AP Micro U1

Scarcity

There is a finite quantity of goods and resources

Economics

Study of scarcity and choice

Resource

Anything that can be used to produce a good

Good

Item that must be used to receive a benefit

Service

Someone or something does an action for you for your benefit

Factors of Production

Land, labor, capital, entrepreneurship

Economy

System for coordination societies productive and consumptive activities

Trade

Exchange of goods and services

Market economy

Producers decide production specifics

Traditional Economy

Simple trade between families and tribes

Command economy

Industry is publicly owned, and central authority makes production and consumption decisions

Mixed economies

Market-based systems with limited government oversight

Incentives

Rewards/ punishments that motivate choice

Property rights

Establish ownership, give trade rights

Opportunity Cost

Value of the next-best decision given up when you make a decision

Marginal analysis

Study of costs and benefits of doing a little more/ a little less

Trade-off

When you give up one thing to get another

Marginal Benefit/ cost

The loss/gain from doing something once more

Microeconomics

Study of how individuals, households, and firms make decisions and how those decisions interact

Macroeconomics

Concerned with the behavior of the economy as a whole

Positive Economics

Branch of economic analysis that describes how the government actually works

Normative economics

Makes prescriptions about the way the economy should work

Production Possibilities Curve/ Fronteir

Shows trade offs facing an economy that produces two goods

Inefficient

Point 1

Efficient and feasible

Points 3 and 4

Impossible

Point 2

Economy is efficient

No mutually beneficial transaction goes unexploited

Economy achieves productive efficiency

It produces on PPC

Economy achieves allocative efficiency

It produces on PPC and consumers are as well off as possible

Graph shifts in/out

Production possibilities expand/ decrease

PPC growth sources

Technology, increase in available resources

Gains from trade

People can get more from trade than if they were self sufficient

Specialization

Each person specializing at the tasks they are good at performing

Competitive advantage

Producer faces lowest opportunity cost of producing

Absolute advantage

Producer can make more than others with a given amount of time/resource

Terms of trade

Rate at which one good can be exchanged for another

Trade is efficient if

A good is obtained for less than the opportunity cost of producing it

Output method

Opportunity Cost of 1A = B/A of B (constant time)

Input method

Opportunity Cost of 1A =A/B of B (change in time)