise when the government prints too much money

When a government created large quantities of the nations money, the value of the money falls relative to the value of the goods.

Society faces a short run trade off between inflation and unemployment

Many economic policies push inflarion and unemployment in opposite directions

Economic System

The method used by society to produce and distribute goods/services

Traditional Economy

The 3 basic questions are answered using customs and culture.

Command/Centrally Planned Economy

The government owns the resources (publicly owned) and answers the 3 basic questions.

Free Market Economy

Individuals own the resources (privately owned) and answer the 3 basic questions.

No government intervention.

Private property rights.

The Invisible Hand

Society’s goals will be automatically met as individuals seek their own self interests. The government doesn’t need to get involved.

• Competition lowers prices and improves quality

• Producers want to make more goods and adjust prices to maximize profits

Mixed Economy

A free market economy with some government intervention

Why is some government intervention needed?

Countries with free markets combined with property rights, regulatio, and the rule of law have historically seen the greatest economic growth

Production Possibilities Curve (PPC)

Shows all possible combinations of goods that can be produced with scarce resources.

Trade Offs

All of the alternative choices that are available

Opportunity Cost

The value of the next best alternative that wasn’t chosen

Constant Opportunity Cost

As you produce more, your opportunity cost is constant because resources are easily adaptable between goods

Law of Increasing Opportunity Cost

As you produce more, your opportunity cost increases because resources are not easily adaptable between goods

Shifts in the PPC Curve

• Change in resources (quantity or quality)

• Change in technology (usually shifts outwards)

• Change in trade